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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1999
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APPLIED MAGNETICS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 3679 95-1950506
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification
organization) Number) No.)
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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)
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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)
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WITH A COPY TO:
JAMES J. SLABY, ESQ.
GRETCHEN W. CORBELL, ESQ.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
333 SOUTH HOPE STREET, 48TH FLOOR
LOS ANGELES, CALIFORNIA 90071
(213) 620-1780
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
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If 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,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT(2) PRICE REGISTRATION FEE
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Rights...................................... (1) N/A N/A None (3)
Common Stock................................ 45,736,741 $2.125 $97,190,544 $27,019
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(1) Such indeterminable number of rights as may be issued to stockholders at the
rate of one right for each share of Common Stock outstanding as of the
record date for the proposed rights offering.
(2) Estimated solely for purposes of determining the registration fee under Rule
457(c). The price indicated is the closing price on the New York Stock
Exchange on July 22, 1999.
(3) The rights are registered in the same registration statement as the
securities being offered pursuant to the rights. Therefore, pursuant to Rule
457(g), no registration fee is payable with respect to the rights.
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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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PROSPECTUS
APPLIED MAGNETICS CORPORATION
RIGHTS OFFERING OF __________ SHARES OF COMMON STOCK
AT $_________ PER SHARE
If you held our common stock on _____________, 1999, we have granted to you
rights to purchase additional shares of common stock for a subscription price of
$__________ in cash per share. You have been granted one right for each share of
common stock you held on that date. You may purchase one share of common stock
for every right granted to you.
Our common stock is listed on the New York Stock Exchange under the symbol
"APM." The closing price of the common stock on July ___, 1999 was $_________
per share. We anticipate that the rights will be eligible to trade on the NYSE
under the symbol "_______." We cannot assure you that there will be an active
trading market for the rights.
The rights expire at 5:00 p.m. Eastern time, on ____________, 1999, if not
properly exercised before that date. If you fully exercise your rights, and
other stockholders do not fully exercise their rights, you may elect to purchase
additional shares on a pro rata basis. See "The Rights Offering" at page ___.
___________
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page __ 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.
AUGUST ___, 1999
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TABLE OF CONTENTS
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Questions and Answers about the Rights Offering............................................................ 1
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 7
Use of Proceeds............................................................................................ 12
Dividends.................................................................................................. 12
Market for Common Stock.................................................................................... 12
Capitalization............................................................................................. 13
The Rights Offering........................................................................................ 14
Reasons for the Rights Offering........................................................................ 14
General Terms and Assumptions.......................................................................... 14
ChaseMellon Shareholder Services, L.L.C................................................................ 14
The Rights............................................................................................. 15
Basic and Oversubscription Privileges.................................................................. 15
Subscription Price..................................................................................... 16
Expiration Term and Date............................................................................... 16
Expenses of the Rights Offering........................................................................ 16
Exercise of Rights..................................................................................... 16
Required Forms of Payment.............................................................................. 17
Special Procedure under "Notice of Guaranteed Delivery" Form........................................... 17
Incomplete Forms; Insufficient of Excess Payment....................................................... 18
Exercise of Less Than All Rights....................................................................... 18
Instructions to Nominee Holders........................................................................ 18
Risk of Loss on Delivery of Subscription Warrant Forms and Payment..................................... 18
How Procedural and Other Questions Are Resolved........................................................ 19
Questions and Assistance Concerning the Rights......................................................... 19
No Revocation.......................................................................................... 19
How To Transfer Rights................................................................................. 19
Procedures for Nominees Who are DTC Participants....................................................... 21
Foreign and Unknown Addresses.......................................................................... 21
Right to Block Exercise Due to Regulatory Issues....................................................... 21
No Adjustment to Outstanding Stock Options or Other Stock Awards....................................... 21
Amendment, Extension and Withdrawal.................................................................... 22
Issuance of Stock Certificates......................................................................... 22
Certain Federal Income Tax Consequences................................................................ 22
Selected Consolidated Financial Data....................................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Forward Looking Information................................................................................ 34
Recent Developments........................................................................................ 34
Business................................................................................................... 38
Properties................................................................................................. 48
Legal Proceedings.......................................................................................... 48
Security Ownership of Principal Stockholders and Management................................................ 49
Management................................................................................................. 51
Management Compensation.................................................................................... 52
Selling Stockholders.......................................................................................
Description of Capital Stock............................................................................... 56
Plan of Distribution.......................................................................................
Legal Matters.............................................................................................. 61
Experts.................................................................................................... 61
Where You Can Find More Information........................................................................ 61
Index to Consolidated Financial Statements................................................................. F-1
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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.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
WHAT IS A RIGHT?
Each right allows you to purchase one additional share of our common stock for
$____. We have granted to each of our stockholders of record on ________, 1999
one right for each share of common stock held by him. Each stockholder may
purchase one newly-issued share of common stock for every one right. This is the
"basic subscription privilege."
MAY STOCKHOLDERS PURCHASE SHARES IN ADDITION TO THE BASIC SUBSCRIPTION
PRIVILEGE?
Yes. If other stockholders do not elect to purchase all of the shares offered
under their basic subscription privilege, and if you fully exercise your basic
subscription privilege, you may elect to purchase additional shares. If there
are not enough shares available to fill all subscriptions for additional shares,
the available shares will be allocated pro rata based on the number of shares
each subscriber for additional shares has purchased under the basic subscription
privilege. If we receive a payment which exceeds the shares available to
allocate to a particular holder, we will refund any excess payment without
interest as soon as practicable. This is the "oversubscription privilege."
WHY ARE YOU OFFERING THE RIGHTS?
Management and the board of Directors believe this rights offering is the most
prudent means of generating cashflow required to sustain our operating
activities and to fund the production of our anticipated magnetoresistive and
giant magnetoresistive products and related working capital requirements.
HOW SOON MUST STOCKHOLDERS ACT?
The rights expire at 5:00 p.m., Eastern time, on ________, 1999. The
subscription agent must actually receive all required documents and payments
before that time and date.
HAS THE BOARD OF DIRECTORS MADE A RECOMMENDATION REGARDING THIS OFFERING?
Our Board does not make any recommendation to you about whether you should
exercise any rights.
TO WHOM DO STOCKHOLDERS DIRECT QUESTIONS OR SEND FORMS AND PAYMENT?
Questions about the rights or additional copies of offering documents: call
ChaseMellon Shareholder Services, L.L.C. at the toll free number 1-888-224-2745.
Subscription documents and payments: send to ChaseMellon Shareholder Services,
L.L.C., at the address indicated in the instructions forwarded with this
prospectus.
Other questions and copies of our most recent filings with the Securities and
Exchange Commission: contact us at our telephone number, or refer to other
sources, described under "Where You Can Find More Information."
HOW ARE STOCKHOLDERS AFFECTED IF THEY DO NOT EXERCISE ANY RIGHTS?
You are not required to exercise any rights or otherwise take any action in
response to this rights offering. If you do not exercise any rights, the number
of shares which you own will not change, but your percentage ownership of total
outstanding common stock will decline, if the rights offering is completed.
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WHAT FORMS AND PAYMENT ARE REQUIRED TO PURCHASE SHARES?
As a record holder of our common stock on _____, 1999, you are receiving with
this prospectus a subscription warrant and instructions on how to purchase
shares. The subscription warrant must be properly filled out and delivered with
full payment to ChaseMellon Shareholder Services, L.L.C. before expiration of
the rights. The instructions also describe an alternate procedure called "Notice
of Guaranteed Delivery," which allows an extra three days to deliver the
subscription warrant if full payment is received before the expiration date and
a securities broker or qualified financial institution signs the form to
guarantee that the subscription warrant will be timely delivered.
WHAT IF A BROKER, BANK OR OTHER NOMINEE IS THE RECORD HOLDER OF MY SHARES?
