<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1999
REGISTRATION NO. 333- 74107
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 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)
<TABLE>
<S> <C>
DELAWARE 95-1950506
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
</TABLE>
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. / /
------------------------
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.
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<PAGE>
PROSPECTUS
30,721,185 SHARES
APPLIED MAGNETICS CORPORATION
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 senior subordinated convertible note.
- 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 25, 1999 was $3 1/8 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.
<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. Magnetic recording heads are used to store and
retrieve information on magnetic storage disks in hard 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.
Magnetoresistive heads are magnetic recording heads that use the physical effect
in a film in which electrical resistance changes within a changing magnetic
field. Gigabyte means 1 billion bits 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. A 3.5 inch disk is 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. 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. 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.
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
<TABLE>
<S> <C>
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.
We have agreed to sell to Kennilworth Partners II LP
6,000,000 shares of our common stock for a purchase price
of $24,000,000. We will sell these shares in three
installments, on or about July 5, 1999, August 23, 1999
and November 4, 1999. We have also agreed to sell to
Kennilworth Partners II LP on or about July 5, 1999 our
$37,776,716 principal amount senior subordinated
convertible note for a purchase price of $25,000,000. The
note will bear interest at the rate of 14% per year,
commencing on October 1, 2002. The principal amount of the
note will be due in July, 2005. The note will be
convertible into 7,028,224 shares of our common stock.
We have also agreed to redeem from Kennilworth Partners II
LP $24,000,000 principal amount of our 7% convertible
subordinated debentures for the sum of $24,000,000. We
will redeem these debentures in three installments, on or
about July 5, 1999, August 23, 1999 and November 4, 1999.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Kennilworth Partners II LP's obligation to complete the
transactions described above is subject to certain
conditions.
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 note to be issued to Kennilworth
Partners II LP may be converted.
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.
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before investing in
our common stock. 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 head
technology to magnetoresistive and giant magnetoresistive head technologies.
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. 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.
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. Our ability to raise capital may be
reduced by the volatility of our stock price. 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. If we are unable to achieve customer qualification
and begin production of magnetoresistive and giant magnetoresistive products 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 on our fiscal 1999 financial statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
IF OUR MAGNORESISTIVE AND GIANT MAGNORESISTIVE PRODUCTS FAIL TO ACHIEVE THE
PERFORMANCE NECESSARY TO REMAIN COMPETITIVE, WE WILL NOT QUALIFY AS A SUPPLIER
FOR DISK DRIVE MANUFACTURERS' PROGRAMS.
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 products. If our magnoresistive and giant
magnoresistive 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, our lenders could enforce penalties, reclaim equipment or intellectual
property, or otherwise seriously harm our business, financial condition and
results of operations.
4
<PAGE>
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. This 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.
ANY UNDERUTILIZED CAPACITY WILL LIKELY RESULT IN OPERATING LOSSES.
We generally make sales in response 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.
INTENSE COMPETITION IN PRODUCT DEVELOPMENT AND PRICING COULD RESULT IN OUR
FAILURE TO DEVELOP AND MANUFACTURE COMPETITIVE PRODUCTS AND THUS RESULT IN A
LOSS OF SALES.
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, 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.
5
<PAGE>
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.
LABOR SHORTAGES, LABOR DISRUPTIONS, CIVIL UNREST AND POLITICAL INSTABILITY IN
KOREA, MALAYSIA AND CHINA 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.
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.
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. These 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. We have no way of ensuring that our suppliers and
others not under our control will be Year 2000 compliant. We believe that in the
worst-case we would experience any of the following:
- the inability of water and power utilities to deliver their products to
one or more of our facilities;
- the inability of Hutchinson Technology, our key supplier of suspension
assemblies, to supply that product to us; and
- the inability of Sumitomo Corporation, our key supplier of substrates for
wafer products, to supply that product to us.
Any of these interruptions, in turn, could result in a number of adverse
consequences to us, including:
- delayed or lost revenue;
- diversion of resources;
6
<PAGE>
- 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. 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
could 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. Our inability to do
so may adversely affect our ability to continue as a going concern. As of June
1, 1999, there were 41,736,741 shares of our common stock outstanding. We have
also issued in private placement transactions rights to purchase up to
approximately 27,000,000 shares of our common stock. See "Description of Capital
Stock" for a description of these rights.
AN ADVERSE OUTCOME FROM PENDING LITIGATION WITH DAS DEVICES' EQUIPMENT LESSORS
COULD SIGNIFICANTLY HARM OUR FINANCIAL POSITION.
Several companies that leased equipment or made equipment financing
available to Das Devices have recently filed actions against Das Devices and us.
They allege that DAS Devices breached its agreements with them by failing to
make lease or loan payments and that we were required, and have failed, to
assume those obligations. Some of those companies have also alleged that we
improperly transferred unique and proprietary magnetoresistive and giant
magnetoresistive technologies from DAS Devices to us for inadequate
consideration. The companies seek to recover in excess of $7 million, and some
of the companies seek to recover punitive damages. Some of the companies also
seek an order restraining us from using the DAS technologies. While we believe
that we have valid defenses to these claims and we intend to vigorously defend
these actions, we cannot assure you that we will prevail in these actions. If
any of these companies 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. See
"Legal Proceedings" for a discussion of these actions.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. 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 for
this offering. As permitted by the rules of the SEC, this prospectus does not
contain all of the information contained 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. You may obtain copies of the registration
statement and each document filed as
7
<PAGE>
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 with 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 identifies for the periods indicated the high and low
sale prices for our common stock.
<TABLE>
<CAPTION>
HIGH LOW
--- ---
<S> <C> <C>
Fiscal year ended September 27, 1997
First Quarter....................... $317/8 $173/8
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....................... $331/4 $111/8
Second Quarter...................... 13 7/8 10 /16
Third Quarter....................... 11 7/8 4
Fourth Quarter...................... 6 5/8 4 /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 25,
1999)............................. 3 15/16 2 /16
</TABLE>
On June 25, 1999, the reported last sale price of our common stock on the
New York Stock Exchange was $3 1/8 per share. As of June 25, 1999, there were
approximately 1,917 holders of record of our common stock.
CAPITALIZATION
The following table shows our consolidated debt and consolidated
capitalization as of April 3, 1999 on a historical basis, which includes the
issuance on February 8, 1999 of approximately 17,416,211 shares in the DAS
merger and to an investor group in connection with the merger. The pro forma
amounts have been adjusted for the following:
- the issuance to Kennilworth Partners II LP of 6,000,000 shares of our
common stock for a purchase price of $24,000,000.
- the issuance to Kennilworth Partners II LP of our senior subordinated
convertible note for a purchase price of $25,000,000.
- the redemption from Kennilworth Partners II LP of $24,000,000 principal
amount of our 7% convertible subordinated debentures for the sum of
$24,000,000.
8
<PAGE>
The pro forma amounts do not reflect the 7,028,224 common shares that are
reserved for issuance upon conversion of the senior subordinated convertible
note 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
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<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..................................................................... 125,373 126,373
Shareholders' Investment:
Preferred stock, $0.10 par value, authorized 5,000,000 shares, none issued at April 3,
1999................................................................................ -- --
Common stock, $0.10 par value, authorized 120,000,000 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....................................................................... 301,931 325,331
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 89,324
----------- -----------
Total capitalization.................................................................. $ 258,975 $ 283,975
----------- -----------
----------- -----------
</TABLE>
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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
</TABLE>
<TABLE>
<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
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT -----------------------------------------------------------
AMOUNTS) 1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
<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.
10
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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 on 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 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 us, it was written-off during the 3 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
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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.
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 shows 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
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 using 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
12
<PAGE>
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 in 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 shows certain financial data for us as a percentage of
net sales for the last 3 fiscal years.
<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
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<PAGE>
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, subject to program qualifications, 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 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
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<PAGE>
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.
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:
- $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;
- $4.5 million charge related to the writedown of obsolete assets;
- net decrease in the accounts receivable balance of $3.9 million; and
15
<PAGE>
- 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 5 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 July 31, 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.
Our accounts receivable and inventory balances are currently heavily
concentrated with one customer, Samsung Electronics Co., Ltd. Sales to Samsung
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 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 on cash and
equivalents was a decrease of $1.4 million for the first half of both fiscal
1999 and fiscal 1998.
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<PAGE>
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.
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
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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 in the worst-case
we could experience 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. Sumitomo Corporation, our
key supplier of substrates for wafer products, and Hutchinson Technology,
Incorporated, our key supplier of suspension assemblies, have indicated that
they will complete their Year 2000 compliance in the second quarter of 1999.
However, we have no direct control over our vendors or suppliers 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 on hand a limited amount of finished goods as well as key supplier
components 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.
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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.
RECENT DEVELOPMENTS
DAS MERGER
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.
As required by the terms of a registration rights agreement with DAS, we
have filed a registration statement for the resale under the Securities Act of
1933 of the shares of our common stock that we issued in 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.
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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 issued to the investors
4,641,089 shares of our common stock for a purchase price of $18,750,000, on
February 11, 1999, as required by the Securities Purchase Agreement.
Under the terms of a registration rights agreement with those investors, we
have filed a registration statement for the resale under the Securities Act of
1933 of the shares of our common stock that we issued to those investors. 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.
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.
KENNILWORTH EXCHANGE AGREEMENT
We have entered into an Amended and Restated Exchange Agreement, dated as of
June 29, 1999, with Kennilworth Partners II LP. Under this agreement,
- we have agreed to sell to Kennilworth Partners II LP 6,000,000 shares of
our common stock for a purchase price of $24,000,000. We will sell these
shares in three installments, on or about July 5, 1999, August 23, 1999
and November 4, 1999;
- we have agreed to sell to Kennilworth Partners II LP on or about July 5,
1999 our $37,776,716 principal amount senior subordinated convertible note
for a purchase price of $25,000,000; and
- we have agreed to redeem from Kennilworth Partners II LP $24,000,000
principal amount of our 7% convertible subordinated debentures for the sum
of $24,000,000. We will redeem these debentures in three installments, on
or about July 5, 1999, August 23, 1999 and November 4, 1999.
Kennilworth Partners II LP has the right to terminate the Amended and
Restated Exchange Agreement,
- as to the July 5, 1999 transactions, if we do not on that date publicly
announce plans to conduct a rights offering;
- as to the August 23, 1999 transactions, if we do not on or before that
date file a registration statement for a rights offering; or
- as to the November 4, 1999 transactions, if we do not on or before that
date close a rights offering with net proceeds to us of no less than
$40,000,000.
As required by the terms of a registration rights agreement with Kennilworth
Partners II LP, we have filed a registration statement for the resale under the
Securities Act of 1933 of the shares of our common stock that it will acquire
under the terms of the Amended and Restated Exchange Agreement or by conversion
of the senior subordinated convertible note. The registration rights agreement
also contains restrictions on the resale of our securities by Kennilworth
Partners II LP similar to those contained in the DAS merger agreement.
What follows is a summary of the terms of the senior subordinated
convertible note. The note:
- is a general unsecured obligation of our company;
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- bears interest at a rate of 14% per year, commencing on October 1, 2002.
Accrued but unpaid interest will be payable quarterly. Accrued but unpaid
interest will also be due upon conversion of the note.
- matures on or about July 5, 2005. Upon maturity, we will be obligated to
pay the holder $37,776,716, plus accrued but unpaid interest.
- is junior in right of payment to our indebtedness under (a) our guarantees
of our Malaysian subsidiary's credit facility agreements with five
Malaysian banks, and (b) our asset-based revolving line of credit from CIT
Group/Business Credit, Inc. We have agreed that the agreements with these
banks will not be amended to increase the amount of indebtedness to the
banks that may be outstanding; and
- is senior in right of payment to all of our other current and future
indebtedness, including our 7% convertible subordinated debentures.
The note is convertible into shares of our common stock as follows:
- The noteholder may convert the note at any time. Upon the election to
convert, the note will convert into 7,028,224 shares of our common stock.
Partial conversions are also permitted. If, however,
- we sell, transfer or encumber assets which, together with all other
sales, transfer and encumbrances of assets since July 5, 1999, have a
market value of greater than $5,000,000, and
- we have negative net income or negative net operating income in our
most recent fiscal quarter,
an alternative conversion formula will apply. Under that formula, the note
will convert into the number of shares of our common stock determined by
dividing $25,000,000 by the price that is 10% above the average reported
price per share of our common stock during a specified period of time. For
example, if the average reported price was $3.00 during the specified
period, the note would convert into 7,575,758 shares of our common stock.
