Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended April 3, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to_______
Commission File No.1-6635
APPLIED MAGNETICS CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
A Delaware Corporation 95-1950506
---------------------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
75 Robin Hill Road, Goleta, California 93117
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 683-5353
(No Change)
---------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes ..X.. No....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 41,736,741 $.10 par value common stock as of May 13, 1999.
Page 1 of 22
Exhibit Index on Page 20
<PAGE>
PART 1. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
--------------------
The unaudited condensed consolidated financial statements included herein have
been prepared by Applied Magnetics Corporation and its subsidiaries (the
"Company" or "Applied Magnetics") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The unaudited condensed consolidated financial statements
and selected notes included therein should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1998.
The following unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, which, in the
opinion of management, are necessary to present fairly the consolidated
financial position and results of operations for the periods presented.
Page 2 of 22
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations - Unaudited
(In thousands except per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
April 3, April 4, April 3, April 4,
------------ ----------- ------------ -----------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 7,989 $ 58,843 $ 31,519 $ 133,255
Cost of sales 23,571 55,122 56,694 136,612
------------ ----------- ------------ -----------
Gross margin (deficit) (15,582) 3,721 (25,175) (3,357)
------------ ----------- ------------ -----------
Research and development expenses 32,002 28,441 61,499 51,750
Selling, general and administrative expenses 1,852 1,790 3,444 3,575
Writedown of assets and restructuring charges 4,500 - 4,500 8,400
Amortization 2,016 - 2,016 -
Purchase in-process technology 28,700 - 28,700 -
------------ ----------- ------------ -----------
Total operating expenses 69,070 30,231 100,159 63,725
------------ ----------- ------------ -----------
Loss from operations (84,652) (26,510) (125,334) (67,082)
Interest income 320 1,165 941 3,426
Interest expense (3,462) (3,259) (6,892) (6,292)
Other income (expense) 28 (3,080) (1,285) (1,455)
------------ ----------- ------------ -----------
Loss before taxes (87,766) (31,684) (132,570) (71,403)
Provision (benefit) for income taxes (267) 247 514 277
------------ ----------- ------------ -----------
Net loss $ (87,499) $ (31,931) $ (133,084) $ (71,680)
============ =========== ============ ===========
Net loss per share:
Loss per common share $ (2.52) $ (1.33) $ (4.53) $ (3.00)
============ =========== ============ ===========
Loss per common share - assuming dilution $ (2.52) $ (1.33) $ (4.53) $ (3.00)
============ =========== ============ ===========
Weighted average number of common shares outstanding:
Common shares 34,729 23,925 29,353 23,891
============ =========== ============ ===========
Common shares - assuming dilution 34,729 23,925 29,353 23,891
============ =========== ============ ===========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
Page 3 of 22
<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.
Page 4 of 22
<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.
Page 5 of 22
<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 was allocated to assets acquired, including the fair value of
in-process technology, and liabilities assumed based on their fair values, as
determined by an independent, third-party appraiser. 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,
which will be amortized on a straight line basis over 3 years, the estimated
period of future benefit and (2) goodwill (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):
April 3, October 3,
-------- ----------
1999 1998
---- ----
Purchased parts and
manufacturing supplies $ 949 $ 8,578
Work in process 1,280 2,414
Finished goods - 2,062
---------- ----------
2,229 13,054
========== ==========
Page 6 of 22
<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. All amounts for severance, outplacement and relocation
at the Ireland facility were paid during 1998. The Company recorded a $4.5
million charge in the second fiscal quarter of 1999 related to the writedown of
obsolete assets and the assets associated with the discontinuation of an
in-house suspension assembly operation.
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.
Page 7 of 22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
On February 12, 1999, the Company completed its previously announced
merger with DAS Devices, Inc. ("DAS"). DAS was founded in 1996, as primarily a
research and development center focused on magnetoresistive ("MR") and giant
magnetoresistive ("GMR") product development. Concurrent with the closing, a
private placement was also completed with certain institutional investors which
provided the Company with $18.75 million in new working capital.
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 of approximately $25.9 million on the transaction.