If you wish to purchase shares, please promptly contact the broker, bank or
other company holding your shares. Your broker or other nominee holder is the
record holder of the shares you own and must exercise the subscription warrant
on your behalf for shares you wish to purchase or arrange for a subscription
warrant to be issued in your name. The broker, bank or other nominee has been
requested to contact you for instructions on exercising your rights.
MAY STOCKHOLDERS TRANSFER RIGHTS?
The instructions which accompany this prospectus describe how to sell rights
through your broker or ChaseMellon Shareholder Services, L.L.C. We cannot ensure
that any rights will have any value or can be sold.
You may also wish to transfer rights to allow your broker or other person to
exercise your rights for you. The forms on the reverse side of the subscription
warrant contain instructions for these types of transfers.
MUST ALL HOLDERS OF RIGHTS PAY THE SUBSCRIPTION PRICE IN CASH?
All stockholders granted rights who wish to participate in the offering must
timely pay the subscription price by wire transfer, certified or cashier"s check
drawn on a U.S. bank, U.S. postal money order or personal check that clears
before expiration of the rights.
WILL MY MONEY BE RETURNED IF THE RIGHTS OFFERING IS CANCELLED?
Yes, but without any payment of interest.
WHAT FEES OR CHARGES APPLY IF I PURCHASE SHARES OR ATTEMPT TO SELL MY RIGHTS?
We are not charging any fee or sales commission to issue rights to you or to
issue shares to you if you exercise rights. If you exercise rights through a
broker or other holder of your shares, you are responsible for paying any fees
that person may charge. If you elect to sell your rights, you are also
responsible for any fees or sales commissions that may apply to that
transaction.
MAY I CHANGE OR CANCEL MY EXERCISE OF RIGHTS AFTER I SEND IN THE REQUIRED FORMS?
No.
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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. A gigabyte is 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 one to ten 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.
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THE RIGHTS OFFERING
Further details concerning the rights offering are set forth under "The
Rights Offering" beginning at page ___. The summary below is qualified in that
only holders of record of common stock at the close of business on ___________
1999, or those to whom rights have been validly transferred, may exercise
rights.
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Securities Offered................ We are offering up to _________ shares of common stock
to be issued upon exercise of the rights.
Shares of Common Stock Outstanding
Prior to this Offering.......... 45,736,741 outstanding on July 15, 1999.
Shares of Common Stock Outstanding
After this Offering............. 91,473,482, if all rights are exercised
Record Date....................... _________________, 1999.
Expiration Date and Time.......... The rights expire at 5:00 p.m., Eastern time, on
______________, 1999, unless properly exercised before
that time and date.
Basic Subscription Privilege...... We have granted each person who was a record holder of
common stock on the record date the right to purchase
one additional share of common stock.
Oversubscription Privilege........ If you fully exercise the basic subscription privilege,
you may also purchase at $____ per share, a ____%
discount to the basic subscription privilege, additional
shares of common stock that are not purchased by other
stockholders. If there are not enough shares available
to fill all subscriptions for additional shares, the
available shares will be allocated pro rata based on the
number of shares each subscriber for additional shares
has purchased under the basic subscription privilege.
Reasons for the Rights Offering... Management and the Board of Directors believe this
rights offering is the most prudent means of generating
cashflow required to sustain our operating activities
and to fund production of our anticipated
magnetoresistive and giant magnetoresistive products and
related working capital requirements.
Our current stockholders have the opportunity to
maintain their percentage ownership in our company by
exercising their rights. Stockholders who do not
exercise rights will continue to own the same number of
shares of our stock, but those shares will represent a
smaller percentage of the outstanding common stock after
completion of the rights offering.
The proceeds will be used to sustain our operating
activities and to fund production of our anticipated
magnetoresistive and giant magnetoresistive products and
related working capital requirements.
No Board Recommendation........... Our Board of Directors makes no recommendation to
stockholders regarding the exercise of rights under this
offering.
Stockholders who do exercise rights risk investment loss
on any money invested. We cannot assure that the
subscription price will remain below the market price
for the common stock during the rights offering, or that
anyone purchasing shares at the subscription price will
be able to sell those shares in the future at
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a higher price. See "Risk Factors."
Subscription Price................ $_______ per share, payable in cash. Payment by personal
check must clear payment on or before the expiration
date and may require five or more business days in which
to clear payment. We recommend that stockholders pay the
subscription price by certified or cashier's check drawn
on a U.S. bank, U.S. postal money order or wire transfer
of funds.
Basis for Subscription Price...... The Board of Directors approved the subscription price.
This price is discounted from the closing market price
of the common stock on _________, 1999 of $________ per
share. The subscription price is $_____ less than that
price, rounded downward to the nearest multiple of
$____.
Transferability of Rights......... The rights are transferable. We anticipate that the
rights will be eligible for trading on the NYSE under
the symbol "____________" until the close of business on
the last trading day prior to the expiration date. We
cannot assure whether or how long a market for the
rights will exist.
The rights are issued in the form of subscription
warrants which accompany this prospectus sent to the
record holders. ChaseMellon Shareholder Services, L.L.C.
will attempt to sell rights by referring sell orders to
a broker for this purpose, for stockholders who deliver
a subscription warrant to ChaseMellon Shareholder
Services, L.L.C. with sale instructions properly
executed, no later than 11:00 a.m., Eastern time, on
_______, 1999. We provide no assurance that any rights
will be sold or as to the price that may be paid for any
rights sold.
No Revocation..................... If you exercise any rights, you are not allowed to
revoke or change the exercise or request a refund of
monies paid.
Subscription Agent................ ChaseMellon Shareholder Services, L.L.C.
Information Agent................. ChaseMellon Shareholder Services, L.L.C.
Telephone: 1-888-224-2745
Procedure for Exercising Rights... To exercise rights, you must complete the subscription
warrant and deliver it to ChaseMellon Shareholder
Services, L.L.C. with full payment under both the basic
and oversubscription privileges you elect to exercise.
ChaseMellon Shareholder Services, L.L.C. must receive
the proper forms and payments on or before the
expiration date.
You may deliver the documents and payments by mail or
commercial courier. If regular mail is used for this
purpose, we recommend using insured, registered mail.
You may use an alternative "Guaranteed Delivery
Procedure" if you are unable to deliver the subscription
warrant before the expiration date, subject to the
requirements for this procedure described under "The
Rights Offering--Special Procedure Under 'Notice of
Guaranteed Delivery' Form."
Payment Adjustments............... If you send a payment that is insufficient to purchase
the number of shares requested, or if the number of
shares requested is not specified in the forms, the
payment received will
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be applied to exercise the basic subscription privilege
to the extent of the payment. If the payment exceeds the
subscription price for the full exercise of the basic
subscription privilege, the excess payment will be
applied to exercise the oversubscription privilege. If
the payment exceeds the amount required to exercise both
the basic and oversubscription privileges, that excess
will be refunded as soon as practicable. We will not pay
interest on any payments received under the rights
offering.
Nominee Accounts.................. If you wish to purchase shares in this offering and your
shares are held by a securities broker, bank, trust
company or other nominee, you should promptly contact
those record holders and request them to exercise rights
on your behalf. You may also contact the nominee and
request the nominee to send a separate subscription
warrant to you.
If you are a record holder who wishes an institution
such as a broker or bank to exercise your rights for
you, you should contact that institution promptly to
arrange that method of exercise. If you are a nominee
which desires subscription warrants re-issued in smaller
denominations, you must act promptly under special
procedures described under "The Rights Offering--How to
Transfer Rights."
You are responsible for the payment of any fees that
brokers or other persons holding your shares may charge.
Exercise by Foreign and Certain
Other Stockholder............... ChaseMellon Shareholder Services, L.L.C. will hold
subscription warrants for stockholders having addresses
outside the United States. In order to exercise rights,
holders with addresses outside the United States must
notify ChaseMellon Shareholder Services, L.L.C. and
timely follow other procedures on or before the
expiration date of the rights.