The alternative conversion will not apply, however, if it would result in
the noteholder receiving less than 7,028,224 shares.
- We may require the noteholder to convert the note into 7,028,224 shares of
our common stock if on or before a specified date in July, 2000, the
reported closing price of our common stock equals or exceeds $10.75 per
share for 20 of 30 consecutive business days;
- We may require the noteholder to convert the note into 7,028,224 shares of
our common stock if on or after the specified date in July, 2000, the
reported closing price of our common stock equals or exceeds $7.00 per
share for 20 of 30 consecutive business days; or
- If we meet or exceed the projections contained in Schedule 1 to the
Exchange Agreement for the four fiscal quarters following the date of this
prospectus and we consummate a rights offering with net proceeds to us of
at least $40,000,000 the note will automatically convert into a new series
of convertible preferred stock having the same terms as the note, other
than rank.
If we issue shares of our common stock at a price below the conversion price
then in effect, the number of shares into which the note is convertible as
described above will be adjusted so that the noteholder's equity interest upon
conversion will not be diluted. The initial conversion price is approximately
$3.56. The conversion price will adjust upwards during the first 3 years until
it reaches approximately $5.38.
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
magnetic 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.
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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 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.
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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'
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. We also believe 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.
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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.
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 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 ability to continue as a going
concern.
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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 and incurred severance expenses of $2.9 million in connection with
those terminations.
We terminated several sub-contract assembly relationships in Malaysia in
fiscal 1998 due to decreasing production volume. We did not incur material
losses as a result of terminating those sub-contract relationships.
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 a significant adverse
effect, 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;
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- 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.
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
time and effort associated with the introduction of the newer technology. We
expect our manufacturing yields to increase during fiscal 1999, as we continue
to gain experience related 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.
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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.
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
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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.
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 have 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.
Several large Japanese companies, each with considerably more resources than
we, 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.
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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 agreements between us and most of our customers permit us to
assert claims for cancellation costs and expenses in these circumstances.
However, resolution of these claims is often a lengthy and extensive process,
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 cancelled
order over an extended period of time at reduced unit prices. In fiscal 1998, we
made a claim for $1.6 million in connection with the cancellation of a master
purchase order from Western Digital. Western Digital accepted and paid the claim
in fiscal 1998. We invoice the customer once agreement is reached on settlement
of the particular cancellation claim. There have not been any significant
cancellation claims during the any of the three fiscal years ended October 3,
1998 or during the first half of fiscal 1999. When a customer notifies us that a
contract is to be cancelled, we review all inventory on hand to determine if we
will be able to recover our costs through the remainder of the contract. If we
believe that our inventory carrying costs may not be fully recoverable, we write
the inventory down, with a charge to income, to the amount that we believe will
be recoverable. We expense as incurred all costs and expenses specifically
incurred in connection with cancellation claims.
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.
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
Elements of our manufacturing processes, product designs, and equipment are
proprietary and we seek to protect our proprietary rights through a combination
of employee and third party nondisclosure
29
<PAGE>
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 on
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 on 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 on 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."
Hitachi Metals, Ltd. entered into a License and Technology Development
Agreement with us 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.
Seagate Technology, Inc. entered into a broad cross license with us in
December, 1994, on certain patents held by Seagate Technology, Inc. and us and
on 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 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
30
<PAGE>
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 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.
PROPERTIES
Certain information concerning our principal properties at June 1, 1999 is
shown below:
<TABLE>
<CAPTION>
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
- ------------------------------------ ----------------------------- --------------------- --------- ----------
<S> <C> <C> <C> <C>
Goleta (Santa Barbara),
California........................ Headquarters, office, plant Marketing and 217,000 Owned
and warehouse manufacturing,
Research 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>
- ------------------------
*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 acquiror 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.
31
<PAGE>
LEGAL PROCEEDINGS
Comdisco, Inc. and Leasing Technologies International, Inc., companies that
lease equipment, each filed a complaint against DAS Devices and us on June 4 and
14, 1999, respectively, in the California Superior Court for the County of Santa
Clara. Venture Lending & Leasing, Inc. and Venture Lending & Leasing II, Inc.,
companies that finance equipment purchases, jointly filed a complaint against
DAS Devices and us on June 8, 1999, in the California Superior Court for the
County of Santa Clara. These complaints allege, among other things, that these
companies leased equipment or made equipment financing available to Das Devices,
that DAS Devices breached its agreements with them by failing to make lease or
loan payments and that we are required, and have failed, to assume those
obligations. The companies seek to recover, among other things:
- money damages, upon accelerating the obligations under the agreements,
totaling $6,843,695 plus additional money damages for other losses to be
proved;
- interest; and
- attorneys fees and costs of suit.
Three of the companies also seek punitive damages.
Two of the complaints also allege that we improperly transferred unique and
proprietary magnetoresistive and giant magnetoresistive technologies from DAS
Devices to us for inadequate consideration, and seek an order setting aside the
transfer of those technologies and restraining us from using or transferring
those technologies. One of the complaints also names Craig D. Crisman, John
Foster and Peter T. Altavilla, our executive officers, as defendants, alleging
that they breached a duty to these companies to not use their control of DAS
unfairly for our and their benefit.
We believe that we have valid defenses to these claims and we intend to
vigorously defend the suits. We cannot, however, assure you that we will prevail
in these disputes. If a plaintiff successfully prosecutes its claim 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.
32
<PAGE>
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 (a) each person that we know
owns beneficially more than 5% of our common stock, (b) each of our directors,
(c) our Chief Executive Officer and our two other most highly compensated
executive officers and (d) 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) *%
Harold R. Frank................................................................... 308,906(2)(3) *
Jerry E. Goldress................................................................. 35,000(2)(4) *
R.C. Mercure, Jr.................................................................. 55,533(2)(4) *
Executive Officers:
Craig D. Crisman.................................................................. 119,643(5) *
John E. Foster.................................................................... 23,256(6) *
Peter T. Altavilla................................................................ 7,858(7) *
Five Percent Stockholders:
Kennilworth Partners II LP........................................................ 12,541,005(8) 27.1
The Chase Manhattan Bank, as Trustee for First Plaza Group Trust.................. 4,900,989(9) 10.6
All Directors and Named Executive Officers as a Group (seven persons)............. 590,196(10) 1.3
</TABLE>
- ------------------------
(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 to be sold to Kennilworth Partners II LP within 60 days
(4,500,000).
(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, as required by an arrangement between Grisanti, Galef & Goldress,
Inc. and us. See "Certain Relationships and Related Transactions".
(6) Includes options granted under employee stock option plans to purchase
19,681 shares exercisable within 60 days.
(7) Includes options granted under employee stock option plans to purchase
5,000 shares exercisable within 60 days.
(8) Includes (a) 4,500,000 shares that Kennilworth Partners II LP has agreed to
purchase within 60 days, (b) 7,028,224 shares that Kennilworth Partners II
LP may acquire within 60 days upon conversion of our senior subordinated
convertible note, and (c) 322,581 shares that Kennilworth Partners II LP may
acquire within 60 days upon conversion of our 7% convertible subordinated
debentures to be redeemed on October 30, 1999. Does not include the shares
that Kennilworth Partners II LP has agreed to purchase in November, 1999,
nor does it include the shares that it may acquire upon conversion of our 7%
convertible subordinated debentures to be redeemed in July and August, 1999.
(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%
33
<PAGE>
MANAGEMENT
The following table provides 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 operations in
Penang, Malaysia and our Vice President of Worldwide Operations. Dr. Foster was
appointed Chief Operating Officer on February 26, 1999. Dr. Foster has over 13
years of experience in the magnetic recording head industry.
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 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.
34
<PAGE>
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 $100,000 during the
fiscal year ended October 3, 1998, information concerning compensation paid for
services to us in all capacities during that fiscal year, as well as the total
compensation paid to each such individual in each of our previous two fiscal
years (if such person was the Chief Executive Officer or an executive officer,
as the case may be, during any part of such fiscal year).
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------- --------------------------
ANNUAL COMPENSATION OTHER ANNUAL RESTRICTED SECURITIES LTIP
------------------------------- COMPENSATION STOCK UNDERLYING PAYOUT
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($)(2) OPTION ($)(2)
- --------------------------------- --------- --------- --------- ------------------- ------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 450,000 0 0 0 100,000 0
1997 422,500 431,809 0 0 200,000 0
1996 375,000 189,287 0 0 100,000 0
Craig D. Crisman ................
Chief Executive Officer
1998 138,316 0 0 0 30,000 0
1997 129,616 66,050 0 56,925 15,000 0
1996 115,866 40,431 0 0 10,000 0
Peter T. Altavilla ..............
Controller and Secretary
</TABLE>
- ------------------------
(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 $450,000 per year. Upon
execution of the employment agreement Mr. Crisman received a grant of
nonqualified options to purchase 300,000 shares of our common stock at the then
fair market price of our common stock.
STOCK OPTION GRANTS AND EXERCISES
The following tables indicates the stock options granted under our stock
option plans to the executive officers named in the Summary Compensation Table,
and the options exercised by them, during the fiscal year ended October 3, 1998.
The Option/SAR Grant Table shows hypothetical gains for the options at the
end of their respective ten-year terms, as calculated in accordance with the
rules of the SEC. Each gain is based on an arbitrarily assumed annualized rate
of compound appreciation of the market price of 5% and 10%, less the exercise
price, from the date the option was granted to the end of the option term.
Actual gains, if any, on option
35
<PAGE>
exercise are dependent on the future appreciation in value of our common stock
which appreciation, if any, would benefit our stockholders as well as persons to
whom options have been granted.
OPTIONS GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERM($)(3)
OPTIONS EMPLOYEES IN SHARE --------------------
NAME GRANTED(#) FISCAL 1998(1) ($/SH)(2) EXPIRATION DATE 5% 10%
- ------------------------------- ----------- --------------- ----------- ---------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Craig D. Crisman............... 100,000 8.1 4.38 September 17, 2008 275,141 697,262
Peter T. Altavilla............. 30,000 2.4 4.38 September 17, 2008 82,542 209,179
</TABLE>
- ------------------------
(1) We did not grant SARs in fiscal 1998.
(2) Options were granted in fiscal 1998 at fair market value and are exercisable
in cumulative annual installments of 25% of the shares granted beginning one
year after date of grant, and in all cases expire ten years from the grant
date.
(3) Potential realizable value is based on an assumption that the price, of the
common stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option term. Potential
realizable value is shown net of exercise price. These numbers are
calculated based on the regulations promulgated by the SEC and do not
reflect our estimate of future stock price growth.
AGGREGATED OPTION EXERCISES FISCAL 1998 AND FISCAL 1998 OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED IN-THE-MONEY-OPTIONS AT
OPTIONS AT OCTOBER 3, 1998 OCTOBER 3, 1998
SHARES ACQUIRED ------------------------------- --------------------------------------
NAME ON EXERCISE(#) VALUE REALIZED($) 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.
36
<PAGE>
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into an agreement with Grisanti, Galef & Goldress, Inc. on August
1, 1994, by 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. As required by 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 and Crisman. 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. As required by 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 in April 1999.
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
37
<PAGE>
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, 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 TO NUMBER OF SHARES
OFFERING(1) SHARES TO BE BENEFICIALLY
----------------------- OFFERED FOR OWNED AFTER
NAME OF SELLING STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
- ----------------------------------------------------------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
The Chase Manhattan Bank, as Trustee for First Plaza Group
Trust(2)(3).................................................... 4,900,989 10.27% 4,900,939 0
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., Trustees of the Cassin
Family Trust U/D/T dated January 31, 1996(5)................... 186,872 * 186,872 0
Donald L. Lucas Profit Sharing Trust DTD 1-1-84(5)............... 52,619 * 65,815 0
Lucas, Richard M. Cancer Foundation(5)........................... 65,815 * 52,619 0
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY OWNED SHARES
SHARES PRIOR TO NUMBER OF BENEFICIALLY
OFFERING(1) SHARES TO OWNED
-------------------- BE OFFERED AFTER
NAME OF SELLING STOCKHOLDER NUMBER PERCENT FOR RESALE OFFERING(1)
- ---------------------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
Donald L. Lucas, Trustee, Donald L.