The Company substantially completed its shipments of inductive thin film
heads in the second fiscal quarter of 1999. The Company also completed shipments
of its 3.4 gigabyte per 3.5 inch disc MR product, also, in the second fiscal
quarter of 1999. The Company is currently in qualification with two customers at
the 4.3 gigabyte per 3.5 inch disc capacity point, and production shipments are
anticipated to begin by the end of the third fiscal quarter. Due to long lead
requirements for new product qualifications, the benefits of the DAS GMR
technology is not anticipated to be realized until the fourth fiscal quarter of
1999. Consequently, the Company anticipates that its third fiscal quarter sales
revenue will be similar to the second fiscal quarter.
The Company anticipates that its new MR and GMR products, based on the DAS
design, will compare favorably to the performance of the other head suppliers'
offerings. Future revenues and operating results will be dependent on the
successful qualification and timely production ramp of new MR and GMR products.
While the Company is devoting significant engineering and manufacturing
resources to these efforts, there can be no assurances that the Company will
realize satisfactory competitive product and process development results. To the
extent that the Company is unable to do so, there would be a continued material
adverse effect on the Company's operating results and liquidity.
Three Months Ended January 2, 1999
- ----------------------------------
Net Sales. Net sales of $8.0 million in the second quarter of fiscal 1999
decreased 86.4% from net sales of $58.8 million in the second quarter of fiscal
1998 as inductive thin film products reach end of life. Due to production
process problems with new MR products, the Company has been unable to maintain
sales volumes 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 negative 195.0% and
positive 6.3%, for the second quarter of fiscal 1999 and the first quarter of
fiscal 1998, respectively. The decrease in gross profit in the second quarter of
fiscal 1999 as compared to the same quarter in the prior fiscal year was due to
the reasons discussed under "Net Sales".
Page 8 of 22
<PAGE>
Research and Development. Research and development ("R&D") expenses as a
percentage of net sales were 400.1% and 48.3% for the second quarter of fiscal
1999 and the second quarter of fiscal 1998, respectively. Expenses in dollars in
the second quarter of fiscal 1999 of $32.0 million increased $3.6 million from
$28.4 million in the second quarter of fiscal 1998. The Company has been
focusing the majority of its technical resources on its new production program
qualifications utilizing MR head technology and on development of giant
magnetoresistive ("GMR") head technology. As a result, there continues to be a
significant increase in R&D expenses as the Company continues its transition
from products with inductive thin film technology to products with MR and GMR
technology.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.9 million in the second quarter of fiscal 1999
an increase of $0.1 million from $1.8 million in the second quarter 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 second quarter 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 second quarter 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 $.3 million in the second
quarter of fiscal 1999 decreased $.9 million compared to interest income of $1.2
million the second quarter of fiscal 1998 due to lower average cash balances.
Interest expense of $3.5 million in the second quarter of fiscal 1999 increased
by $.2 million compared to $3.3 million in the second quarter of fiscal 1998 due
to varying interest rates and higher average debt balances.
Other Income and Expense. Other expense was negligible for the second quarter of
fiscal 1999 compared to other expense of $3.1 million in the second quarter of
fiscal 1998. The balances represent primarily foreign currency exchange gains
and losses. The Company has manufacturing operations in Asia that experienced
volatility in exchange rates during fiscal 1998.
Six Months Ended April 3, 1999
- ------------------------------
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 MR products the Company has 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".
Page 9 of 22
<PAGE>
Research and Development. Research and development ("R&D") 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. The Company has been focusing the
majority of its technical resources on its new production program qualifications
utilizing MR technology and on development of GMR technology. As a result, there
continues to be a significant increase in R&D expenses as the Company continues
its transition from products with inductive thin film technology to products
with MR and GMR 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. The Company has manufacturing operations in Asia that experienced
volatility in exchange rates during fiscal 1998 which continued into the first
fiscal quarter of 1999.