U.S. Income Tax Consequences...... For United States federal income tax purposes, we
believe that a stockholder will not recognize taxable
income upon the receipt or exercise of rights. See "The
Rights Offering--Federal Income Tax Consequences." Each
stockholder should consult the holder's own tax adviser
concerning the tax consequences of this offering under
the holder's own tax situation. This prospectus does not
summarize tax consequences arising under state tax laws,
non-U.S. tax laws, or any tax laws relating to special
tax circumstances or particular types of taxpayers.
Stock Certificates................ We will deliver stock certificates representing common
stock purchased by the exercise of rights as soon as
practicable after the expiration date and after all
prorations under the oversubscriptions privilege have
been made.
Amendment, Extension and
Termination..................... We may amend, extend or terminate the rights offering at
any time prior to the expiration date at our Board of
Directors' discretion. We will issue a press release
with respect to any amendment, extension or termination
of the rights of offering.
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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 using loops of wire
exposed to a changing magnetic field to enable it to "read" as it passes over
the disk. This transition 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. 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."
OUR STOCK PRICE HAS VARIED GREATLY AND MAY CONTINUE TO FLUCTUATE, WHICH MAY
REDUCE OUR ABILITY TO RAISE ADDITIONAL OPERATING FUNDS.
The market price of our common stock has been volatile, with closing market
prices ranging from $4.00 to $33.25 per share during fiscal 1998 and from $2.56
to $9.19 per share during the first nine months of fiscal 1999. The volatility
of our stock price may reduce our ability to raise additional operating funds.
IF OUR MAGNETORESISTIVE 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 magnetoresistive and giant
magnetoresistive 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 July 15, 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
7
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not, our lenders could enforce penalties, reclaim equipment or intellectual
property, or otherwise seriously harm our business, financial condition and
results of operations.
OUR REVENUES HAVE 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.
ANY UNDERUTILIZED PRODUCTION CAPACITY DUE TO CANCELLATION, RESCHEDULING OR
REDUCTION OF CUSTOMER ORDERS 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.
AMORTIZATION OF GOODWILL AND MERGER EXPENSES WILL DELAY OR REDUCE OUR
PROFITABILITY.
Amortization of expenses incurred in the merger with DAS Devices 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 $39.6 million. The developed technology and know-how will be
amortized as an expense over three years, and the goodwill
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<PAGE>
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 adversely affected 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;
- damage to our reputation;
- increased administrative and processing costs; and
- liability to suppliers and/or customers.
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<PAGE>
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 THE 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 July
15, 1999, there were 45,736,741 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.
RISKS RELATING TO THE RIGHTS OFFERING
- DILUTION: Stockholders who do not exercise their rights will own a smaller
percentage of our outstanding stock.
- STOCK MARKET RISKS:
- The trading price of our stock has declined substantially since the
second quarter of fiscal year ended September 27, 1997.
- Future prices of our stock may be affected positively or negatively by
our future revenues and earnings, changes in estimates by analysts, our
ability to meet analysts' estimates, speculation in the trade or
business press about our company, and overall conditions affecting
economic trends and the stock market.
- We cannot assure you that the subscription price set by the rights
offering will remain below any trading prices, or that trading prices
will not decline during or after the rights offering.
- NO REVOCATION: You are not allowed to revoke or change your exercise of
rights after you send in your subscription forms and payment. If the
rights offering is canceled, we are obligated only to refund payments
actually received, without interest.
- NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS: Stockholders
who desire to purchase shares in the rights offering or to transfer or
sell their rights must act promptly to ensure that all
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required forms and payments are actually received by ChaseMellon
Shareholder Services, L.L.C. prior to the expiration date. If you fail to
complete and sign the required subscription forms, send an incorrect
payment amount, or otherwise fail to follow the subscription procedures
that apply to your desired transaction, ChaseMellon Shareholder Services,
L.L.C. may, depending on the circumstances, reject your subscription or
accept it to the full extent of the payment received. Neither Applied nor
ChaseMellon Shareholder Services, L.L.C. undertakes to contact you
concerning, or attempts to correct, an incomplete or incorrect
subscription form. We have the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.
- RISK OF PERSONAL CHECKS: Any personal check used to pay for shares must
clear prior to the expiration date, and the clearing process may require
five or more business days.
- DELAY IN ABILITY TO RESELL SHARES: If you exercise rights, you may not be
able to resell the new shares purchased until you (or your broker or other
nominee) have received a stock certificate for the shares purchased.
Although we will endeavor to issue the appropriate certificates as soon as
practicable after completion of the rights offering, there may be some
delay between the expiration date and the time we are able to issue the
new stock certificates.
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USE OF PROCEEDS
We will use the proceeds to sustain our operating activities and to fund
production of our anticipated magnetoresistive and giant magnetoresistive
products and related working capital requirements. We will also pay from cash
proceeds of the rights offering estimated expenses of approximately $
relating to the offering of rights.
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
closing sale prices for our common stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year ended September 27, 1997
First Quarter.................................................................... $ 31 7/8 $ 17 3/8
Second Quarter................................................................... 60 1/2 27 3/8
Third Quarter.................................................................... 36 1/2 22 3/8
Fourth Quarter................................................................... 38 5/8 22 1/4
Fiscal year ended October 3, 1998
First Quarter.................................................................... $ 33 1/4 $ 11 1/8
Second Quarter................................................................... 13 7/8 10 5/16
Third Quarter.................................................................... 11 7/8 4
Fourth Quarter................................................................... 6 5/8 4 3/16
Fiscal year ending October 2, 1999
First Quarter.................................................................... 9 3/16 3 3/8
Second Quarter................................................................... 7 15/16 3 5/8
Third Quarter.................................................................... 3 15/16 2 9/16
Fourth Quarter (through July 15, 1999)........................................... 3 2 7/8
</TABLE>
On July 15, 1999, the reported last closing sale price of our common stock
on the New York Stock Exchange was $3 per share. As of July 15, 1999, there were
approximately 1906 holders of record of our common stock.
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<PAGE>
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 17,692,961 shares in the merger
with DAS Devices and to an investor group in connection with the merger.
The pro forma amounts have been "adjusted" for the following transactions,
which occurred subsequent to April 3, 1999 and prior to this offering:
- 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.
The pro forma amounts have been "further adjusted" to reflect the completion
of this rights offering assuming 70% of the rights are sold and converted into
common shares at a price of $1.575 per share (closing price of $2.25 on July 21,
1999 less 30% discount).
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 merger with DAS Devices. You should read this table in
conjunction with the Unaudited Condensed Consolidated Financial Statements and
notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
APRIL 3, 1999
(IN THOUSANDS)
(UNAUDITED)
-------------------------------------
HISTORICAL
-----------
PRO FORMA
------------------------
AS FURTHER
AS ADJUSTED ADJUSTED
----------- -----------
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt........................................ $ 3,458 $ 3,458 $ 3,458
Bank notes payable....................................................... 64,820 64,820 64,820
----------- ----------- -----------
Total short-term debt...................................................... 68,278 68,278 68,278
Long-term debt, net........................................................ 125,373 126,373 126,373
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
80,000,000 shares, issued 41,557,887 at April 3, 1999,
47,557,887 on an adjusted pro forma basis and 80,848,408 on a further
adjusted pro forma basis............................................... 4,156 4,756 8,085
Paid-in capital.......................................................... 301,931 325,331 374,435
Retained deficit......................................................... (239,149) (239,149) (239,149)
Treasury stock, at cost (130,552 shares as of April 3, 1999)............. (1,581) (1,581) (1,581)
Unearned restricted stock compensation................................... (33) (33) (33)
----------- ----------- -----------
Total shareholders' investment........................................... 65,324 89,324 141,757
----------- ----------- -----------
Total capitalization..................................................... $ 258,975 $ 283,975 $ 336,408
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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THE RIGHTS OFFERING
REASONS FOR THE RIGHTS OFFERING
Management and the Board of Directors believe this rights offering is the
most prudent means of generating cashflow required to sustain our operating
activities and to fund production of our anticipated magnetoresistive and giant
magnetoresistive products and related working capital requirements.
Net cash proceeds from the rights offering will be used to sustain our
operating activities and to fund production of our anticipated magnetoresistive
and giant magnetoresistive products and related working capital requirements.