Lucas and Lygia S. Lucas Trust DTD
12/3/84(5)............................ 13,196 * 13,196 0
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY OWNED SHARES
SHARES PRIOR TO NUMBER OF BENEFICIALLY
OFFERING(1) SHARES TO OWNED
-------------------- BE OFFERED AFTER
NAME OF SELLING STOCKHOLDER NUMBER PERCENT FOR RESALE OFFERING(1)
- ---------------------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
Viko Technology, Inc.(5)................ 35,189 * 35,189 0
Patel, Pinakin R., Trustee of the
Pinakin R. and Kalpana P. Patel Trust,
January 13, 1986(5)................... 17,594 * 17,594 0
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)
Custodian FBO(5)...................... 1,112 * 1,112 0
Goel, Prabhaker as Custodian for
Prakrati Goel(5)...................... 17,596 * 17,596 0
Goel Foundation(5)...................... 17,596 * 17,596 0
Adkisson, James(5)...................... 4,399 * 4,399 0
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,
L.P.(5)............................... 485,294 1.02 % 485,294 0
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 & Berman,
LLC, Custodian FBO, IRA Rollover(5)... 35,192 * 35,192 0
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
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY OWNED SHARES
SHARES PRIOR TO NUMBER OF BENEFICIALLY
OFFERING(1) SHARES TO OWNED
-------------------- BE OFFERED AFTER
NAME OF SELLING STOCKHOLDER NUMBER PERCENT FOR RESALE OFFERING(1)
- ---------------------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
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
Martin, Neil P.(5)...................... 1,759 * 1,759 0
Martin, Herbert J.(5)................... 17,596 * 17,596 0
Lehman Brothers MBG Venture Capital
Partners 1997 L.P.(5)................. 15,234 * 15,234 0
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
Partnership(5)........................ 120,523 * 120,523 0
JAFCO JS-3 Investment Enterprise
Partnership(5)........................ 72,313 * 72,313 0
JAFCO G-6(A) Investment Enterprise
Partnership(5)........................ 108,470 * 108,470 0
JAFCO G-6(B) Investment Enterprise
Partnership(5)........................ 108,470 * 108,470 0
JAFCO G-7(A) Investment Enterprise
Partnership(5)........................ 147,038 * 147,038 0
JAFCO G-7(B) Investment Enterprise
Partnership(5)........................ 147,038 * 147,038 0
U.S. Information Technology No. 2
Investment Enterprise
Partnership(5)........................ 527,890 * 527,890 0
Flinn, Lawrence Jr.(5).................. 175,963 * 175,963 0
Yorkton Securities Inc. in trust for
Valeo Limited(5)...................... 68,625 * 68,625 0
Falore, David J.(5)..................... 1,759 * 1,759 0
Falore, Joseph M.(5).................... 1,759 * 1,759 0
Schaltz, Gerald and Sharon A., Trustees
Shaltz Family Trust, DTD 1/12/98(5)... 1,759 * 1,759 0
Rush & Co.(5)........................... 19,356 * 19,356 0
Lehman Brothers MBG Ventures Capital
Partners 1998 (A) L.P.(5)............. 577 * 577 0
Lehman Brothers MBG Ventures Capital
Partners 1998 (B) L.P.(5)............. 10 * 10 0
Lehman Brothers MBG Venture Capital
Partners 1998 (C) L.P.(5)............. 65 65 0
M.I.S. VC Partners, L.P.(5)............. 615,870 1.29 % 615,870 0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY OWNED SHARES
SHARES PRIOR TO NUMBER OF BENEFICIALLY
OFFERING(1) SHARES TO OWNED
-------------------- BE OFFERED AFTER
NAME OF SELLING STOCKHOLDER NUMBER PERCENT FOR RESALE OFFERING(1)
- ---------------------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
Mitchel G. Underseth(5)................. 69,307 * 74,257 0.00
ORYX Technology Corp.(5)................ 54,455 * 54,455 0
Kennilworth Partners II LP(6)........... 12,541,005(7) 27.12% 13,028,224(8) 690,200(9)
</TABLE>
- ------------------------
(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 to be sold to Kennilworth Partners II LP
within 60 days (4,500,000).
(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 for certain employee
benefit plans of General Motors Corporation and its subsidiaries and for
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 for 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
Kennilworth Partners II LP Jeffrey Parket may be deemed to beneficially own
the shares held by Kennilworth Partners II LP. The address of Kennilworth
Partners II LP and Mr. Parket is 40 Cuttermill Road, Suite 308, Great Neck,
New York 11021. Kennilworth Partners II LP and Mr. Parket each claim sole
power to vote and dispose of the shares.
(7) See Note 8 to table presented under "Security Ownership by Principal
Stockholders and Management".
(8) Consisting of (a) the 6,000,000 shares that Kennilworth Partners II LP has
agreed to purchase under the Amended and Restated Exchange Agreement and (b)
the 7,028,224 shares that Kennilworth Partners II LP may acquire upon
conversion of our senior subordinated convertible note.
(9) Consisting of shares of our common stock purchased by Kennilworth Partners
II LP 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.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation authorizes us to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock and up to 120,000,000 shares
of common stock. As of the date of this prospectus, no shares of preferred stock
our outstanding, nor do we have plans to issue any shares of preferred stock
other than, under certain circumstances, upon conversion of our senior
subordinated convertible note. See "Recent Developments--Kennilworth Exchange
Agreement". As of June 1, 1999, there were 41,736,741 shares of common stock
outstanding. We also have outstanding:
- an agreement to issue to Kennilworth Partners II LP 6,000,000 shares of
our common stock. See "Recent Developments--Kennilworth Exchange
Agreement";
- $115,000,000 principal amount of 7% convertible subordinated debentures
due 2006, which are convertible into 6,182,796 shares of our common stock.
We have agreed to repurchase from Kennilworth Partners II LP $24,000,000
principal amount of these debentures, which are convertible into 1,290,323
shares of our common stock. See "Recent Developments--Kennilworth Exchange
Agreement";
- 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
- a senior subordinated convertible note, which is convertible into
7,028,224 shares of our common stock. The note will convert into
additional shares under certain circumstances. See "Recent
Developments--Kennilworth Exchange Agreement."
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.
Subject to the rights of the holders of our preferred stock, if any, 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, subject
to the rights of our creditors and the holders of our preferred stock, if any.
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.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock in one
or more series, which can have rights senior to those of our common stock. Our
Board of Directors may fix or alter any of the following for any unissued series
of our preferred stock:
- number of shares;
- powers;
- designation;
- dividend rights;
- dividend rate;
42
<PAGE>
- conversion rights;
- voting rights;
- rights and terms of redemption (including sinking fund provisions);
- redemption price or prices;
- liquidation and other preferences; and
- other special rights.
Our issuance of preferred stock could adversely affect holders of common
stock. These effects could include the following:
- if dividends on the preferred stock have not been made, dividends on our
common stock may be restricted;
- to the extent the preferred stock has voting rights, the voting rights of
our common stock will be diluted;
- if holders of preferred stock are entitled to preferred dividends or
liquidation preferences, the amount of earnings and assets available for
distribution to holders of our common stock may be reduced;
- our issuance of preferred stock could decrease the market price of our
common stock; and
- our issuance of preferred stock may have the effect of delaying or
preventing a change in control.
OTHER SECURITIES
STOCK OPTIONS
See Note 5 to the Consolidated Financial Statements for a discussion of the
various stock options that we have issued.
WARRANTS
See Note 13 to the Consolidated Financial Statements for a discussion of
warrants to purchase 1,200,000 shares of our common stock.
SENIOR SUBORDINATED CONVERTIBLE NOTE
See "Recent Developments--Kennilworth Exchange Agreement" for a discussion
of the terms of our senior subordinated convertible note.
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
In March 1996, we issued $115,000,000 aggregate principal amount of 7%
convertible subordinated debentures under an indenture dated as of March 22,
1996 with Chase Manhattan Bank, N.A., as trustee.
The debentures:
- are general unsecured obligations;
- mature on March 15, 2006;
- bear interest at a rate of 7% per year;
- are convertible at any time at the holder's option into approximately
53,763 shares of our common stock for each $1,000 principal amount of
debentures;
43
<PAGE>
- are convertible at our option and at the same conversion ratio, if the
reported closing per share of our common stock exceeds an amount equal to
130% of the conversion price then in effect. The conversion price
currently in effect is $18.60;
- may be redeemed at our option in whole or in part at any time, subject to
the giving of required notices, at the following prices (expressed as a
percentage of principal amount) during the periods set forth below:
<TABLE>
<CAPTION>
REDEMPTION
AFTER APRIL 1, PRICE
- ----------------------------------------------------------------------- ---------------
<S> <C>
1999................................................................... 103%
2000................................................................... 102%
2001................................................................... 101%
2002 and thereafter.................................................... 100%
</TABLE>
When we redeem a debenture, we must also pay any accrued but unpaid
interest to the date fixed for redemption on the debenture;
- may be redeemed at the holder's option if we undergo a change of control
(as defined in the indenture);
- are junior in right of payment to our current and future indebtedness,
other than to:
- other indebtedness, if the instrument creating or evidencing that other
indebtedness provides that it is not senior or superior, in right of
payment, to the debentures or to other indebtedness that is equal or
junior in right of payment to the debentures;
- indebtedness owed or owing to any of our subsidiaries or to any of our
or our subsidiaries' officers, directors or employees;
- any liability for taxes we owe; and
- our trade payables to trade creditors in the ordinary course of
business; and
- are equal in right of payment with our other subordinated indebtedness.
The occurrence of any of the following events would constitute a default
under the indenture:
- failure to pay interest when due, if the failure continues for 30 days;
- failure to pay principal when due;
- failure to perform a conversion of debentures when required, if the
failure continues for 60 days;
- failure to observe or perform any other covenant or agreement contained in
the debentures or the indenture, if, subject to certain exceptions, the
failure continues for 60 days after appropriate written notice;
- certain events of bankruptcy, insolvency or reorganization of us or any of
our significant subsidiaries;
- a default in the payment of principal, premium or interest when due that
extends beyond any stated period of grace or an acceleration for any other
reason of the maturity of any of our or any of significant subsidiary's
indebtedness with an aggregate principal amount in excess of $5 million;
and
- final judgments not covered by insurance totaling more than $2 million, at
any one time rendered against us or any of our significant subsidiaries
and not satisfied, stayed, bonded or discharged within 60 days.
44
<PAGE>
If an event of default occurs and is continuing, the trustee or the holders
of 25% in aggregate principal amount of the debentures then outstanding may, by
proper notice, declare all principal and interest and other amounts on the
debentures to be due and payable immediately.
ANTI-TAKEOVER EFFECTS OF SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law. This
section prohibits a Delaware corporation from engaging in any "business
combination" with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. This
section defines a business combination to include a merger or sale of more than
10% of the corporation's assets, and defines an "interested stockholder"
generally as a person owning 15% or more of the outstanding voting stock of the
corporation and any person associated with, affiliated with or controlling or
controlled by such person.
Section 203 does not apply if:
- prior to the date that the stockholder became an interested stockholder,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
The application of Section 203 to us may limit the ability of our
stockholders to approve a transaction that they may deem to be in their best
interests.
ANTI-TAKEOVER EFFECT OF RIGHTS PLAN
We adopted a rights plan for the purpose of discouraging an acquisition of
us without our consent. Reference is made to the Amended and Restated Rights
Agreement dated as of October 28, 1998 between our company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, for all of the terms of the
rights plan. What follows is a summary of those terms. In this summary, we refer
to a person or group of persons that has acquired at least 20% of our common
stock or the right to acquire at least 20% of our common stock as a
"blockholder"; if such person or group of persons has done so without our
consent, we refer to such person or group as a "non-approved blockholder".
Each holder of our common stock has one right for each share of common stock
held. Holders do not, however, enjoy any benefits with respect to these rights
until they become exercisable. The rights become exercisable upon:
- a public announcement is made that someone has become or intends to become
a non-approved blockholder; or
- the tenth day after the commencement of or the public announcement of the
intent to commence a tender or exchange offer that would result in someone
becoming a non-approved blockholder.
45
<PAGE>
Once exercisable, each right 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 share of this preferred stock will be entitled to:
- a preferential quarterly dividend equal to 100 times the dividend declared
on each share of our common stock, but in no event less than $1.00;
- if we liquidate our assets, a payment from funds available for
distribution equal to the greater of $2,000 or 100 times the liquidation
payment made on each share of our common stock;
- 100 votes, voting together with the shares of our common stock; and
- if we merge or are involved in another business combination in which our
common stock is exchanged, 100 times the amount and type of consideration
received by each share of our common stock.