Liquidity and Capital Resources
- -------------------------------
At April 3, 1999, the Company's cash and cash equivalents decreased to
$20.2 million from $71.7 million at October 3, 1998. Total debt, including notes
payable, was $193.7 million, an increase of $16.9 million from the balance
outstanding at October 3, 1998, primarily due to an increase in notes payable
and debt assumed in the DAS merger. Total debt included $115.0 million of 7.0%
Convertible Subordinated Debentures, due 2006. Also included in total debt at
April 3, 1999, was $62.4 million in Malaysian bank borrowings. All the Malaysian
credit facilities are callable on demand, have no termination date and are
guaranteed by the Company. Credit facilities with one bank, which have been in
place since June 1990, are secured by the Company's real property holdings in
Malaysia and include certain financial covenants and certain covenants which
preclude the Company from granting liens and security interests in other assets
Page 10 of 22
<PAGE>
in Malaysia. Credit facilities with four other banks, established in fiscal
1997, are unsecured. No additional borrowings were available under the existing
facilities at January 2, 1999. Should all or any significant portion of the
Malaysian credit facilities become unavailable for any reason, the Company would
need to pursue alternative financing sources. The Company was in compliance with
all of its covenants at April 3, 1999.
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 the Company 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.
In response to the wind down of the Company's inductive thin film product
and its consolidation with DAS, the Company continues to reduce headcount in its
California and Malaysia facility. The Company had 3,400 employees as of April 3,
1999, which is a reduction of approximately 1,300 from the end of its first
fiscal quarter. Reductions will continue during the Company's third fiscal
quarter of 1999. The Company's capital expenditure plan for fiscal 1999 is
approximately $35 million, which includes equipment to be obtained through
operating leases. In comparison, capital expenditures for fiscal 1998 were $79.5
million, which included equipment obtained through operating leases. Capital
equipment expenditures for the first half of 1999 were $6.7 million. In
addition, the Company leased $3.3 million of production equipment through
operating leases. Purchase commitments were approximately $6.7 million at April
3, 1999.
During the third quarter of fiscal 1999, the Company realized a gain of
approximately $26.0 million from the completion of the sale of its MDT
subsidiary on April 12, 1999. In addition, the Company is seeking to arrange
additional private financing which will provide sufficient funding to support
the transition to GMR production. Future revenues and profitability will depend
upon the Company's ability to achieve qualification status with its customers,
achievement of satisfactory production yields and successful execution of
planned production ramps on its MR and GMR products. While the Company is
devoting significant engineering and manufacturing resources to these efforts,
there can be no assurance that the Company will realize satisfactory product and
process development results. To the extent that the Company is unable to do so,
there would be a continued material adverse effect on the Company's operating
results and liquidity. This may require the Company to either obtain additional
capital from external sources or to curtail its capital, research and
development and working capital expenditures. Such curtailment could have a
material adverse affect on the Company's future operations and competitive
position.
The Company's effort to address Year 2000 (Y2K) issues began in 1997. In
fiscal 1998, the Company spent $7.5 million to complete the implementation of a
worldwide management information system that addresses the Y2K issue and also
provides fully integrated manufacturing and financial capabilities. In
addressing the issues, the Company has employed a five-step process consisting
of 1) conducting a company-wide inventory, 2) assessing Y2K compliance, 3)
remediation non-compliant hardware and software, 4) testing remediation hardware
and software and 5) certifying Y2K compliance. Personnel from operations and
from functional disciplines, as well as information technology professionals,
Page 11 of 22
<PAGE>
are involved in the process. Inventory and assessment activities are estimated
at approximately 85 percent complete. This data is continuously updated as new
information becomes available and the Company expects this to continue. Overall
remediation efforts are estimated at approximately 60 percent complete.
Communication with customers and suppliers to determine the extent of their Y2K
efforts is an integral part of the program. The Company is tracking the progress
of its key suppliers toward their Y2K compliance. However, the Company has no
means of ensuring that the Suppliers will be Y2K compliant. Costs for Y2K
efforts are not being accumulated separately. Much of the cost is being
accounted for as part of normal operating budgets. Overall, the costs are not
expected to have significant effect on the Company's financial condition or
results of operations. The Company believes it will not have significant
exposure to Y2K issues and that the risk to its operations and financial
condition is not significant.
Certain Additional Business Factors
- -----------------------------------
Technology Transitions
The magnetic recording head industry has been characterized by rapidly
changing technology, short product life cycles and price erosion, as recently
experienced with the faster acceleration from inductive thin film to MR disk
head technology. The Company estimates that the industry product life cycle is
currently running as short as 9 to 12 months. The demand for greater data
storage capacity requires disk drive and disk head manufacturers to continue to
build greater performance into their respective products. There is no assurance
that the Company's products will achieve such performance or that the Company
will continue to qualify as a supplier for disk drive manufacturers' programs.