NO BOARD INVESTMENT RECOMMENDATION TO STOCKHOLDERS
The Board of Directors does not make any recommendation to you about whether
you should exercise any rights. If you do not exercise all of your rights, you
will own a smaller percentage of the total outstanding common stock after
completion of the rights offering. If you exercise rights, you risk investment
loss on new money invested. We do not ensure that the subscription price will
remain below the market price for the common stock during the rights offering,
or that anyone purchasing shares will be able to sell those shares in the future
at a higher price. See "Risk Factors."
GENERAL TERMS AND ASSUMPTIONS
- The record date is ___________, 1999.
- Only holders of record of common stock at the close of business on the
record date, or those to whom rights have been validly transferred, may
exercise rights. You are a record holder for this purpose only if your
name is registered as a stockholder with our transfer agent, ChaseMellon
Shareholder Services, L.L.C., as of the record date.
- The text below generally assumes that you are a record holder of shares,
unless otherwise noted.
- If you own shares held in a brokerage, bank or other custodial or nominee
account, you should promptly send the proper instruction form to your
broker or other person holding your shares, in order to exercise rights.
Your broker or other person holding your shares is the record holder and
will have to act in order for you to exercise rights. We have asked the
securities brokers and other nominee holders of our stock to contact you
to obtain your instructions concerning rights you are entitled to
exercise.
- No interest will be paid on your funds delivered to exercise rights,
regardless of whether the funds are applied to the purchase of shares or
returned for any reason.
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
ChaseMellon Shareholder Services, L.L.C. is acting as the subscription agent
for the rights offering under an agreement with us.
All subscription warrants, payments of the subscription price, nominee
holder certifications, notices of guaranteed delivery, and Depository Trust
Company participant oversubscription exercise forms, to the
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<PAGE>
extent applicable to your exercise of rights, must be delivered to ChaseMellon
Shareholder Services, L.L.C. as follows:
<TABLE>
<CAPTION>
IF BY MAIL: IF BY HAND: IF BY OVERNIGHT COURIER:
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
ChaseMellon Shareholder Services, ChaseMellon Shareholder Services, ChaseMellon Shareholder Services,
L.L.C. L.L.C. L.L.C.
Post Office Box 3301 120 Broadway, 13th Floor 85 Challenger Road--
South Hackensack, NJ 07606 New York, New York 10271 Mail Dr.
Attn: Reorganization Department Attn: Reorganization Department Ridgefield Park, NJ 07660
Attn: Reorganization Department
</TABLE>
ChaseMellon Shareholder Services, L.L.C."s facsimile number is (201)
296-4293.
The telephone number for confirmation of receipt of facsimiles is (201)
296-4860.
We will pay the fees and expenses of ChaseMellon Shareholder Services,
L.L.C., except for fees, applicable brokerage commissions, taxes and other
expenses relating to the sale of rights by ChaseMellon Shareholder Services,
L.L.C., which will be for the account of the seller of the rights. We have also
agreed to indemnify ChaseMellon Shareholder Services, L.L.C. against certain
liabilities in connection with the rights offering.
THE RIGHTS
As soon as practicable after the date of this prospectus, we will
distribute, at no charge, to holders of our common stock on the record date
transferable subscription rights to purchase additional shares of common stock.
We are distributing one right for each share of common stock held on the record
date.
We will send a subscription warrant to each record holder along with this
prospectus and related instructions to evidence the rights. In order to exercise
rights, you must fill out and sign the appropriate subscription warrant and
timely deliver it with full payment for the shares to be purchased.
A depository bank, trust company or securities broker or dealer which is a
record holder for more than one beneficial owner of shares may divide or
consolidate subscription warrants to represent shares held on the record date by
their beneficial owners, upon proper showing to ChaseMellon Shareholder
Services, L.L.C.
BASIC AND OVERSUBSCRIPTION PRIVILEGES
BASIC SUBSCRIPTION PRIVILEGE. You are entitled to purchase one share of
common stock at the subscription price for every one right exercised. We have
reserved a total of _________ shares of common stock for the exercise of the
rights.
OVERSUBSCRIPTION PRIVILEGE. If you exercise your basic subscription
privilege in full, you may also subscribe for additional shares that other
stockholders may not purchase under their basic subscription privilege. If there
are not enough shares available to fill all subscriptions for additional shares,
the available shares will be allocated pro rata based on the number of shares
each subscriber for additional shares has purchased under the basic subscription
privilege. We will not allocate to you more than the number of shares you have
actually subscribed and paid for.
You are not entitled to exercise the oversubscription privilege unless you
have fully exercised your basic subscription privilege. For this purpose, you
would only count the shares you own in your own name, and not other shares that
might, for example, be jointly held with a spouse, held as a custodian for
someone else, or held in an individual retirement account.
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<PAGE>
You may elect to exercise the oversubscription privilege only at the same
time you exercise your basic subscription privilege in full.
If we do not allocate to you all shares you have subscribed for under the
oversubscription privilege, we will refund by mail to you any payment you have
made for shares which are not available to issue to you, as soon as practicable
after completion of the rights offering.
Banks, brokers and other nominees who exercise the oversubscription
privilege on behalf of beneficial owners of shares must report certain
information to ChaseMellon Shareholder Services, L.L.C. and us and record
certain other information received from each beneficial owner exercising rights.
Generally, banks, brokers and other nominees must report (1) the number of
shares held on the record date on behalf of each beneficial owner, (2) the
number of rights as to which the basic subscription privilege has been exercised
on behalf of each beneficial owner, (3) that each beneficial owner's basic
subscription privilege held in the same capacity has been exercised in full, and
(4) the number of shares subscribed for under the oversubscription privilege by
each beneficial owner.
If you complete the portion of the subscription warrant to exercise the
oversubscription privilege, we will rely on this as your certification that you
have fully exercised your basic subscription privilege as described above.
SUBSCRIPTION PRICE
The subscription price is $_____ per share subscribed for, payable in cash.
The oversubscription price is $_____ per share, a ___% discount to the basic
subscription price.
EXPIRATION TIME AND DATE
The basic subscription privilege and the oversubscription privilege both
expire at 5:00 p.m., Eastern time, on ________, 1999. After the expiration date,
rights will no longer be exercisable by anyone.
In order to exercise rights in a timely manner, you must assure that
ChaseMellon Shareholder Services, L.L.C. actually receives, prior to expiration
of the rights, the properly executed and completed subscription warrant (or form
of "Notice of Guaranteed Delivery"), together with full payment for all shares
you wish to purchase.
EXPENSES OF THE RIGHTS OFFERING
We will pay from cash proceeds of the rights offering or available cash
estimated expenses of approximately $_________ relating to the rights offering.
EXERCISE OF RIGHTS
Please do not send us subscription warrants or related forms. Please send
the properly completed and executed form of subscription warrant with full
payment to ChaseMellon Shareholder Services, L.L.C.
You should read carefully the forms of subscription warrant and related
instructions and forms which accompany this prospectus. You should call
ChaseMellon Shareholder Services, L.L.C. (1-888-224-2745) promptly with any
questions you may have.
You may exercise your rights by delivering to ChaseMellon Shareholder
Services, L.L.C., at the address specified in the instructions accompanying this
prospectus, at or prior to expiration of the rights:
- the properly completed and executed subscription warrant(s) which evidence
your rights, and
- payment in full of the subscription price for each share you wish to
purchase under the basic subscription privilege and the oversubscription
privilege.
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<PAGE>
If you are not a broker, bank or other eligible institution, you must obtain
a signature guarantee on the subscription warrant from a broker, bank or other
institution eligible to guarantee signatures in order to transfer the
subscription warrant in whole or to transfer a portion of your rights.