The holder will also have the right under certain circumstances to receive,
instead of the preferred stock, shares of our common stock having a market value
of two times the exercise price of the right. A non-approved blockholder will
not have this right, and accordingly the blockholder's ownership interest in us
may become substantially diluted.
If we are merged or involved in another business combination in which our
common stock is exchanged or changed, or we sell 50% or more of our assets or
earning power, each right will become an option to buy shares of the acquiring
company's common stock having a market value of two times the exercise price of
the right. Again, a non-approved blockholder will not have this right, and
accordingly the blockholder's ownership interest in us may become substantially
diluted.
We may redeem the rights at a nominal price ($.01 per right):
- at any time before the rights become exercisable; or
- at any time after the rights become exercisable, but only if the
redemption is:
- in connection with a merger or other business combination involving us
and someone other than a non-approved blockholder; or
- made more than 60 days after someone becomes a non-approved blockholder
and the non-approved blockholder does not own more than 20% of our
stock.
The rights will expire on the earlier of:
- November 4, 2008;
- the redemption of the rights, as described above; and
- a merger involving us and a blockholder who:
- acquired shares of our common stock in a tender or exchange offer for
all our common stock at a price and on terms determined by at least a
majority of our outside directors to be in our and our shareholder's
best interests, and
- paid in the merger the same price per share and form of consideration
paid in the tender or exchange offer.
46
<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 with this prospectus or under Rule 144 of 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.
47
<PAGE>
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 applicable 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
considered "underwriters" under Section 2(11) of the Securities Act; any
commissions received by them and any profit on the resale of shares as
principals might be considered 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.
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 on 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 on the uncertainty
regarding Applied Magnetics Corporation's ability to continue as a going concern
as discussed in Note 1 to the financial statements.
48
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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-23
Unaudited Condensed Consolidated Statements of Operations
for the six months ended April 3, 1999 and April 4, 1998............... F-24
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended April 3, 1999 and April 4, 1998............... F-25
Notes to Condensed Consolidated Financial Statements..................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Applied Magnetics Corporation:
We have audited the accompanying consolidated balance sheets of Applied
Magnetics Corporation (a Delaware corporation) and subsidiaries as of 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)
<TABLE>
<CAPTION>
AS OF
--------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
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>
<CAPTION>
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
-------------------------------------------- -------------------------------------------
RETAINED UNEARNED
NUMBER OF PAID-IN EARNINGS NUMBER OF RESTRICTED STOCK
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT COMPENSATION
--------- ----------- --------- --------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995......... 22,619,205 $ 2,262 $ 181,191 $ (79,031) 96,603 $ (830) $ --
Stock options exercised........... 582,772 58 2,945 -- -- -- --
Purchase of treasury stock, net... -- -- -- -- 20,392 (364) --
Litigation settlement............. 81,070 8 1,242 -- -- -- --
Net income........................ -- -- -- 32,218 -- -- --
--------- ----------- --------- --------- ----------- ----------- ---
Balance, September 28, 1996......... 23,283,047 2,328 185,378 (46,813) 116,995 (1,194) --
Stock options exercised........... 668,296 67 5,008 -- -- -- --
Purchase of treasury stock, net... -- -- -- -- 11,389 (360) --
Restricted stock issuance, net.... 25,368 3 799 -- -- -- (802)
Amortization of unearned
restricted stock compensation,
net............................. -- -- -- -- -- -- 251
Net income........................ -- -- -- 96,116 -- -- --
--------- ----------- --------- --------- ----------- ----------- ---
Balance, September 27, 1997......... 23,976,711 2,398 191,185 49,303 128,384 (1,554) (551)
Stock options exercised........... 128,650 13 640 -- -- -- --
Purchase of treasury stock, net... -- -- -- -- 1,849 (23) --
Restricted stock issuance, net.... (2,067) (1) (600) -- -- -- 550
Amortization of unearned
restricted stock compensation,
net............................. -- -- -- -- -- -- (32)
Net loss.......................... -- -- -- (155,368) -- -- --
--------- ----------- --------- --------- ----------- ----------- ---
Balance, October 3, 1998............ 24,103,294 $ 2,410 $ 191,225 $(106,065) 130,233 $ (1,577) $ (33)
--------- ----------- --------- --------- ----------- ----------- ---
--------- ----------- --------- --------- ----------- ----------- ---
<CAPTION>
SHAREHOLDERS'
INVESTMENT
-------------
<S> <C>
Balance, September 30, 1995......... $ 103,592
Stock options exercised........... 3,003
Purchase of treasury stock, net... (364)
Litigation settlement............. --
Net income........................ 32,218
-------------
Balance, September 28, 1996......... 139,699
Stock options exercised........... 5,075
Purchase of treasury stock, net... (360)
Restricted stock issuance, net.... --
Amortization of unearned
restricted stock compensation,
net............................. 251
Net income........................ 96,116
-------------
Balance, September 27, 1997......... 240,781
Stock options exercised........... 653
Purchase of treasury stock, net... (23)
Restricted stock issuance, net.... (51)
Amortization of unearned
restricted stock compensation,
net............................. (32)
Net loss.......................... (155,368)
-------------
Balance, October 3, 1998............ $ 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 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.
F-7
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
F-8
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-9
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
F-10
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENTS OF BUSINESS (CONTINUED)
Export sales are made by the United States operations to the following
geographic locations (in thousands):
<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.
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>
F-11
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENTS OF BUSINESS (CONTINUED)
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.
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>
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
F-12
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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-13
<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-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (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 EXERCISABLE
OPTIONS OUTSTANDING --------------------------
- ---------------------------------------------------- WEIGHTED WEIGHTED
RANGE OF EXERCISE WEIGHTED AVERAGE AVERAGE AVERAGE
PRICES NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE 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>
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.
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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 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.
F-16
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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 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.
F-17
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 not in compliance with all financial covenants
but has received notification from the Company's lender waiving the area of
non-compliance until July 31, 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.
F-18
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
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>
F-19
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
F-20
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING CHARGE (CONTINUED)
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 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.
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.
F-21
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
<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-22
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--UNAUDITED
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
<TABLE>
<CAPTION>
APRIL 3, OCTOBER 3,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
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-23
<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-24
<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-25
<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 supplies.............................. $ 949 $ 8,578
Work in process......................................................... 1,280 2,414
Finished goods.......................................................... -- 2,062
--------- -----------
2,229 13,054
--------- -----------
--------- -----------
</TABLE>
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
F-26
<PAGE>
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
(APRIL 3, 1999)
NOTE C: WRITEDOWN OF ASSETS AND RESTRUCTURING CHARGE (CONTINUED)
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-27
<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 WITH THIS PROSPECTUS 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 4
Where You Can Find More Information....................................... 7
Use of Proceeds........................................................... 8
Dividends................................................................. 8
Market for Common Stock................................................... 8
Capitalization............................................................ 8
Selected Consolidated Financial Data...................................... 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 11
Forward Looking Information............................................... 19
Recent Developments....................................................... 19
Business.................................................................. 22
Properties................................................................ 31
Legal Proceedings......................................................... 32
Security Ownership of Principal Stockholders and Management............... 33
Management................................................................ 34
Management Compensation................................................... 35
Selling Stockholders...................................................... 38
Description of Capital Stock.............................................. 42
Plan of Distribution...................................................... 47
Legal Matters............................................................. 48
Experts................................................................... 48
Index to Consolidated Financial Statements................................ F-1
</TABLE>
30,444,435
APPLIED MAGNETICS CORPORATION
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................................... 30,000
Accounting fees and expenses...................................... 25,000
Legal fees and expenses........................................... 75,000
Miscellaneous expenses............................................ 7,500
---------
Total......................................................... $ 142,680
---------
---------
</TABLE>
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 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)
II-1
<PAGE>
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 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.
II-2
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
4.1 Form of senior subordinated convertible note.
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1 Amended and Restated Exchange Agreement by and between Applied Magnetics
Corporation and Kennilworth Partners II LP
10.2 Amended and Restated Registration Rights Agreement by Applied Magnetics
Corporation and Kennilworth Partners II LP
23.1 Consent of Sheppard, Mullin, Richter & Hampton LLP (included in Exhibit
5.1)
23.2 Consent of Arthur Andersen LLP
24.1* Power of Attorney of certain officers and directors
</TABLE>
- ------------------------
*Previously filed.
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;
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
II-3
<PAGE>
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 30, 1999.
APPLIED MAGNETICS CORPORATION
By /s/ CRAIG D. CRISMAN
-----------------------------------------
Craig D. Crisman
CHIEF EXECUTIVE OFFICER
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------- ---------------
<C> <S> <C>
/s/ CRAIG D. CRISMAN Chairman of the Board and Chief
------------------------------------------- Executive Officer (principal executive June 30, 1999
Craig D. Crisman officer, principal financial officer)
/s/ PETER T. ALTAVILLA
------------------------------------------- Secretary and Controller (principal June 30, 1999
Peter T. Altavilla accounting officer)
/s/ HERBERT DWIGHT, JR.*
------------------------------------------- Director June 30, 1999
Herbert Dwight, Jr.
/s/ HAROLD FRANK*
------------------------------------------- Director June 30, 1999
Harold Frank
/s/ JERRY GOLDRESS*
------------------------------------------- Director June 30, 1999
Jerry Goldress
/s/ R. C. MERCURE*
------------------------------------------- Director June 30, 1999
R. C. Mercure
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By /s/ CRAIG D. CRISMAN
-------------------------
Craig D. Crisman
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT 4.1
EXECUTION VERSION
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
SENIOR SUBORDINATED CONVERTIBLE NOTE
DUE JULY __, 2005
$37,776,716.00 July __, 1999
This Senior Subordinated Convertible Note (the "Note") is executed and
delivered under and pursuant to the terms of that certain Amended and Restated
Exchange Agreement, dated as of June 29, 1999 (the "Agreement"), between Applied
Magnetics Corporation, a Delaware corporation (the "Maker"), and Kennilworth
Partners II LP, a Delaware limited partnership ("Holder").
FOR VALUE RECEIVED, Maker promises to pay to the order of Holder
the principal sum of Thirty-Seven Million Seven Hundred Seventy-Six Thousand
Seven Hundred Sixteen Dollars ($37,776,716) (the "Principal Amount") on July
__, 2005 (the "Maturity Date"), which amount includes a borrowing in the
amount of Twenty-Five Million Dollars ($25,000,000) (the "Borrowing Amount"),
together with zero coupon interest compounded quarterly through July __, 2002
(the "Zero Coupon Date"), and interest from the Zero Coupon Date on the
unpaid Principal Amount at 14% per annum, which interest (the "Interest")
shall accrue on a daily basis using quarterly compounding. The Principal
Amount of and Interest on this Note shall be paid in lawful money of the
United States of America at the principal office of Holder, 40 Cuttermill
Road, Suite 308, Great Neck, New York 11021, or at such other place as Holder
may designate to Maker from time to time.
1. INTEREST PAYMENTS. Interest payments on the Note shall be payable
in cash quarterly in arrears on the first day of April, July, October and
January in each year (each such date being referred to herein as a
"Quarterly Interest Payment Date"), commencing on the first Quarterly
Interest Payment Date after the Zero Coupon Date. If
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<PAGE>
any Quarterly Interest Payment Date occurs on a day that is not a business
day, any accrued interest payments otherwise payable on such Quarterly
Interest Payment Date shall be paid, without interest, on the next succeeding
business day. Interest payments payable on any Quarterly Interest Payment
Date with respect to a period (a "Interest 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 Interest Period. Interest payments on
account of arrears for any past Interest Periods may be declared and paid at
any time to holders of record on the payment date.