During fiscal 1996 and 1997, the Company experienced increased customer demand
and significant revenue growth and profitability. This success was due primarily
to continued timely production ramps on a number of inductive thin film programs
and continued successful transition to advanced inductive thin film disk head
products as a result of achievement of profitable yields. During fiscal 1998,
the Company experienced significant losses as it attempted to transition from
inductive thin film to MR disk head technology. Fiscal 1999 will be another
technology transition year for the Company as it works to achieve both MR and
GMR qualifications with the DAS designs. There can be no assurance that the
Company will continue to qualify for disk head manufacturing programs or that it
will not continue to experience manufacturing and product quality problems in
the future. The inability of the Company to develop and qualify new products on
a timely basis and to manufacture them in sufficient quantities that compete
effectively on the basis of price and performance would have a material adverse
affect on the Company's future operating results.
Fluctuations in Quarterly and Annual Operating Results
The Company's operating results have fluctuated and may continue to
fluctuate from quarter to quarter and year to year. The Company's sales are
generally made pursuant to individual purchase orders and customer-specific
materials are ordered on the basis of such purchase orders. As customer programs
reach end of life, the Company may have to write-down inventory and equipment.
In addition, the Company must qualify on future programs to sell its products.
The Company, on occasion, and as recently as the first quarter of fiscal 1998,
experienced cancellations and rescheduling of orders and reductions in
quantities ordered as customer requirements changed. Cancellations, rescheduling
and reductions of orders resulted in under utilization of production capacity
Page 12 of 22
<PAGE>
and had a material adverse effect on the Company's operating results for fiscal
1998. Fiscal 1999 operating results will continue to be impacted as the Company
reaches end of life with its inductive thin film products and works with its
customers to qualify on their MR and GMR disk head technology products. The
Company's operating results have in the past been and likely will in the future
be adversely affected during periods when production capacity is underutilized.
Dependence on Cyclical Hard Disk Drive Industry
Multimedia personal computers and high-end computer applications such as
network servers (Internet and Intranet), workstations and mainframes are driving
the demand for greater storage capacity and performance. In addition, the market
growth of laptop, notebook and sub-notebook computers has increased the demand
for smaller form factor disk drives. As a result, the Company experienced
significant customer demand for its advanced inductive thin film products during
fiscal 1997. However, due to continued industry trends towards even greater
storage capacity and performance, customer demand began to shift from inductive
thin film product technology to MR technology. By the end of fiscal 1998, the
Company's customers had discontinued development of new products based on
inductive thin film disk head technology. MR and GMR disk heads, which generally
permit greater storage capacities per disk and provide higher data transfer
rates than inductive thin film disk heads, now represent the fastest growing
segments of the recording head industry. Demand for inductive thin film disk
heads peaked during fiscal 1997. Fiscal 1998 was a year of significant
technology transition, as the Company's customer demand went from predominantly
inductive thin film to MR technology. Fiscal 1999 will see this trend continue
as inductive thin film reaches end of life and the market transitions to MR and
GMR products.
In recent years, the disk drive industry has experienced significant
growth and the Company has expanded its capacity during the last two fiscal
years to meet that growth. However, the disk drive industry is cyclical and
historically has experienced periods of oversupply and reduced production
levels, resulting in significantly reduced demand for disk heads, as well as
pricing pressures. The effect of these cycles on suppliers, including the
Company, has been magnified by hard disk drive manufacturers' practice of
ordering components, including disk heads, in excess of their needs during
periods of rapid growth, which increases the severity of the drop in the demand
for components during periods of reduced growth or contraction. The disk drive
industry entered into an oversupply condition in early 1998 and, as a result,
head suppliers, including the Company, are experiencing competitive pricing
pressures for their inductive thin film and MR heads. A continued decline in
demand for hard disk drives, as experienced by the industry during fiscal 1998,
had a material adverse effect on the Company's operating results. A continued
decline in demand for older products and the failure to bring new products to
the market would have a material adverse effect on the Company's future
operating results.