REQUIRED FORMS OF PAYMENT
If you exercise any rights, you must deliver full payment in the form of:
- a check or bank draft drawn upon a U.S. bank, or U.S. postal money order,
payable to ChaseMellon Shareholder Services, L.L.C. Subscription Agent, or
- by wire transfer of funds to the account maintained by the ChaseMellon
Shareholder Services, L.L.C. for this rights offering at The Chase
Manhattan Bank, New York, NY, ABA No. 021 000 021, Attention: ChaseMellon
Shareholder Services Reorg. Account: ________ (Applied Magnetics
Corporation).
In order for you to timely exercise your rights, ChaseMellon Shareholder
Services, L.L.C. must actually receive the subscription price before expiration
of the rights in the form of:
- a personal check which must have timely cleared payment,
- a certified or cashier's check or bank draft drawn upon a U.S. bank or a
U.S. postal money order, or
- collected funds in ChaseMellon Shareholder Services, L.L.C.'s account
designated above.
Funds paid by uncertified personal check may take at least five business
days to clear. Accordingly, if you pay the subscription price by means of
uncertified personal check, you should make payment sufficiently in advance of
the expiration time to ensure that your check actually clears and the payment is
received before that time. We are not responsible for any delay in payment by
you and suggest that you consider payment by means of certified or cashier's
check, money order or wire transfer of funds.
SPECIAL PROCEDURE UNDER "NOTICE OF GUARANTEED DELIVERY" FORM
If you wish to exercise rights but cannot ensure that ChaseMellon
Shareholder Services, L.L.C. will actually receive the executed subscription
warrant before the expiration of the rights, you may alternatively exercise
rights by causing all of the following to occur within the time prescribed:
- Full payment must be received by ChaseMellon Shareholder Services, L.L.C.
prior to the expiration time for all shares you desire to purchase under
the basic and oversubscription privileges.
- A properly executed "Notice of Guaranteed Delivery" substantially in the
form distributed with your subscription warrant must be received by
ChaseMellon Shareholder Services, L.L.C. at or prior to the expiration
time.
- The "Notice of Guaranteed Delivery" must be executed by both you and one
of the following: a member firm of a registered national securities
exchange, an NASD member, a commercial bank or trust company having an
office or correspondent in the United States, or other eligible guarantor
institution qualified under a guarantee program acceptable to ChaseMellon
Shareholder Services, L.L.C. The cosigning institution must guarantee in
the Notice of Guaranteed Delivery that the subscription warrant will be
delivered to ChaseMellon Shareholder Services, L.L.C. within three NYSE
trading days after the date of the form. You must also provide in that
form other relevant details concerning the intended exercise of rights.
- The properly completed subscription warrant(s) with any required signature
guarantee must be received by ChaseMellon Shareholder Services, L.L.C.
within three NYSE trading days following the date of the related Notice of
Guaranteed Delivery.
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<PAGE>
- If you are a nominee holder of rights, the "Nominee Holder Certification"
must also accompany the Notice of Guaranteed Delivery.
A Notice of Guaranteed Delivery may be delivered to ChaseMellon Shareholder
Services, L.L.C. in the same manner as subscription warrants at the address set
forth above under "The Rights Offering-- ChaseMellon Shareholder Services,
L.L.C.," or may be delivered by telegram or facsimile transmission (telecopier
no. (201) 296-4293). To confirm facsimile deliveries, please call (201)
296-4860.
Additional copies of the form of Notice of Guaranteed Delivery are available
upon request from ChaseMellon Shareholder Services, L.L.C., whose address and
telephone numbers are set forth above.
INCOMPLETE FORMS; INSUFFICIENT OR EXCESS PAYMENT
If you do not indicate the number of rights being exercised, or do not
forward sufficient payment for the number of rights that you indicate are being
exercised, then we are entitled to accept the subscription forms and payment for
the maximum number of rights that may be exercised based on the actual payment
delivered.
If your payment exceeds the amount required to pay for the shares you
indicate in your subscription warrant, then we are entitled to accept the excess
payment as an exercise of the oversubscription privilege to the full extent of
your payment.
We will return any payment not applied to the purchase of shares under the
rights offering procedures to those who made these payments as soon as
practicable by mail.
EXERCISE OF LESS THAN ALL RIGHTS
If you subscribe for fewer than all of the shares represented by your
subscription warrant, you may (1) direct ChaseMellon Shareholder Services,
L.L.C. to attempt to sell your remaining rights, or (2) receive from ChaseMellon
Shareholder Services, L.L.C. a new subscription warrant representing the unused
rights. See "The Rights Offering--How to Transfer Rights" below.
INSTRUCTIONS TO NOMINEE HOLDERS
If you are a broker, trustee or depository for securities or other nominee
holder of common stock for beneficial owners of the stock, we request you
contact the beneficial owners as soon as possible to obtain instructions and
related certifications concerning their rights. Our request to you is further
explained in the suggested form of letter of instructions from nominee holders
to beneficial owners accompanying this prospectus.
To the extent so instructed, nominee holders should complete appropriate
subscription warrants on behalf of beneficial owners and, in the case of any
exercise of the oversubscription privilege, the related form of "Nominee Holder
Certification," and submit them on a timely basis to ChaseMellon Shareholder
Services, L.L.C. with the proper payment.
RISK OF LOSS ON DELIVERY OF SUBSCRIPTION WARRANT FORMS AND PAYMENTS
Each holder of rights bears all risk of the method of delivery to
ChaseMellon Shareholder Services, L.L.C. of subscription warrants and payments
of the subscription price.
If subscription warrants and payments are sent by mail, you are urged to
send these by registered mail, properly insured, with return receipt requested,
and to allow a sufficient number of days to ensure delivery to ChaseMellon
Shareholder Services, L.L.C. and clearance of payment prior to the expiration
time.
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<PAGE>
Because uncertified personal checks may take at least five business days to
clear, you are strongly urged to pay, or arrange for payment, by means of
certified or cashier's check, money order or wire transfer of funds.
HOW PROCEDURAL AND OTHER QUESTIONS ARE RESOLVED
We are entitled to determine all questions concerning the timeliness,
validity, form and eligibility of any exercise of rights. This determination
will be final and binding. We may, in our sole discretion, waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise or any right because
of any defect or irregularity.
Subscription warrants will not be considered received or accepted until all
irregularities have been waived or cured within such time as we determine, in
our sole discretion. Neither Applied nor ChaseMellon Shareholder Services,
L.L.C. has any duty to give notification of any defect or irregularity in
connection with the submission of subscription warrants or any other required
document. Neither Applied nor ChaseMellon will incur any liability for failure
to give such notification.
We reserve the right to reject any exercise of rights if the exercise does
not comply with the terms of the rights offering or is not in proper form or if
the exercise of rights would be unlawful or materially burdensome. See "The
Rights Offering--Right to Block Exercise Due to Regulatory Issues" below.
QUESTIONS AND ASSISTANCE CONCERNING THE RIGHTS
You should direct any questions or requests for assistance concerning the
method of exercising rights or requests for additional copies of this
prospectus, forms of instructions or the Notice of Guaranteed Delivery to
ChaseMellon Shareholder Services, L.L.C., at 450 W. 33rd Street, 14th Floor, New
York, New York 10001 (telephone: banks and brokers (212) 273-8070, collect; all
others (888) 224-2745).
NO REVOCATION
Once you have exercised the basic subscription privilege and/or the
oversubscription privilege, you may not revoke or change your exercise.
HOW TO TRANSFER RIGHTS
There has been no prior trading in the rights. We provide no assurance that
a trading market will develop or, if a market develops, that the market will
remain available for a sufficient time to complete any transfer of rights.
You may transfer all of the rights evidenced by a single subscription
warrant by signing the subscription warrant for transfer in accordance with the
appropriate form printed on the subscription warrant.
You may transfer a portion of the rights evidenced by a single subscription
warrant by delivering to ChaseMellon Shareholder Services, L.L.C. the
subscription warrant properly signed for transfer, with separate written
instructions to register a portion of the rights in the name of your transferee
and to issue a new subscription warrant to the transferee covering the
transferred rights. In that event and by appropriate written instructions, you
may elect to receive a new subscription warrant covering the rights you did not
transfer, or may request ChaseMellon Shareholder Services, L.L.C. to sell your
retained rights in the manner described below.