2. CONVERSION.
2.1 OPTIONAL CONVERSION BY HOLDER. The Note (or any portion
thereof) shall be convertible, at the option of the holder thereof, at any
time, into seven million twenty-eight thousand two hundred twenty-four
(7,028,224) shares of Common Stock (or the applicable PRO RATA portion
thereof). Such conversion reflects a conversion price of $3.557085 per share
of Common Stock (the "Conversion Price"). Notwithstanding the foregoing, if
at any time on or after the date that each of the following shall be true:
(a) the Maker has sold, transferred, pledged, assigned or otherwise
encumbered assets with a market value reasonably estimated at greater than
five million dollars ($5,000,000) when aggregated with all other assets sold,
transferred, pledged, assigned or otherwise encumbered after the date hereof,
other than assets encumbered solely to secure existing Senior Indebtedness
(as described below), and (b) the Maker shall have had negative net income or
negative net operating income in its most recent fiscal quarter (the
"Conversion Price Adjustment Date"), the Conversion Price shall be adjusted
(to the extent such adjustment reflects a decrease in the Conversion Price)
to a 10% premium to the average closing price of the Common Stock as reported
on any of the New York Stock Exchange, any national securities exchange or
the National Market System of the National Association of Securities dealers,
Inc. (an "Exchange") for five (5) business days prior to the Conversion Price
Adjustment Date. Maker shall give prompt written notice to the Holder of the
occurrence of a Conversion Price Adjustment Date which, if practicable, shall
be not less than seven days prior thereto.
2.2 MANDATORY CONVERSION.
2.2.1 MANDATORY CONVERSION BY MAKER IN YEAR ONE. In the event
that, on or prior to July __, 2000, the closing price of the Common Stock as
reported on any Exchange is greater than or equal to ten
dollars and seventy-five cents ($10.75) per share for twenty (20) of thirty
(30) consecutive business days, at the option of the Maker, the Note shall be
converted into seven million twenty-eight thousand two hundred twenty-four
(7,028,224) shares of Common Stock.
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<PAGE>
2.2.2 MANDATORY CONVERSION BY MAKER FOLLOWING YEAR ONE. In the
event that, after July __, 2000, the closing price of the Common Stock as
reported by any Exchange is greater than or equal to seven dollars ($7.00)
for twenty (20) of thirty (30) consecutive business days, at the option of
the Maker, the Note shall be converted into seven million twenty-eight
thousand two hundred twenty-four (7,028,224) shares of Common Stock.
2.2.3 MANDATORY CONVERSION TO PREFERRED STOCK. In the event that
(a) Maker meets or exceeds the projections set forth on Schedule 1 hereto for
the four fiscal quarters following the date hereof and (b) Maker consummates
a rights offering with net proceeds of not less than $40,000,000 to Maker,
this Note shall be converted into that number of shares of Maker's Series B
Convertible Preferred Stock equal to a fraction, the numerator of which shall
be the sum of the Borrowing Amount, together with interest accrued on a daily
basis through such conversion date using quarterly compounding at the rate of
14% per annum, and the denominator of which shall be one hundred dollars
($100). The terms of the Series B Convertible Preferred Stock will be exactly
identical to this Note.
2.3 MECHANICS OF CONVERSION.
2.3.1 MECHANICS OF OPTIONAL CONVERSION. In order to convert
the Note into shares of Common Stock pursuant to Section 2.1,
Holder shall surrender the Note at the office of the transfer agent, together
with written notice (the "Optional Conversion Notice") that Holder elects to
convert the Note (or any part hereof). The Optional Conversion Notice shall
state (i) the Holder's name or the names of the nominees in which the 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 Maker,
upon its surrender the Note shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Maker,
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 Maker. The Maker 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. From and after the Optional
Conversion Date, all interest on the Note shall cease to accrue, all rights
of the Holder (except the right to receive certificates representing the
applicable number of shares of Common Stock upon surrender of the Note) shall
cease with respect to such Note, and the Note shall thereafter not be deemed
to be outstanding for any purpose whatsoever.
2.3.2 MECHANICS OF MANDATORY CONVERSION. In order for the Maker
to convert the Note into shares of Common Stock pursuant to Section 2.2, at
least fifteen (15) days prior to the date set by the Board of Directors on
which the Note will automatically be converted to Common Stock (the
"Mandatory Conversion Date"), written
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<PAGE>
notice (the "Mandatory Conversion Notice") shall be given to each Holder at
Holder's address last shown on the records of the Maker, specifying the
applicable Conversion Price and the Mandatory Conversion Date. On or after
and as of the Mandatory Conversion Date, the Note shall be deemed converted
into shares of Common Stock in accordance with Section 2.2 above. From and
after the Mandatory Conversion Date, all interest on the Note shall cease to
accrue, all rights of the Holder (except the right to receive certificates
representing the applicable number of shares of Common Stock upon surrender
of the Note) shall cease with respect to such Note, and the Note shall
thereafter not be deemed to be outstanding for any purpose whatsoever.
2.4 INTEREST PAYABLE ON CONVERSION. Unpaid Interest accruing from
the Zero Coupon Date through any Optional or Mandatory Conversion Date shall
be due and payable upon conversion and, thereafter, any unpaid amount of
Interest shall be deemed unpaid principal and shall accrue interest at the
rate applicable to the Principal Amount immediately prior to such conversion.
2.5 TERMINATION OF RIGHTS UNDER THE NOTE. All or any portion of
the Note 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 or Series B
Convertible Preferred Stock in exchange therefor. The conversion rights of
the Note shall continue to, and terminate on, the Maturity Date.
3. SUBORDINATION.
3.1 SUBORDINATION TO SENIOR OBLIGATIONS. The Maker covenants and
agrees, and by its acceptance hereof Holder likewise covenants and agrees,
that, to the extent and in the manner hereinafter set forth in this Section,
this Note, and the payment of the principal and interest hereunder
(collectively, the "Senior Subordinated Obligations"), are hereby expressly
made subordinate and subject in right of payment to the prior payment in full
in cash of all indebtedness of the Maker now existing or hereinafter arising
under (i) the Guarantees entered into by the Company prior to the date hereof
and as amended from time to time relating to loan agreements between Applied
Magnetics (M) SDN BHD, a wholly-owned subsidiary of the Company, and (a) RHB
Bank Berhad, formerly known as DCB Bank of Berhad, dated December 10, 1996,
(b) Arab-Malaysian Bank Berhad, dated July 18, 1996, (c) Ban Hin Lee Bank
Berhad, dated April 8, 1997, (d) Malayan Banking Berhad, April 19, 1995, and
(e) United Overseas Bank (Malaysia) Bhd, dated August 18, 1998, as each may
have been amended from time to time, and (ii) its loan agreements with CIT
Group/Business Credit Financing Agreement dated January 11, 1995, as amended
from time to time (together with the Guarantees, the "Senior Indebtedness
Documents"), including any future borrowings under such Senior Indebtedness
Documents, and all related interest, fees, expenses and other amounts payable
thereunder (the "Senior Indebtedness"), provided, that, notwithstanding
anything to the contrary contained herein, at any time of determination, the
Senior Subordinated Obligations shall be subordinated pursuant to the terms
hereof only to that amount of such Senior Indebtedness that at such time
would be permitted to be outstanding under the terms of the Senior
Indebtedness Documents as in effect on the date hereof and without giving
effect to any subsequent amendments thereto. Such Senior Indebtedness shall
constitute the only indebtedness of Maker which shall be higher in priority
to the Senior Subordinated Obligations and Maker agrees that no additional
indebtedness, other than the Senior Indebtedness and any future
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<PAGE>
borrowings under the Senior Indebtedness Documents, shall be incurred which
is senior to or pari passu with the Senior Subordinated Obligations. The
Holder hereby agrees not to amend or otherwise modify any provision of this
Section without the prior written consent of the holders of all Senior
Indebtedness. This Section shall be reinstated if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by
any holder of Senior Indebtedness or any agent of such holder. The holders
of the Senior Indebtedness are third-party beneficiaries of the provisions of
this Section and are entitled to rely hereon.
3.2 SENIORITY TO JUNIOR OBLIGATIONS. The Maker covenants and
agrees and, by its acceptance hereof Holder likewise covenants and agrees,
that, to the extent and in the manner set forth in this Section, this Note,
and the payment of the Principal Amount and Interest hereunder, are expressly
made senior to those certain 7% Convertible Subordinated Debentures of the
Company (the "Junior Indebtedness") and all related interest, fees, expenses
and other amounts payable with respect to such Junior Indebtedness.
3.3 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION. In the event of
(a) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to Maker or its assets, or (b) any liquidation,
dissolution or other winding up of Maker, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any assignment
for the benefit of creditors or any the marshaling of assets and liabilities
of Maker, then and in any such event:
(x) the holders of Senior Indebtedness shall be entitled to receive
payment in full of all amounts due or to become due on or in respect of all
Senior Indebtedness, before Holder is entitled to receive any payment on
account of the Senior Subordinated Obligations and Holder shall be entitled
to receive payment in full of all amounts due or to become due on or in
respect of this Note, before the holders of the Junior Indebtedness are
entitled to receive any payment on account of the Junior Indebtedness.
(y) any payment or distribution of assets of Maker of any kind or
character to which Holder would be entitled but for the provisions of this
Section (other than any payment or distribution in the form of equity
securities or other securities subordinated in right of payment to all
Senior Indebtedness the same extent as, or to a greater extent than, the
Senior Subordinated Obligations) shall be paid to the holders of Senior
Indebtedness, to the extent necessary to make payment in full in cash of
all Senior Indebtedness; and
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<PAGE>
(z) in the event that, notwithstanding the foregoing provisions of
this Section, Holder shall have received any such payment or distribution
(but excluding any payment of the character described in the parenthetical
clause in the foregoing clause (y)) before all Senior Indebtedness is paid
in full in cash, then such payment or distribution shall be held in trust
for the holders of the Senior Indebtedness and paid over or delivered
forthwith for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in
full in cash, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness, with any excess to be
promptly returned to Holder for application hereto.
If Holder fails to file claims or proofs of claim in any proceeding of the
type referred to in the first sentence of this Section earlier than 10 days
prior to the deadline for any such filing, Holder hereby appoints the holders of
the Senior Indebtedness as its attorney (i) to file such claims or proofs of
claim and/or (ii) if Holder fails to vote any such claim at least 10 days prior
to the expiration of the time to vote such claim, to vote such claim; provided,
that the Senior Indebtedness shall have no obligation to file and/or vote any
such claim.
3.4 NON-PAYMENT IN CERTAIN CIRCUMSTANCES. (a) In the event that
any payment of principal of or interest on the Senior Indebtedness is not
paid when due, whether at stated maturity, by mandatory prepayment, by
acceleration or otherwise ("Payment Default"), then no payment shall be made
by Maker, or accepted by Holder, on account of the Senior Subordinated
Obligations, unless and until such payment shall have been made or such Payment
Default is waived in accordance with the terms of the Senior Indebtedness.
(b) In the event that any event of default other than a Payment
Default (each a "Non-Payment Default") has occurred and is continuing and
Maker and Holder shall have received written notice of such Non-Payment
Default (a "Blockage Notice") from the holders of the Senior Indebtedness,
then no payment shall be made by Maker, or accepted by Holder, on account of
the Senior Subordinated Obligations during the period commencing on the date
Maker and Holder received such Blockage Notice and ending on the earlier of
(A) the date 120 days thereafter and (B) the date on which such Non-Payment
Default has been cured or waived; provided, that (x) in any 365 consecutive
day period, irrespective of the number of defaults with respect to Senior
Indebtedness during such period, Blockage Notices may be in effect for no
more than 120 days in the aggregate and (y) a Non-Payment Default, or an
event which, with the giving of notice and/or lapse of time, would become a
Non-Payment Default which existed on the date of the commencement of any such
blockage period and has since matured into an Event of Default, may be used
as the basis for any subsequent Blockage Notice unless such Non-Payment
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<PAGE>
Default or event, as the case may be, shall in the interim have been cured or
waived.
(c) The failure of Maker to make any payment with respect to the
Senior Subordinated Obligations by reason of the operation of this Section
shall not be construed as preventing the occurrence of a default hereunder.
Immediately upon the expiration of any period under this Section during which
no payment may be made on account of the Senior Subordinated Obligation,
Maker may resume making any and all payments on account of the Senior
Subordinated Obligations (including any payment of principal, interest or any
other amount missed during such period), which payment (if so made in full)
shall be deemed to have cured, and Holder shall be deemed to have waived, any
default which may arise on account of any such missed payment.
(d) In the event that, notwithstanding the foregoing, Holder shall
have received any payment prohibited by this Section, then and in such event
such payment shall be held in trust for the holders of the Senior Indebtedness
and paid over and delivered forthwith to the agent for the holders of the Senior
Indebtedness for application to the Senior Indebtedness to the extent then
payable, with any excess to be returned promptly to Holder for application
hereto.