Significant Capital Needs
The recording disk head industry is capital intensive and requires
significant expenditures for research and development in order to develop and
take advantage of technological improvements and new technologies. The Company
believes that, in order to achieve its objectives, it will need significant
additional resources over the next several years for capital expenditures,
working capital and research and development. Capital expenditures for the six
months ended April 3, 1999 were $6.7 million. In addition, the Company leased
$3.3 million of production equipment through operating leases during the same
Page 13 of 22
<PAGE>
period. During fiscal 1999, the Company plans to spend approximately $35.0
million on capital expenditures, which includes operating lease commitments. The
Company believes that it will be able to fund future expenditures from a
combination of existing cash balances, existing credit facilities, and equipment
lease financing arrangements along with the $25.9 million it received with the
completion of the sale of its MDT subsidiary, on April 12, 1999. In addition,
the Company is seeking to arrange additional private financing which will
provide sufficient funding to support the transition to GMR production. The
Company may need additional sources of capital to meet requirements in future
years. There is no assurance that such additional funds will be available to the
Company or, if available, upon terms and conditions acceptable to the Company.
If the Company were unable to obtain sufficient capital, it would need to
curtail its operating and capital expenditures, which could have a material
adverse affect on the Company's future operating results.
Short-Term Borrowings
At April 3, 1999, the Company had approximately $62.4 million of
short-term borrowings outstanding in floating rate demand loan facilities from
banks in Malaysia, where it has substantial manufacturing operations. The
facilities are callable on demand, have no termination date and are guaranteed
by the Company. The loan facilities are used for the purchase of manufacturing
equipment and for working capital purposes. While the Company has no reason to
believe the loan facilities will be called, there is no assurance that the banks
will continue to make this credit available.
Concentration of Revenues
The disk head industry is intensely competitive and largely dependent on
sales to a limited number of major disk drive manufacturers. The Company had one
customer, Western Digital, that accounted for 72% of the Company's net sales in
fiscal 1998. Samsung Electronics accounted for 27% of net sales in fiscal 1998.
The Company's ability to obtain new customers depends on its ability to
anticipate technological changes, develop products to meet individualized
customer requirements and to achieve delivery of products that meet customer
specifications at competitive prices. In addition, the disk drive industry is
also intensely competitive and disk drive manufacturers may quickly lose market
share as a result of successful deployment of new technologies by their
competitors or various other factors. A significant reduction in orders, the
loss of a major customer or the inability to increase the customer base, which
could occur for any variety of reasons, could have a material adverse effect on
the Company's operating results.
The Company believes that disk drive manufacturers that are not vertically
integrated represent significant sales opportunities for the Company's disk head
products. Moreover, the Company believes that certain vertically integrated
companies will continue to rely on independent suppliers of disk heads as
alternative sources of supply, or in some cases, as primary sources of supply
for individual disk drive programs.
Competition
The Company competes with other independent recording head suppliers, as
well as disk drive manufacturers that produce magnetic recording heads used in
their own products. Fujitsu Ltd., Hitachi Ltd., IBM and Seagate produce some or
all inductive thin film, MR, and/or GMR heads for their own use. All these
companies have significantly greater financial, technical and marketing
resources than the Company. IBM also makes its recording head products available
Page 14 of 22
<PAGE>
in the original equipment manufacturers ("OEM) market to competing drive
manufacturers, in direct competition with the Company.
Read-Rite Corporation ("Read-Rite") has had substantially greater sales of
disk head products than the Company and has been the largest domestic competitor
among independent head manufacturers. Read-Rite and Sumitomo Metal Industries,
Ltd. ("SMI") have a joint venture in Japan to make MR and/or GMR wafers. Another
domestic supplier of MR and GMR recording heads is Headway Technologies.
Several large Japanese companies, all with considerably more resources
than the Company, compete in the independent head market. Alps Electric
Corporation, Ltd., TDK Corporation (and its SAE Magnetics, Ltd. subsidiary) and
Yamaha Corporation continue to aggressively develop and market recording heads.
Consolidation of the Disk Drive Industry
Consolidation of the disk drive industry may reduce the number of disk
drive programs requiring the Company's products and may increase business risks
for the Company due to the concentration of its customers. As a result, there is
no assurance that further vertical integration of disk drive and system
companies and consolidation within the disk drive industry will not have a
material adverse effect on the Company's future operating results.