We anticipate that the rights will be eligible to trade on the NYSE under
the symbol "______" until the close of business on the last trading day prior to
the expiration date. We cannot ensure that there will be a trading market for
the rights, that any market that does develop will continue through the rights
offering, or that stockholders will be able to sell rights.
19
<PAGE>
You may elect to request ChaseMellon Shareholder Services, L.L.C. to sell
all or part of your rights by delivering to ChaseMellon Shareholder Services,
L.L.C. your subscription warrant properly executed for sale by ChaseMellon
Shareholder Services, L.L.C. If you request that only a portion of your rights
be sold, you should indicate in writing what action should be taken as to the
rights you are not selling.
If you request ChaseMellon Shareholder Services, L.L.C. to sell rights, your
subscription warrant signed as provided above must be received by ChaseMellon
Shareholder Services, L.L.C. at or prior to 11:00 a.m., Eastern time, on
__________, 1999.
Promptly following the expiration time, ChaseMellon Shareholder Services,
L.L.C. will send you a check for the net proceeds from the sale of any rights
sold on your behalf. To the extent rights have been sold, all of the sales for
those requesting this service shall be considered together and effected at the
weighted average sale price of all rights sold by the ChaseMellon Shareholder
Services, L.L.C. in this rights offering, less the pro rata portion of any
applicable brokerage commissions, taxes and other expenses.
We cannot ensure that a market will develop for the rights or that
ChaseMellon Shareholder Services, L.L.C. will be able to sell any rights.
ChaseMellon Shareholder Services, L.L.C.'s obligation to execute orders is
subject to its ability to find buyers. If less than all sales orders received by
ChaseMellon Shareholder Services, L.L.C. can be filled, sales proceeds will be
prorated among those requesting the sales based upon the number of rights each
holder of rights has requested ChaseMellon Shareholder Services, L.L.C. to sell.
All sale orders properly received by the above deadline will be treated on a pro
rata basis without regard to the actual date of delivery.
If rights cannot be sold by ChaseMellon Shareholder Services, L.L.C. by 5:00
p.m. Eastern time, on _________, 1999, they will be returned promptly by mail to
the holders who delivered them.
If you wish to transfer all or a portion of your rights, you should allow a
sufficient amount of time prior to the expiration time for (1) the transfer
instructions to be received and processed by ChaseMellon Shareholder Services,
L.L.C., (2) new subscription warrants to be issued and transmitted and (3) the
rights evidenced by the new subscription warrants to be exercised or sold by the
intended recipients.
It may require from two to ten business days, or more, to complete transfers
of rights, depending upon how you deliver the subscription warrant and payment
and the number of transactions you request. Neither Applied nor ChaseMellon
Shareholder Services, L.L.C. will be liable to you or any transferee of rights
if subscription warrants or any other required documents are not received in
time for exercise or sale prior to the expiration time.
If you exercise or sell rights in part, a new subscription warrant for the
remaining rights will be issued to you only if ChaseMellon Shareholder Services,
L.L.C. receives a properly endorsed subscription warrant from you no later than
5:00 p.m., Eastern time, on the fifth business day prior to the expiration date.
It will not issue new subscription warrants for partially exercised or sold
warrants submitted after that time and date. If you do submit a partial exercise
or sale after that time and date, you will not be able to exercise the
unexercised or unsold rights.
Unless you make other arrangements with ChaseMellon Shareholder Services,
L.L.C., a new subscription warrant issued after 5:00 p.m., Eastern time, on the
fifth business day before the expiration date will be held for pick-up by you at
the ChaseMellon Shareholder Services, L.L.C."s hand delivery address provided
above.
If you request a reissuance of a subscription warrant, the delivery of that
document will be at your risk.
You, and not Applied or ChaseMellon Shareholder Services, L.L.C., will be
responsible for paying any commissions, fees and other expenses (including
brokerage commissions and transfer taxes) you may incur for a purchase, sale or
exercise of rights.
20
<PAGE>
If you do not exercise your rights prior to the expiration time, those
rights will expire and will no longer be exercisable.
PROCEDURES FOR NOMINEES WHO ARE DTC PARTICIPANTS
We anticipate that you may transfer rights, or exercise the basic
subscription privilege (but not the oversubscription privilege) through, the
facilities of the Depository Trust Company, generally known as "DTC." If you
exercise the basic subscription privilege through DTC, you may exercise your
oversubscription privilege by properly executing and delivering to ChaseMellon
Shareholder Services, L.L.C., at or prior to the time the rights expire, a "DTC
Participant Oversubscription Exercise Form" and a related "Nominee Holder
Certification," together with payment of the appropriate subscription price for
the number of shares for which the oversubscription privilege is to be
exercised. You may obtain copies of these forms from ChaseMellon Shareholder
Services, L.L.C. at the telephone numbers listed above.
FOREIGN AND UNKNOWN ADDRESSES
We are not mailing subscription warrants to stockholders whose addresses are
outside the United States or who have an APO or FPO address. In those cases, the
subscription warrants will be held by ChaseMellon Shareholder Services, L.L.C.
for those stockholders. To exercise their rights, these stockholders must notify
ChaseMellon Shareholder Services, L.L.C. prior to 11:00 a.m., Eastern time, on
______________, 1999. At that time, if a foreign holder has not given any other
instructions, these rights will be sold, subject to availability of buyers. If
the rights can be sold, a check for the proceeds from the sale of these rights,
less a pro rata portion of any applicable brokerage commissions, taxes and other
expenses, will be sent by mail to the foreign holders. These sales for foreign
holders will be aggregated so that each foreign holder will receive a weighted
average price for the sales, if any.
If you have sold rights through ChaseMellon Shareholder Services, L.L.C. but
it does not know your address or cannot otherwise make delivery of sale proceeds
to you, your sale proceeds will be held in a special account. These proceeds
will be delivered to us if you do not claim them within two years after the
expiration date of the rights offering.
RIGHT TO BLOCK EXERCISE DUE TO REGULATORY ISSUES
We reserve the right to refuse the exercise of rights by any holder of
rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal or foreign regulatory authorities for the
exercise of rights or ownership of additional shares if, at the expiration date,
this clearance or approval has not been obtained. We are not undertaking to pay
for any expenses incurred in seeking that clearance or approval.
We are not offering or selling, or soliciting any purchase of, rights or
underlying shares in any state or other jurisdiction in which this is not
permitted. We reserve the right to delay the commencement of the rights offering
in certain states or other jurisdictions if necessary to comply with local laws.
However, we may elect not to offer rights to residents of any state or other
jurisdiction whose law would require a change in the rights offering in order to
carry out the rights offering in that state or jurisdiction.
NO ADJUSTMENT TO OUTSTANDING STOCK OPTIONS OR OTHER STOCK AWARDS
We will not, solely as a result of the rights offering, adjust the number of
shares of common stock reserved for issuance under its stock award plans for
employees and other eligible participants or the number of shares subject to
outstanding awards of stock options or awards of restricted stock.
21
<PAGE>
AMENDMENT, EXTENSION AND WITHDRAWAL
Subject to the foregoing, we reserve the right to amend, extend or terminate
the rights offering at any time prior to the expiration date and for any reason
at the Board of Directors' discretion. In the event the rights offering is
terminated, all funds received in the rights offering will be returned to those
persons who subscribed for shares in the rights offering.
ISSUANCE OF STOCK CERTIFICATES
Stock certificates for shares purchased in the rights offering will be
issued as soon as practicable after the expiration date. ChaseMellon Shareholder
Services, L.L.C. will deliver subscription payments to us only after
consummation of the rights offering and the issuance of stock certificates to
those exercising rights. If you exercise the oversubscription privilege but are
not allocated all of the shares you asked to purchase, the excess funds you paid
will be returned to you as soon as practicable after the expiration date.