3.5 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full in cash of all Senior Indebtedness, Holder
shall be subrogated to the rights of the holders of the Senior Indebtedness
to receive payments and distributions of cash, property and securities
applicable to the Senior Indebtedness until the principal of and interest on
this Note shall be paid in full. For purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of any cash,
property or securities to which Holder would be entitled except for the
provisions of this Section, and no payments pursuant to the provisions of
this Section to the holders of Senior Indebtedness by Holder shall, as among
Maker, its creditors (other than holders of Senior Indebtedness), and Holder
be deemed to be a payment or distribution by Maker to or on account of the
Senior Indebtedness.
3.6 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions
of this Section 3 are and are intended solely for the purpose of defining the
relative rights of Holder on the one hand and the holders of Senior
Indebtedness on the other hand. Nothing contained in this Section or
elsewhere in this Note is intended to or shall impair, as among Maker and
Holder, the obligation of Maker, which is absolute and unconditional, to pay
to Holder the principal of and interest under this Note as and when the same
shall become due and payable.
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<PAGE>
3.7 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any
present or future holder of any Senior Indebtedness to enforce subordination
as herein provided shall at any time in any way be prejudiced or impaired by
any act or failure to act on the part of Maker or by any act or failure to
act, in good faith, by any such holder, or by any non-compliance by Maker
with the terms, provisions and covenants of this Note, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing sentence, the
holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to Holder, without incurring responsibility
to Holder and without impairing or releasing the subordination provided in
this Section or the obligations hereunder of Holder to the holders of Senior
Indebtedness, do any one or more of the following: (a) change the manner,
place or terms of payment or extend the time of payment of, or renew or
alter, Senior Indebtedness or any instrument evidencing the same or any
agreement under which Senior Indebtedness is outstanding, provided, that the
Senior Indebtedness Documents may not be amended to increase the amount of
any Senior Indebtedness that may be outstanding at any time; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; and (c) exercise or refrain from
exercising any rights against Maker and any other person.
3.8 LIMITATION ON RIGHTS AND REMEDIES: NOTICE OF EXERCISE OF
REMEDIES. Notwithstanding anything contained herein to the contrary, for any
period during which Holder shall be blocked from receiving payments pursuant
to Section 3.4 hereof (but in no event exceeding 60 days), Holder shall not
(i) accelerate any portion of the Senior Subordinated Obligation, (ii)
initiate any judicial proceeding or action to collect any portion of the
Senior Subordinated Obligation, or (iii) initiate any case, proceeding or
other action in respect of Maker of the type referred to in clause (a) or (b)
of clause (b) (each a "Proceeding") hereof unless, prior to the expiration of
such period, (i) the holders of the Senior Indebtedness shall take any such
action in respect of the Senior Indebtedness or (ii) the Senior Indebtedness
and/or the Senior Subordinated Obligations shall have become automatically
due payable in accordance with their respective terms.
3.9 ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(a) Special Definitions. For purposes of this Section, the
following definitions shall apply:
(1) "Option" shall mean rights, options or warrants issued
by the Maker to subscribe for, purchase or otherwise
acquire Common Stock or Convertible Securities.
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<PAGE>
(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 pursuant to
Section 3.9(b) to be issued) by Maker after the date
hereof, other than Key Employee Shares (as defined
below) and other than shares of capital stock issued
or issuable:
(A) upon conversion of shares of Series B Convertible
Preferred Stock;
(B) pursuant to Options or Convertible Securities
outstanding on the date hereof; or
(C) 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 Maker pursuant to any restricted
stock plan or agreement heretofore approved by the
Board of Directors.
(5) "Rights to Acquire Common Stock" (or "Rights") shall
mean all rights issued by this Maker 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 Maker at any time or from time to time
after the date hereof
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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:
(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 such readjustment or 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 Maker shall at any time
after the date hereof 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 (as adjusted until the Zero Coupon Date to
give effect to a per annum accretion rate of 14%), then and
in such event, such Conversion Price shall be reduced,
concurrently with such issue to a price (calculated to the
nearest cent) determined
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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 Maker 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).
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, the consideration received by the Maker 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 Maker,
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 Maker 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
Maker's Board of Directors.
(2) OPTIONS, RIGHTS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Maker for
Additional Shares of
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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 Maker 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
Maker upon the exercise of such Options, Rights
or the conversion or exchange of such
Convertible Securities, by
(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.
3.10 ADJUSTMENT FOR STOCK SPLITS, DIVIDENDS AND COMBINATIONS. If
the Maker shall at any time or from time to time after the date hereof effect
a subdivision of the outstanding Common Stock or shall issue a dividend in
Common Stock on its outstanding Common Stock, the Conversion Price then in
effect immediately before that subdivision shall be proportionately
decreased. If the Maker shall at any time or from time to time after the date
hereof combine the outstanding shares of Common Stock into a lesser number of
shares of Common Stock, the 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.
3.11 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 the Note, Holder 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 the Note might
have been converted immediately prior to such reorganization,
reclassification, or change, all subject to further adjustment as provided
herein.
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<PAGE>
3.12 ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In case of any
consolidation or merger of the Maker with or into another corporation or the
sale of all or substantially all of the assets of the Maker to another
corporation, the Note 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 Maker deliverable upon
conversion of the Note 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 Holder, 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 applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter
deliverable upon the conversion of the Note. In the event that the
consolidation or merger is an all-cash transaction, Holder shall be entitled
to cash payment on an as-converted basis.
3.13 CHANGE IN CONTROL. In addition to any adjustment provided in
Section 3.12, Holder will have the right, at Holder's option, to cause Maker
to purchase the Note, in whole or in part, for a cash amount equal to the
accreted value of the Note, based on the Borrowing Amount, through the
effective date of the purchase by Maker, 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, the Note must be received with a duly executed written
notice at the office of the Maker not later than the fifth business day prior
to the date fixed for such purchase. Upon such purchase, the Note will be
canceled. Following tender of a notice of purchase, Holder will be entitled
to revoke its election by delivering a written notice of such revocation to
the Maker 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 Maker 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 Maker 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
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<PAGE>
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 Maker 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 Maker
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the stockholders of the Maker was 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 Maker then in office.
3.14 NO IMPAIRMENT. The Maker 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
Maker, 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 Holder
of the Note.
3.15 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section,
the Maker at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to Holder 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 Maker
shall, upon the written request at any time of Holder, 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 the Note.
Despite such adjustment or readjustment, the form of each or all certificates
for the Note, 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 Section
which shall control.
4. MISCELLANEOUS.
4.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or
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<PAGE>
privilege preclude other or further exercise thereof or of any other right,
power or privilege. All rights and remedies existing hereunder are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
4.2 RESERVATION OF SHARES. The Maker has authorized, and shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to the effect the conversion of this Note
into shares of Common Stock as provided for herein and, if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of this Note, Maker will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose. The Maker has authorized, and
shall at all times reserve and keep available out of its authorized but
unissued shares of Series B Convertible Preferred Stock, such number of its
shares of Series B Convertible Preferred Stock as shall from time to time be
sufficient to the effect the conversion of this Note into shares of Series B
Convertible Preferred Stock as provided for herein and, if at any time the
number of authorized but unissued shares of Series B Convertible Preferred
shall not be sufficient to effect the conversion of this Note, Maker will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Series B
Convertible Preferred Stock to such number of shares as shall be sufficient
for such purpose, provided that, in no event shall any Series B Convertible
Preferred Stock, other than such stock issued upon conversion of and in
exchange for this Note, be issued by the Maker.
4.3 AMENDMENT AND CONSENT. The term "Note" or "this Note" and
all references thereto, as used throughout this instrument, shall mean this
instrument as originally executed or if later amended or supplemented, then,
as so amended or supplemented. This Note may be amended only by a writing
executed by Maker and consented to by Holder.
4.4 ASSIGNABILITY. This Note shall be binding upon Maker, its
successors and assigns, and shall inure to the benefit of Holder, and any
successors and assigns of Holder. This Note may be sold, assigned, pledged
or otherwise encumbered, in whole or in part, without the prior written
consent of Maker.
4.5 WAIVERS. The Maker hereby waives presentment, demand for
payment, dishonor, notice of dishonor, protest, notice of protest and any
other notice or formality, to the fullest extent permitted by applicable law.
4.6 COST OF COLLECTION. If default is made in the payment of
this Note or should any other Event of Default occur, Maker shall pay or
reimburse all of Holder's costs of collection, including reasonable
attorneys' fees, which amounts shall be payable on demand and accrue interest
at the rate then applicable to the Borrowed Amount.
4.7 NON-BUSINESS DAYS. If any payment to be made by the Maker
under this Note shall become due on a day other than a Business Day (as
defined in the Agreement), payment shall instead by considered to be due on
the succeeding Business Day and any extension of time shall be reflected in
computing interest.
4.8 GOVERNING LAW. THIS NOTE SHALL BE DELIVERED TO AND ACCEPTED
BY HOLDER IN THE STATE OF NEW YORK, AND SHALL BE
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<PAGE>
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS
THEREOF.
IN WITNESS WHEREOF, Maker has caused this Note to be signed in its
name by its duly authorized officers.
DATED: July__, 1999.
APPLIED MAGNETICS CORPORATION
a Delaware corporation
By __________________________________
Its ________________________________
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SCHEDULE 1
For the quarter ended September 30, 1999:
Net revenues of not less than $33.3 million
Net loss of not more than $31 million
Cash of not less than $32 million
For the quarter ended December 31, 1999:
Net revenues of not less than $49.8 million
Net loss of not more than $21 million
Cash of not less than $23 million
For the quarter ended March 31, 2000:
Net revenues of not less than $66.2 million
Net loss of not more than $10 million
Cash of not less than $27 million
For the quarter ended June 30, 2000:
Net revenues of not less than $85.6 million
Net profit of not less than $2 million
Cash of not less than $44 million
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<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-1
----------------------------------
Ladies and Gentlemen:
As special counsel for Applied Magnetics Corporation, a Delaware
corporation ("AMC"), in connection with AMC's Registration Statement on Form
S-1, No. 333-74107 (the "Registration Statement"), registering a maximum of
30,721,185 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 29, 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
June __, 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
AMENDED AND RESTATED
EXCHANGE AGREEMENT
By and Between
APPLIED MAGNETICS CORPORATION
and
KENNILWORTH PARTNERS II LP
Dated as of June 29, 1999
<PAGE>
AMENDED AND RESTATED EXCHANGE AGREEMENT
This Amended and Restated Exchange Agreement (the "Agreement") is made
as of June 29, 1999, by Kennilworth Partners II LP, a Delaware limited
partnership ("Kennilworth"), and Applied Magnetics Corporation, a Delaware
corporation (the "Company").
WHEREAS, Kennilworth and the Company have previously entered into an
Exchange Agreement, dated as of May 10, 1999 (the "Prior Agreement");
WHEREAS, Kennilworth and the Company now desire to amend the terms of
the Prior Agreement to reflect certain changes to the agreements previously
reached between the two parties;
WHEREAS, at this time and in lieu of the transactions contemplated
by the Prior Agreement and all agreements ancillary thereto, Kennilworth
desires to purchase, and the Company desires to sell to Kennilworth, and
Kennilworth desires to purchase from the Company six million (6,000,000)
shares of the common stock, $.10 par value, of the Company (the "Common
Shares") for a total purchase price of twenty-four million dollars
($24,000,000) (the "Stock Purchase");
WHEREAS, the Company desires to sell to Kennilworth and Kennilworth
desires to purchase from the Company for the sum of twenty-five million
dollars ($25,000,000) (the "Note Purchase Price") a Senior Subordinated
Convertible Note (the "Note") in the aggregate principal amount of
thirty-seven million seven hundred seventy-six thousand seven hundred sixteen
dollars ($37,776,716) reflecting interest accruing on the Note on a
zero-coupon basis for the first three years after the issuance thereof (the
"Note Purchase");
WHEREAS, in connection with the Stock Purchase and the Note
Purchase, the Company desires to purchase from Kennilworth, and Kennilworth
desires to sell to the Company (the "Debenture Purchase") certain 7%
Convertible Subordinated Debentures of the Company in the aggregate principal
amount of twenty-four million dollars ($24,000,000) (the "Debentures");
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein, the parties agree as follows:
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<PAGE>
1. STOCK PURCHASE; BOND PURCHASE.
1.1 STOCK PURCHASE. Subject to the terms and conditions of this
Agreement,
(a) On the initial closing date (the "Initial Closing Date"),
which shall be as promptly as practicable following the
fulfillment or waiver of all conditions to the Initial
Closing, the Company will issue and sell three million
(3,000,000) Common Shares to Kennilworth (the "Tranche
One Shares"), and Kennilworth will purchase the Tranche
One Shares from the Company;
(b) On that day which is forty-five (45) days after the
Initial Closing Date (the "Second Closing Date"), the
Company will issue and sell one million five hundred
thousand (1,500,000) Common Shares to Kennilworth (the
"Tranche Two Shares"), and Kennilworth will purchase the
Tranche Two Shares from the Company; and
(c) On that day which is ninety (90) days after the Initial
Closing Date (the "Third Closing Date" and, together with
the First Closing Date and the Second Closing Date, the
"Closing Dates") the Company will issue and sell one
million five hundred thousand (1,500,000) Common Shares to
Kennilworth (the "Tranche Three Shares"), and Kennilworth
will purchase the Tranche Three Shares from the Company.