Dependence on Foreign Operations
The Company conducts substantially all of its slider production, assembly
and test operations in its facilities in Korea, Malaysia and the People's
Republic of China ("PRC"). In addition, the Company has contractual
relationships with unaffiliated parties who conduct manufacturing and assembly
operations for the Company in Malaysia and the PRC. The Company's operations in
Korea have, from time to time in recent years, been affected by labor
disruptions and slow downs. The Company's production facility in Malaysia faced
potential labor shortages during fiscal 1996 and may face potential labor
shortages in the future, as other disk drive and component manufacturers expand
their production facilities in Malaysia. In addition to risks of labor
disruption, civil unrest and political instability, the Company's foreign
operations may be subject to delays in obtaining governmental permits and
approvals, currency exchange fluctuations, currency and trade restrictions and
transportation problems.
Intellectual Property
The Company regards elements of its manufacturing processes, product
designs, and equipment as proprietary and seeks to protect its proprietary
rights through a combination of employee and third party non-disclosure
agreements, internal procedures and patent protection. The Company has been
issued a number of United States Patents and has additional patent applications
pending. There is no assurance that patents will be issued with respect to such
applications or that any patents issued to the Company will protect the
Company's competitive position.
The Company believes that its success depends on the innovative skills and
technological competence of its employees and upon proper protection of its
intellectual properties. The Company has, from time to time, been notified of
claims that it may be infringing patents owned by others. If it appears
necessary or desirable, the Company may seek licenses under patents that it is
allegedly infringing. Although patent holders commonly offer such licenses, no
assurance can be given that licenses will be offered or that the terms of any
Page 15 of 22
<PAGE>
offered licenses will be acceptable to the Company. The failure to obtain a key
patent license from a third party could cause the Company to incur substantial
liabilities and/or to suspend the manufacture of the products utilizing the
patented invention.
Volatility of Stock Price
The market price of the Company's Common Stock has been volatile, with
daily closing market prices ranging from $4.00 to $33.25 per share during fiscal
1998 and ranging from $3.38 to $9.19 during the first six months of fiscal 1999.
The trading price of the Company's Common Stock has fluctuated in response to
quarter-to-quarter operating results, industry conditions, awards of orders to
the Company or its competitors, new product or product development announcements
by the Company or its competitors, general market and economic conditions and
other events or factors. In addition, the volatility of the stock markets in
recent years has caused wide fluctuations in trading prices of stocks of
technology companies independent of their individual operating results. The
market price of the Company's Common Stock at any given time may be adversely
affected by factors independent of the Company's operating results. The
volatility of the stock price may reduce the ability of the Company to raise
additional operating funds through equity offerings.
Forward-Looking Information
- ---------------------------
When used in Management's Discussion and Analysis, the words "believe",
"anticipate", "expect" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements speak only as of the date
hereof. All of the forward looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain and difficult to predict; therefore, undue
reliance should not be placed upon such estimates. Such statements are subject
to certain risks and uncertainties inherent in the Company's business that could
cause actual results to differ materially from those projected. These factors
include, but are not limited to: successful transition to volume production of
MR and GMR disk 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 the Company's
financial position or results of operations which significantly increase the
Company's working capital needs; the Company's inability to generate or obtain
sufficient capital to fund its working capital needs; the Company's ability to
control inventory levels; domestic and international competition in the
Company's product areas; risks related to international transactions; Y2K
issues; and general economic risks and uncertainties.
Page 16 of 22
<PAGE>
PART ll. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Stockholders Meeting held on February 6, 1998, the
Company's stockholders voted on the following matters:
1. Election of directors;
2. Approval of amendment of the Company's Certificate of Incorporation to
increase the number of shares of Common Stock authorized for issuance from
80,000,000 to 120,000,000;
3. Ratification of selection of auditors;
The tabulation of votes provided by the Inspector of Elections was as follows:
Proposal Voting Tabulation
1. Election of directors:
Nominee For Withheld/Against
------- --- ----------------
C.D. Crisman 20,639,281 977,405
H.M. Dwight 20,642,605 974,081
H.R. Frank 20,639,532 977,154
J.E. Goldress 20,630,004 986,682
R.C. Mercure 20,642,437 974,249
2. Approval of amendment of the Company's Certificate of Incorporation:
For Against Abstain
--- ------- -------
20,060,001 1,364,734 191,951
3. Ratification of selection of auditors:
For Against Abstain
--- ------- -------
21,232,111 260,274 124,301
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description
------ -----------
11 Statement re computation of per share information.
27 Financial Data Schedules
Page 17 of 22
<PAGE>
(b) Reports on Form 8-K.