If you exercise rights, you will have no rights as a stockholder until
certificates representing shares you purchased are issued. Unless otherwise
instructed in your subscription warrant form, shares purchased by the exercise
of rights will be registered in the name of the person exercising the rights.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL. This section discusses certain federal income tax consequences of
the rights offering to (1) beneficial owners of common stock upon distribution
of the rights, and (2) holders of rights upon the exercise and disposition of
the rights. The discussion is based on the Internal Revenue Code of 1986, as
amended, the Treasury regulations thereunder, judicial authority, and current
administrative rulings and practice, all of which are subject to change
prospectively or retroactively.
The discussion is limited to U.S. taxpayers who hold common stock, and will
hold the rights and any shares acquired upon the exercise of rights, as capital
assets (generally, property held for investment). The discussion does not
include any tax consequences under state, local and foreign law. Financial
institutions, broker-dealers, nominee holders of common stock or rights, life
insurance companies, tax-exempt organizations and possibly other types of
taxpayers may be subject to special provisions of the tax law or subject to
other tax considerations not discussed below.
Holders should consult their own tax advisors concerning their own
respective tax situations or special tax considerations that may apply to them,
including without limitation foreign, state and local laws that may apply.
DISTRIBUTION OF RIGHTS. Owners of common stock will not recognize taxable
income solely as a result of the distribution of the rights.
EXERCISE OF THE RIGHTS AND BASIS AND HOLDING PERIOD OF THE COMMON
STOCK. Holders of rights will not recognize any gain or loss upon the exercise
of rights. The basis of the shares acquired through exercise of the rights will
be equal to the sum of the subscription price for rights exercised and the
holder's basis in such rights (if any).
The holding period for the shares acquired through exercise of the rights
will begin on the date the rights are exercised.
SALE OF SHARES. An owner of shares will recognize gain or loss upon the
sale of shares acquired by exercise of rights in an amount equal to the
difference between the amount realized and the stockholder's basis in the
shares. The gain or loss so recognized will be long-term or short-term capital
gain or loss, depending on whether the shares have been held for more than one
year, assuming the stockholder holds the shares as a capital asset.
22
<PAGE>
BASIS AND HOLDING PERIOD OF THE RIGHTS. The tax basis of the rights for an
owner of common stock who receives a distribution of rights will be zero,
assuming the following exceptions do not apply. If, however, either (1) the fair
market value of the rights on the date of distribution is 15% or more of the
fair market value (on the date of distribution) of the common stock held, or (2)
the stockholder elects to allocate the basis of common stock to the rights in
the holder's federal income tax return for the taxable year in which the rights
are received, then upon exercise or transfer of the rights, the stockholder's
basis in such common stock will be allocated between the common stock and the
rights in proportion to the fair market values of each on the date of
distribution.
The holding period of a stockholder with respect to the rights received as a
distribution on such stockholder's common stock will include the stockholder's
holding period for the common stock with respect to which the rights were
distributed.
In the case of a purchaser of rights, the tax basis of such rights will be
equal to the purchase price paid therefor, and the holding period for such
rights will commence on the day following the date of the purchase.
TRANSFER OF THE RIGHTS. A holder or purchaser of rights who sells the
rights prior to exercise will recognize capital gain or loss equal to the
difference between the sale proceeds and the basis (if any) in the rights sold,
if the common stock would be a capital asset in the hands of such purchaser.
LAPSE OF THE RIGHTS. If rights expire prior to sale or other disposition of
the rights, the holders of those rights will not recognize any gain or loss, and
no adjustment will be made to the basis of the common stock, if any, owned by
such holders.
Purchasers of the rights will recognize a loss equal to their tax basis in
the rights, if such rights expire unexercised. Any loss recognized on the
expiration of the rights acquired by a purchaser will be a capital loss if the
common stock would be a capital asset in the hands of the purchaser.
INFORMATION REPORTING AND BACKUP WITHHOLDING. Holders who sell rights and
receive payments may be subject to backup withholding at the rate of 31% on the
payments unless the holder (1) is a corporation or is otherwise exempt and
demonstrates the basis for the exemption if so required, or (2) provides a
correct taxpayer identification number and certifies under penalties of perjury
that the taxpayer identification number is correct and that the holder is not
subject to backup withholding. Any amount withheld under these rules will be
credited against such holder's federal income tax liability. We may require
holders to establish their exemptions from backup withholding or to arrange for
payment of backup withholding.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
APRIL 3, APRIL 4,
1999 1998
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AND
EMPLOYMENT AMOUNTS)
<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.............................................................................. 307,676 383,941
Total debt................................................................................ 193,651 169,247
Shareholders' investment.................................................................. 65,324 169,629
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales........................................... $ 183,597 $ 494,839 $ 344,754 $ 292,600 $ 275,927
Net income (loss)................................... (155,368) 96,116 32,218 1,748 (52,670)
Net income (loss) per share:
Income (loss) per common share.................. $ (6.49) $ 4.08 $ 1.41 $ 0.08 $ (2.39)
Income (loss) per common share-assuming
dilution...................................... (6.49) 3.37 1.21 0.08 (2.39)
Weighted average number of common shares
outstanding:
Common shares................................... 23,931 23,567 22,913 22,145 22,082
Common shares-assuming dilution................. 23,931 31,011 30,173 22,472 22,082
Order backlog....................................... $ 10,752 $ 137,508 $ 116,262 $ 107,466 $ 64,781
Year-end employment................................. 5,154 8,431 6,401 5,478 5,531
BALANCE SHEET
Working capital (deficit)(1)........................ $ 13,399 $ 161,164 $ 117,882 $ (5,963) $ (36,443)
Total assets........................................ 299,518 477,988 359,450 246,817 220,556
Total debt.......................................... 176,845 166,731 163,917 69,629 67,151
Shareholders' investment............................ 85,960 240,781 139,699 103,592 98,433
</TABLE>
- ------------------------
(1) This balance includes borrowings outstanding under loan facilities with
Malaysian banks which are callable on demand and have no termination date.
The balances for the periods ended April 3, 1999 and April 4, 1998 were
$62,352 and $49,751, respectively. The balances for the years ended October
3, 1998, September 27, 1997, September 28, 1996, September 30, 1995 and 1994
were $55.5 million, $50.2 million, $45.8 million, $46.9 million and $46.1
million, respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In fiscal 1998, the disk drive industry entered a period of slowdown coupled
with an accelerated transition from the use of inductive thin film to
magnetoresistive head products. We experienced purchase order cancellations,
production reschedules and price reductions related to the industry slowdown and
were late to market with our magnetoresistive head products, which resulted in a
net loss of $155.4 million for the year ended October 3, 1998, compared to a net
profit of $96.1 million for the year ended September 27, 1997, and $32.2 million
for the year ended September 28, 1996. Net sales decreased 62.9% in fiscal 1998
from fiscal 1997, but increased 43.5% in fiscal 1997 from fiscal 1996. Our
financial performance continued to be impacted by this technology transition in
the first half of fiscal 1999. We are late in qualifying our magnetoresistive
head products and we have incurred a loss of $133.1 million for the first half
of fiscal 1999 as compared to $71.7 million loss in the same period of the
previous fiscal year.
Inductive thin film head products represented 96.9% of fiscal 1998 revenue.
During fiscal 1998, we successfully transitioned from inductive thin film head
products at the 1.7 gigabytes per 3.5 inch disk capacity point to inductive thin
film head products at 2.1 gigabytes per 3.5 inch disk. Our 2.1 gigabyte per 3.5
inch disk product was the last generation of inductive thin film heads. We plan
to make inductive film shipments through the third fiscal quarter of 1999, which
makes fiscal 1999 another significant technology transition year for us.
Magnetoresistive head products accounted for 2.5% of revenue in fiscal 1998 as
compared to 4.9% in fiscal 1997. We are currently working on magnetoresistive
head product qualifications with two customers at the 4.3 gigabyte per 3.5 inch
disk and expect to begin volume production shipments of these products in the
fourth fiscal quarter of 1999. We are continuing our commitment to
magnetoresistive and giant magnetoresistive head products with the addition of
technical personnel, capital investments, and research and development.