1.2 PURCHASE PRICE FOR COMMON SHARES. The purchase price (the "Share
Purchase Price") for (a) the Tranche One Shares will be twelve million
dollars ($12,000,000) (the "Tranche One Purchase Price"); (b) the
Tranche Two Shares will be six million dollars ($6,000,000) (the
"Tranche Two Purchase Price); and (c) the Tranche Three Shares will be
six million dollars ($6,000,000) (the "Tranche Three Purchase Price").
The respective Share Purchase Prices shall be paid to the Company on
each of the three respective Closing Dates in U.S. dollars by wire
transfer of immediately available funds to an account designated in
writing by the Company.
1.3 NOTE AND NOTE ISSUANCE. On the Initial Closing Date, the Company
shall execute and deliver to Kennilworth the Note, which shall be
substantially in the form of that certain Senior Subordinated
Convertible Note attached hereto as Exhibit B. The aggregate
principal amount of the Note Purchase Price shall be paid to the
Company on the Initial Closing Date in U.S. dollars by wire transfer
of immediately available funds to an account designated in writing
by the Company.
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<PAGE>
1.4 DEBENTURE PURCHASE.
(a) On the Initial Closing Date, the Company shall tender
payment in the amount of twelve million dollars
($12,000,000) (the "Tranche One Debenture Payment") and
purchase from Kennilworth Debentures in the aggregate
principal amount of twelve million dollars ($12,000,000)
(the "Tranche One Debentures") and any and all interest
due on such Tranche One Debentures through the Initial
Closing Date;
(b) On the Second Closing Date, the Company shall tender payment
in the amount of six million dollars ($6,000,000) (the
"Tranche Two Debenture Payment) and purchase from
Kennilworth Debentures in the aggregate principal amount of
six million dollars ($6,000,000) (the "Tranche Two
Debentures") and any and all interest due on such Tranche
Two Debentures through the Second Closing Date; and
(c) On the Third Closing Date, the Company shall tender payment
in the amount of six million dollars ($6,000,000) (the
"Tranche Three Debenture Payment") and purchase from
Kennilworth Debentures in the aggregate principal amount
of six million dollars ($6,000,000) (the "Tranche Three
Debentures") and any and all interest due on such Tranche
Three Debentures through the Third Closing Date.
(d) The Tranche One Debenture Payment, Tranche Two Debenture
Payment and Tranche Three Debenture Payment shall be paid
to Kennilworth on each of the three respective Closing
Dates in U.S. dollars by wire transfer of immediately
available funds to an account designated in writing by
Kennilworth.
1.5 INITIAL CLOSING DATE OBLIGATIONS. On the Initial Closing Date:
(a) The Company will deliver to Kennilworth:
(i) a certificate representing the Tranche One
Shares;
(ii) the Note, duly executed by the Company;
(iii) the Tranche One Debenture Payment and any and
all interest due on such Tranche One
Debentures through the Initial Closing Date;
(iv) an Amended and Restated Registration Rights
Agreement substantially in the form of
Exhibit C hereto, executed by the Company
(the "Registration Rights Agreement");
(v) a certificate executed by the Company
representing and warranting to Kennilworth
that each of the Company's representations
and warranties in this Agreement is accurate
in all material respects as of the Initial
Closing Date; and
(vi) such other agreements, certificates or
documents as may be reasonably requested by
Kennilworth.
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<PAGE>
(b) Kennilworth will deliver to the Company:
(i) the Tranche One Purchase Price;
(ii) the Note Purchase Price;
(iii) the Tranche One Debentures, duly endorsed
for delivery;
(iv) the Registration Rights Agreement, executed
by Kennilworth;
(v) a certificate executed by Kennilworth
representing and warranting to the Company
that each of Kennilworth's representations
and warranties in this Agreement is accurate
in all material respects as of the Initial
Closing Date; and
(vi) such other agreements, certificates or
documents as may be reasonably requested by
the Company.
1.6 SECOND CLOSING DATE OBLIGATIONS. On the Second Closing Date:
(a) The Company will deliver to Kennilworth:
(i) a certificate representing the Tranche Two
Shares;
(ii) the Tranche Two Debenture Payment and any and
all interest due on such Tranche Two
Debentures through the Second Closing Date;
(iii) a certificate executed by the Company
representing and warranting to Kennilworth
that each of the Company's representations
and warranties in this Agreement is
accurate in all material respects as of
the Second Closing Date; and
(iv) such other agreements, certificates or
documents as may be reasonably requested by
Kennilworth.
(b) Kennilworth will deliver to the Company;
(i) the Tranche Two Purchase Price;
(ii) the Tranche Two Debentures, duly endorsed
for delivery;
(iii) a certificate executed by Kennilworth
representing and warranting to the Company
that each of Kennilworth's representations
and warranties in this Agreement is
accurate in all material respects as of
the Second Closing Date; and
(iv) such other agreements, certificates or
documents as may be reasonably requested by
the Company.
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<PAGE>
1.7 THIRD CLOSING DATE OBLIGATIONS. On the Third Closing Date:
(a) The Company will deliver to Kennilworth:
(i) a certificate representing the Tranche
Three Shares;
(ii) the Tranche Three Debenture Payment and
any and all interest due on the Tranche
Three Debentures through the Third Closing
Date;
(iii) a certificate executed by the Company
representing and warranting to Kennilworth
that each of the Company's representations
and warranties in this Agreement is
accurate in all material respects as of
the Third Closing Date; and
(iv) such other agreements, certificates or
documents as may be reasonably requested by
the Company.
(b) Kennilworth will deliver to the Company;
(i) the Tranche Three Purchase Price;
(ii) the Tranche Three Debentures, duly
endorsed for delivery;
(iii) a certificate executed by Kennilworth
representing and warranting to the Company
that each of Kennilworth's representations
and warranties in this Agreement is
accurate in all material respects as of
the Third Closing Date; and
(iv) such other agreements, certificates or
documents as may be reasonably requested by
the Company.
1.8 CLOSING DELIVERIES. All deliveries made at each of the Initial,
Second and Third Closings shall be deemed simultaneous deliveries
on such date and at such Closing. To the extent that delivery of
any one item is not made on any Closing Date, no deliveries shall
be deemed to have been made on such Closing Date.
2. RESTRICTIONS ON TRANSFER OF SECURITIES.
2.1 SECURITIES LEGEND. All certificates evidencing (i) the Note,
(ii) subject to the terms of 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 Note
(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.
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<PAGE>
2.2 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.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to Kennilworth 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 Kennilworth true and complete
copies of its Certificate of Incorporation and Bylaws, each as amended
through and in effect as of the date hereof.
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, as of the Initial Closing Date, 100 shall be
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
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<PAGE>
not been issued in violation of any federal or state
securities laws. Except as set forth on SCHEDULE 3.2 and
this Agreement, and the Note and Common Shares to be
issued hereunder, 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 and the
Note, 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 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.
(b) This Agreement and the Registration Rights Agreement have
been duly executed and delivered by the Company; and each
of this Agreement, the Registration Rights Agreement, the
Note and each other document executed and delivered by
the Company hereunder (collectively, 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
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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 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
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<PAGE>
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 Kennilworth 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 April 3, 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 Report on Form 8-K dated May 10, 1999, the
Company's Current Report 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 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,
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<PAGE>
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 April 3, 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 or the Registration Rights 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 or the Registration Rights Agreement.
4. REPRESENTATIONS AND WARRANTIES OF KENNILWORTH.
Kennilworth represents and warrants to the Company as follows:
4.1 ORGANIZATION AND GOOD STANDING. Kennilworth (i) is a partnership duly
organized, validly existing and in good standing under the laws of the
state of
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<PAGE>
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
Kennilworth.
4.2 AUTHORITY; NO CONFLICT.
(a) Kennilworth 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 Kennilworth which are
necessary to authorize the execution, delivery and
performance by Kennilworth of this Agreement and the other
agreements and instruments contemplated hereby.
(b) This Agreement, the Registration Rights Agreement, the
Note and each other document executed and delivered by the
Company hereunder (collectively, "Kennilworth's Closing
Documents") have been duly executed and delivered by
Kennilworth and each of Kennilworth's Closing Documents
constitutes the valid and binding obligation of
Kennilworth, enforceable against Kennilworth 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 Kennilworth's Closing
Documents by Kennilworth nor the consummation or performance
of any of the transactions contemplated by Kennilworth's
Closing Documents by Kennilworth 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 Kennilworth may be subject; or
any contract, agreement, obligation, promise or undertaking
(a "Contract") to which Kennilworth is a party or by which
Kennilworth may be bound.
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
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<PAGE>
Exchange Act or the securities or blue sky laws of the United
States of America or any state or territory thereof) by Kennilworth is
required in connection with the execution and delivery of
Kennilworth's Closing Documents, the performance by Kennilworth of its
obligations thereunder and the consummation of the transactions
contemplated thereby. Kennilworth 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 Kennilworth's Closing
Documents or the consummation or performance of any of the
transactions contemplated by Kennilworth's Closing Documents.
4.4 OWNERSHIP OF DEBENTURES. Kennilworth 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
Kennilworth's own account and not on behalf of any other Person, and
the Securities are being acquired by Kennilworth 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. Kennilworth has received and examined the
Commission Filings. Kennilworth 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. Kennilworth
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 to protect its own interests in connection
with the transactions contemplated by Kennilworth's Closing Documents.
Kennilworth has been advised by the Company and understands that,
except as expressly contemplated by Kennilworth'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 order against the
Securities prohibiting transfer of the Securities except in accordance
with the Securities Act.
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<PAGE>
4.6 CERTAIN PROCEEDINGS. There is no Proceeding pending or, to
Kennilworth's knowledge, threatened, against, involving or affecting
Kennilworth or Kennilworth'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 Kennilworth 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 Kennilworth
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. Kennilworth 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 Kennilworth as a result
of the action of Kennilworth 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 90 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
90 days after the Closing Date.
5.2 PARTICIPATION IN RIGHTS OFFERING. Subject to the requirements of
applicable law, Kennilworth shall have the right, but not the
obligation, to participate in the Rights Offering (as hereinafter
defined) as if Kennilworth were the vested owner of the Common
Shares.
6. CONDITIONS PRECEDENT TO KENNILWORTH'S OBLIGATION TO CLOSE. Kennilworth's
obligation to consummate the transactions contemplated by this Agreement
is subject to the satisfaction, at or prior to each applicable Closing
Date, of each of the following conditions (any of which may be waived by
Kennilworth, 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 each Closing Date.
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<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 each Closing Date must
have been performed or complied with in all material
respects.
(b) Each document required to be delivered to Kennilworth
pursuant to Section 1.5, 1.6 or 1.7, as the case may be,
must have been delivered.
(c) On the Initial Closing Date, the Company shall make a
public announcement of the transactions contemplated by
this Agreement, which public announcement shall include
reference to a future rights offering (the "Rights
Offering").
(d) On or prior to the Second Closing Date, the Company shall
have filed a registration statement covering the Rights
Offering.
(e) On or prior to the Third Closing Date, the Company shall
have effectuated the Rights Offering, with net proceeds to
the Company of not less than forty million dollars
($40,000,000).
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 Kennilworth's Closing Documents
will, directly with, or result in a material violation of, or cause
Kennilworth or any person affiliated with Kennilworth 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 Kennilworth effectively to exercise full rights of ownership of the
securities issued to Kennilworth hereby, other than those limitations
imposed by the terms of Kennilworth's Closing Documents.