(i) On February 11, 1998, the Company filed a Current Report on
Form 8-K dated November 24, 1998 reporting under item 5 that the
Company consummated the acquisition of DAS Devices, Inc., a Delaware
Corporation ("DAS") through an Agreement and Plan of Merger, dated as
of November 24, 1998 and amended and restated as of January 19, 1999
(the "Merger Agreement") whereby a wholly owned subsidiary of the
Company combined with DAS in a merger transaction in which DAS become
a wholly owned subsidiary of the Company. In connection with the
merger, the Company issued or reserved for issuance to investors,
options and certain consultants of DAS, an aggregate of 13,051,872
shares of the Common Stock, $.10 par value (the "AMC Common Stock").
The report also included information related to the completion of a
private placement with a group of institutional investors which
provided the Company with $20 million in new working capital.
(ii) On March 5, 1999 the Company filed a Current Report on Form 8-K/A
amending the Company's Current Report on Form 8-K filed on
February 11, 1999.
Page 18 of 22
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
APPLIED MAGNETICS CORPORATION
Dated: May 18, 1999 /s/ Craig D. Crisman
----------------------
Craig D. Crisman
Chairman of the Board and Chief Executive Officer
(Principal Financial Officer)
Dated: May 18, 1999 /s/ Peter T. Altavilla
----------------------
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
Page 19 of 22
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
- --------------------------------------------------------------------------------
11 Statement re computation of per share information. 21
27 Financial Data Schedule 22
Page 20 of 22
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
April 3 April 4 April 3 April 4
--------------------------------- --------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Loss Per Share:
Net loss $ (87,520) $ (31,931) $ (133,095) $ (71,680)
============ =========== =========== ============
Common shares outstanding 34,729 23,925 29,353 23,891
============ =========== =========== ============
Loss per common share $ (2.52) $ (1.33) $ (4.53) $ (3.00)
============ =========== =========== ============
Loss Per Common Share-Assuming Dilution:
Net loss before adjustment (87,520) (31,931) (133,095) (71,680)
Add back subordinated debentures interest
Add back subordinated debentures amortization
Less tax impact
------------ ----------- ----------- ------------
Net loss as adjusted $ (87,520) $ (31,931) $ (133,095) $ (71,680)
============ =========== =========== ============
Shares
Weighted average common shares outstanding 34,729 23,925 29,353 23,891
Dilutive effect of stock options
Assuming conversion of convertible subordinated
debentures
------------ ----------- ----------- ------------
Common shares-assuming dilution 34,729 23,925 29,353 23,891
============ =========== =========== ============
Loss per common share assuming dilution: $ (2.52) $ (1.33) $ (4.53) $ (3.00)
============ =========== =========== ============
</TABLE>
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 the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period and as if the Company's Convertible Subordinated Debentures ("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. Common shares
equivalentes were not considered as they would be anti-dilutive and had no
impact on earnings per share for the periods presented.
Page 21 of 22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of April 3, 1999 and the Consolidated Statement of
Operations for the six months ended April 3,1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-2-1999
<PERIOD-END> APR-3-1999
<CASH> 20,191
<SECURITIES> 0
<RECEIVABLES> 3,870
<ALLOWANCES> 0
<INVENTORY> 2,229
<CURRENT-ASSETS> 39,476
<PP&E> 392,905
<DEPRECIATION> (207,679)
<TOTAL-ASSETS> 305,651
<CURRENT-LIABILITIES> 112,060
<BONDS> 0
0
0
<COMMON> 4,156
<OTHER-SE> 61,168
<TOTAL-LIABILITY-AND-EQUITY> 305,651
<SALES> 31,519
<TOTAL-REVENUES> 31,519
<CGS> 56,694
<TOTAL-COSTS> 56,694
<OTHER-EXPENSES> 100,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,236)
<INCOME-PRETAX> (132,570)
<INCOME-TAX> 514
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133,084)
<EPS-PRIMARY> (4.53)
<EPS-DILUTED> (4.53)
</TABLE>