6.5 ADDITIONAL DOCUMENTS. Such other documents as Kennilworth 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 Kennilworth.
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<PAGE>
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.
6.7 EFFECTIVENESS OF REGISTRATION STATEMENT. On or prior to the
Initial Closing Date, the SEC shall have declared effective the
Registration Statement (as such term is defined in the Registration
Rights Agreement) and, at each Closing Date, 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 Kennilworth, 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 each applicable 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 each Closing Date.
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7.2 KENNILWORTH'S PERFORMANCE.
(a) Each of the covenants and obligations that Kennilworth is
required to perform or to comply with pursuant to
Kennilworth's Closing Documents at or prior to each Closing
Date 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, 1.6 or 1.7, as the case may be,
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.
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 Kennilworth, (ii) evidencing the
performance by Kennilworth of, or the compliance by Kennilworth with,
any covenant or obligation required to be performed or complied with
by Kennilworth, (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. On or prior to the
Initial Closing Date, the SEC shall have declared effective the
Registration Statement (as such term is defined in the Registration
Rights Agreement) and, at each Closing Date, 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.
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<PAGE>
8. INDEMNIFICATION; REMEDIES.
8.1 INDEMNIFICATION AND PAYMENT OF DAMAGES BY KENNILWORTH. Kennilworth
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 Kennilworth in this Agreement
or in any certificate delivered by Kennilworth pursuant to this
Agreement, (b) any Breach by Kennilworth of any covenant or obligation
of Kennilworth 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 Kennilworth (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.
8.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE COMPANY. The Company
will indemnify and hold harmless Kennilworth and its partners,
officers, employees, agents, advisors or other representatives (the
"Kennilworth Representatives") and will pay to Kennilworth and the
Kennilworth 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
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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
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
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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 Kennilworth 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 Kennilworth 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 each of the
Closing Dates as follows:
(a) At the election of the Company, if Kennilworth 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;
(b) At the election of Kennilworth, 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
Kennilworth, 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 each of the Closing Dates by mutual
written agreement of the Company and Kennilworth.
If the Company or Kennilworth, 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
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Agreement in accordance with the provisions of such Section, and setting
forth therein the basis for such termination. If this Agreement so
terminates, (a) neither the Company nor Kennilworth shall have any obligation
to consummate any transactions scheduled for subsequent Closing Dates, (b)
any previously consummated transactions between the parties pursuant to this
Agreement shall remain in full force and effect and (c) this Agreement shall
become null and void and have no further force or effect (except as provided
in Section 9.7 below) as to the subsequent Closing Dates, if any, but shall
remain in full force and effect as to any consummated Closings; 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 Kennilworth shall be
subject to the reasonable prior approval of the other party in all
essential respects, except that (a) the approval of Kennilworth 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 Kennilworth 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 interpreted to limit Kennilworth's ability to discuss
information relating to the transactions contemplated by this
Agreement in accordance with Section 9.4 below.
9.4 CONFIDENTIALITY. Kennilworth 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
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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 Kennilworth:
Kennilworth Partners II LP
40 Cuttermill Road, Suite 308
Great Neck, New York 11021
Attn: Mr. 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
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
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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 each Closing Date until performed, and all
representations, warranties of the parties hereto shall survive for
eighteen (18) months following the applicable 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
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
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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 (including, without limitation, that certain Exchange Agreement
dated as of May 10, 1999, which the parties agree, upon execution and
delivery of this Agreement, shall be of no further force or effect)
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.
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.
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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 KENNILWORTH 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 KENNILWORTH, AND
THE COMPANY AND KENNILWORTH 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 KENNILWORTH 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,
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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.
"KENNILWORTH"
KENNILWORTH PARTNERS II LP
By: Kennilworth Advisors LLC,
General Partner
/s/ Jeffrey Parket
-------------------------------
Jeffrey Parket, Managing Member
"COMPANY"
APPLIED MAGNETICS CORPORATION
/s/ Craig D. Crisman
-------------------------------
Craig D. Crisman
Chief Executive Officer
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SCHEDULE 3.2
VOTING SECURITIES AND OUTSTANDING OPTIONS AND WARRANTS
As of April 29, 1999:
(1) 41,736,741 shares of the Company's common stock (the "Common
Stock") were outstanding. Such number includes 309,406
shares of Common Stock which have been issued to JAFCO
America Ventures, Inc., but for which no consideration has
been received.
(2) 5,000,000 shares of the Company's preferred stock were
authorized and none of such shares were outstanding.
(3) 6,199,947 shares of Common Stock were reserved for future
issuance pursuant to the terms of the 7% Convertible
Subordinated Debentures due 2006.
(4) 6,445,345 shares of Common Stock were reserved for issuance
pursuant to outstanding options or warrants issued under
various benefit plans.
(5) 276,750 shares of Common Stock were reserved for issuance
pursuant to options and warrants relating to the Company's
acquisition of DAS Devices, Inc., a Delaware corporation.
(6) Warrants for 1,000,000 shares of Common Stock were issued
and outstanding.
(7) Options for 4,175,122 shares of Common Stock were issued and
outstanding.
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Schedule 3.4
REQUIRED CONSENTS
1. Certain filings must be made with the Securities and Exchange
Commission.
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Schedule 3.7
BROKER FEES
None.
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Schedule 3.8
MATERIAL CHANGES
The Company continues to experience financial difficulties, as
described in the Company's Quarterly Report on Form 10-Q for the quarters
ended April 3, 1999, and January 2, 1999, and the Company's press release
dated April 22, 1999, which discusses the Company's financial results for the
first six months and the second quarter of its current fiscal year.
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Schedule 3.9
PENDING AND THREATENED LITIGATION
The Company is involved in litigation captioned APPLIED MAGNETICS
CORPORATION VS. JAFCO AMERICA VENTURES, INC., Santa Barbara Superior Court, Case
Number 229327. This action relates to breach of a contract pursuant to which
JAFCO America Ventures, Inc., was to purchase securities from the Company.
The Company has received correspondence dated June 10, and
September 21, 1998, from attorneys representing the Lemelson Medical,
Education & Research Foundation LP (the "Foundation") claiming that the
Company has infringed Foundation patents. To date, the Company has not
responded to the correspondence from the Foundation's lawyers. At this time
it is not possible to estimate the potential liability, if any, of the
Company to the Foundation or the extent to which any such liability may be
offset by possible claims against others.
The Company has also been named as a defendant in REULING VS. DAS
DEVICES, INC., ET AL., an employment lawsuit filed in Santa Clara Superior
Court, Case No. CV 779295. Wilson Sonsini Goodrich & Rosati, in Palo Alto,
California, has been defending DAS and the other defendants (other than the
Company). The Company was named as a defendant in a recently filed amended
complaint. No decision has been made as to the law firm that will defend the
Company is this lawsuit. We understand that to date an insurance carrier has
paid defense costs.
Comdisco, Inc. and Leasing Technologies International, Inc.,
companies that lease equipment, each filed a complaint against DAS Devices
and the Company on June 4 and 14, 1999, respectively, in the California
Superior Court for the County of Santa Clara. Venture Lending & Leasing, Inc.
and Venture Lending & Leasing II, Inc., companies that finance equipment
purchases, jointly filed a complaint against DAS Devices and us on June 8,
1999, in the California Superior Court for the County of Santa Clara. These
complaints allege, among other things, that these companies leased equipment
or made equipment financing available to DAS Devices, that DAS Devices
breached its agreements with them by failing to make lease or loan payments
and that we were required, and have failed, to assume those obligations. The
companies seek to recover, among other things:
- money damages, upon accelerating the obligations under the
agreements, totaling $6,843,695 plus additional money damages for other
losses to be proved;
- interest; and
- attorneys fees and costs of suit.
Three of the companies also seek punitive damages.
Two of the complaints also allege that the Company improperly
transferred unique and proprietary magnetoresistive and giant
magnetoresistive technologies from DAS Devices to the Company for inadequate
consideration, and seek an order setting aside the transfer of those
technologies and restraining the Company from using or transferring those
technologies. One of the complaints also names Craig D. Crisman, John Foster
and Peter T. Altavilla, executive officers of the Company, as defendants,
alleging that they breached a duty to these companies to not use their
control of DAS unfairly for the Company's and their benefit.
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Schedule 4.3
REQUIRED CONSENTS
Certain filings must be made with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 10.2
EXECUTION VERSION
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the
"Agreement") is made and effective as of June 29, 1999, by Applied Magnetics
Corporation, a Delaware corporation (the "Company"), and Kennilworth Partners II
LP, a Delaware limited partnership ("Kennilworth").
RECITALS
A. Upon the terms and subject to the conditions of an Amended and
Restated Exchange Agreement, dated as of June 29, 1999 (the "Exchange
Agreement"), by the Company and Kennilworth, Kennilworth has agreed to
purchase six million (6,000,000) shares of the common stock, $0.10 par value
("Common Stock"), and to loan to the Company an aggregate principal amount of
twenty-five million dollars ($25,000,000) pursuant to the terms of a Senior
Subordinated Convertible Promissory Note (the "Note"), by Company in favor of
Kennilworth. Such Note shall be in the aggregate principal amount of
thirty-seven million seven hundred seventy-six thousand seven hundred sixteen
dollars ($37,776,716), reflecting zero coupon interest through the third
anniversary of the issuance date thereof.
B. A material inducement for the parties to execute the Exchange
Agreement is 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.
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"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"COMMON STOCK" shall have the meaning provided in Recital A.
"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 Kennilworth or any other Person who is the record
owner of Registrable Shares.
"INITIAL CLOSING DATE" shall have the meaning provided in the
Exchange Agreement.
"KENNILWORTH" shall have the meaning provided in the first paragraph
of this Agreement.
"NOTE" shall have the meaning provided in Recital A.
"PERSON" shall mean an individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization or any
other similar entity
"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
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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 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 Kennilworth 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 6,000,000 shares of Common Stock to be
issued and sold by the Company to Kennilworth pursuant to the Exchange Agreement
and (ii) the shares of Common Stock issuable upon conversion of the (A) Senior
Subordinated Convertible Promissory Note in the aggregate principal amount of
thirty-seven million seven hundred seventy-six thousand seven hundred sixteen
dollars ($37,776,716) to be issued and sold by the Company to Kennilworth
pursuant to the Exchange Agreement or (B) Class B Convertible Preferred Stock
of the Company issuable upon conversion of the Senior Subordinated
Convertible Promissory Note pursuant to Section 2.2.3 of the Note.
"VIOLATION" shall have the meaning provided in Section 9(a).
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2. REGISTRATION. The Company shall, prior to the Initial 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 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
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<PAGE>
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.
(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, the 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.
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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.
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
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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 9(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.
(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
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agreement contained in this Section 9(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 9(b) exceed the net
proceeds from the offering received by such Holder.
(c) PROCEDURES. Promptly after receipt by an indemnified party
under this Section 9 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 9, 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 relieve such indemnifying party of any liability to the
indemnified party under this Section 9, 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 9. 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 9 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
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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 9(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.
(e) SURVIVAL. The obligations of the Company and Holders under
this Section 9 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 an effective registration statement, 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;
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(b) qualify for registration 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. 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 shall be binding upon each
Holder of any Registrable Shares then outstanding, each future holder of all
such Registrable Shares and the Company.
12. 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).
13. 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.
14. 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.
15. NEGOTIATION OF AGREEMENT. Each of the parties acknowledges that
it has been represented by independent counsel of its choice throughout all
negotiations that
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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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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. The parties agree that the terms of
this Agreement supercede any and all prior agreements between the parties,
including without limitation that certain Registration Rights Agreement dated as
of May 10, 1999, which, upon
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execution and delivery of this Agreement, shall be of no further force or
effect. 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.
21. 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)
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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: /s/ Craig D. Crisman
-----------------------------------
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
KENNILWORTH PARTNERS II LP
By: Kennilworth Advisors LLC, general partner
By: /s/ Jeffrey Parket
---------------------------------
Jeffrey Parket
Its: Managing Member
ADDRESS:
40 Cuttermill Road, Suite 308
Great Neck, New York 11021
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report dated June 1, 1999
included (or incorporated by reference) in Applied Magnetics Corporation's
Form 10-K/A for the fiscal year ended October 3, 1998 and to all references
to our firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 28, 1999