In fiscal 1998, we experienced a significant decrease in net sales and
demand for inductive thin film head products, which resulted in a significant
loss and negative cash flow from operations as we continue to transition from
inductive thin film to magnetoresistive and giant magnetoresistive head
technology. Our ability to fund our operating and capital requirements for
fiscal 1999 is heavily dependent on our ability to receive qualification and
begin volume production of our magnetoresistive and giant magnetoresistive head
products on a timely basis. As of June 1, 1999, we are in the final stages of
qualification for one of our magnetoresistive head products and expect to begin
volume production shipments in the fourth quarter of fiscal 1999. We are also
attempting to raise capital, which is required immediately to fund current
operating activities, and we will be required to raise significant additional
capital in the near term to fund the anticipated magnetoresistive head
production ramp up and related working capital requirements. If we are unable to
achieve magnetoresistive head production shipments during the fourth quarter of
fiscal 1999 or raise sufficient capital in the near term, there will be a
material adverse effect on our financial condition, competitive position and
ability to continue as a going concern. Due to the significant uncertainties
described above, our auditors have re-issued their report on our October 3, 1998
financial statements. The re-issued report, dated June 1, 1999, includes an
uncertainty paragraph regarding our ability to continue as a going concern. Our
auditors have also advised us that based on current conditions, it is likely
that this going concern uncertainty will also be continued 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
25
<PAGE>
amortized on a straight line basis over 3 years, the estimated period of future
benefit and (2) goodwill of approximately $39.6 million (including a value of
$1.6 million associated with assembled workforce), which will be amortized on a
straight line basis over the estimated period of future benefit of 7 years.
Concurrent with this acquisition and contingent on the merger, a private
investor group purchased 4,641,089 shares of our common stock in exchange for
$18.75 million.
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 1999
----------- -----------
<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".
26
<PAGE>
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 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.
27
<PAGE>
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 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.
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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 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
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$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;
- decrease in inventories of $10.9 million;
- and 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
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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 $.7 million for fiscal 1998;
- a decrease of $.6 million for fiscal 1997;
- a decrease of $1.4 million for the first half of fiscal 1999; and
- a decrease of $1.4 million for the first half of fiscal 1998.
We continue to work with our customers to qualify on magnetoresistive head
programs and believe we will receive qualification on our 4.3 gigabyte per 3.5
inch magnetoresistive head product and begin volume production shipments during
the fourth quarter of fiscal 1999. However, as of June 1, 1999, we had not
received qualification and did not have any sales backlog for our 4.3 gigabyte
per 3.5 inch magnetoresistive head products. Our liquidity and ability to fund
our operating and capital expenditure requirements during fiscal 1999 are
heavily dependent on our ability to receive qualification and begin volume
production of our magnetoresistive and giant magnetoresistive head products on a
timely basis. Although we have completed our plant capacity expansion and
conversion of our existing fabrication facilities to enable manufacturing of
magnetoresistive and giant magnetoresistive heads and are devoting substantial
engineering and manufacturing resources to these efforts, there can be no
assurances that we will receive qualification and achieve planned production
levels on a timely basis. If we are unable to achieve any of
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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 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;
- delayed or lost revenue;
- diversion of resources;
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- 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
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failure to disclose information or the disclosure of false information in the
registration statement in reliance on information provided to us by such holder.
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
July 14, 1999, with Kennilworth Partners II LP. Under this agreement,
- we sold 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 two
installments, on July 14, 1999 and October 12, 1999;
- we sold to Kennilworth Partners II LP on July 14, 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 two installments, on
July 14, 1999 and October 12, 1999.
Kennilworth Partners II LP has the right to terminate the Amended and
Restated Exchange Agreement, as to the October 12, 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.
Under the Amended and Restated Exchange Agreement, we have agreed not to
diminish the number of shares of Common Stock outstanding without the consent of
Kennilworth Partners II LP unless required by law.
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 and
requires us to register the senior subordinated convertible note upon holders
request.
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What follows is a summary of the terms of the senior subordinated
convertible note. The note:
- is a general unsecured obligation of our company;
- bears zero coupon interest compounded quarterly at a rate of 14% per year
through July 14, 2002;
- from July 15, 2002 through July 14, 2005 bears 14% interest per year,
accruing on a daily basis, compounding quarterly and payable in cash
quarterly in arrears;
- matures on or about July 13, 2005. Upon maturity, we will be obligated to
pay the holder $37,776,716, plus accrued but unpaid interest. Accrued but
unpaid interest will also be due upon conversion of the note;
- 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 conversion, 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.
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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.
39
<PAGE>
PRODUCTS
We qualified and made volume production shipments on new disk drive programs
during fiscal 1998, which required inductive thin film products. We produce our
inductive thin film products in volume for 3.5 inch disk drives to achieve data
storage capacities of up to 2.1 gigabytes per 3.5 inch disk. However, this
represents the last generation of inductive thin film products, as our product
mix transitions to magnetoresistive head and giant magnetoresistive head
technology during fiscal 1999.
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.
40
<PAGE>
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;
41
<PAGE>
- 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.
42
<PAGE>
CUSTOMERS AND MARKETING
Our customers in fiscal 1998 included, among others, Western Digital and
Samsung Electronics Co., Ltd. During the first half of fiscal 1999 Samsung has
been our principal customer.
We sell our magnetic recording disk heads in the United States and foreign
countries through our direct sales personnel, with the exception of Japan, where
Hitachi Metals, Ltd. acts as our sales representative for products covered under
a cross-license agreement with them.
Western Digital represented approximately 20% of our net sales during the
first half of fiscal 1999. During the first fiscal quarter of 1998, Western
Digital announced expected lower revenues and profits for that quarter. We were
then notified of significant reductions to our order backlog due to Western
Digital's plan to substantially transition from thin film to magnetoresistive
head production by the end of the third fiscal quarter of 1998. Western
Digital's action was in response to disk drive oversupply in the industry and to
increasing pricing pressures.
Samsung represented approximately 76% of net sales during the first half of
fiscal 1999. Samsung has been among the fastest growing suppliers of hard disk
drives in 1998 and continues to manufacture drives based on magnetoresistive
head technology. We anticipate that Samsung will phase out magnetoresistive
heads in favor of giant magnetoresistive heads during calendar year 2000.
Quantum Corporation and Matsushita Kotobuki Electronics Industries, Ltd.
announced in October 1998 an agreement to dissolve the MKE-Quantum Components
LLC recording head joint venture and attempt to sell its U.S. operations.
Matsushita Kotobuki Electronics Industries, Ltd. announced its intent to
continue to make head gimbal assemblies and head stack assemblies in support of
its drive production relationship with Quantum.
We have begun our magnetoresistive and giant magnetoresistive head program
qualifications with prospective new customers in order to increase the size of
our customer base. Our ability to obtain new orders from customers depends on
our ability to, among other things:
- anticipate technological changes;
- develop products to meet individualized customer requirements; and
- achieve delivery of products that meet customer specifications at
competitive prices.
The disk drive industry is also intensely competitive and disk drive
manufacturers may quickly lose market share as a result of successful deployment
of new technologies by their competitors. A significant reduction in orders or
the loss of a major customer, which could occur for a variety of reasons,
including bankruptcy, could have a material adverse effect on our future
operating results. We can provide no assurance that disk drive companies will
not continue to vertically integrate and acquire the ability to produce disk
heads for their own use. Further consolidation of the disk drive industry may
reduce the number of disk drive programs requiring our products and may increase
our credit risks due to the concentration of our customers. We can provide no
assurance that disk drive companies won't make their own heads or that
consolidation within the disk drive industry will not have a material adverse
effect on our future operating results.
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
43
<PAGE>
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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<PAGE>
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
45
<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
46
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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.
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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.
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.
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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.
SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table contains certain information regarding beneficial
ownership of our common stock as of July 15, 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.................................................................. 45,533(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........................................................ 12,041,005(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)............. 580,196(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".
49
<PAGE>
(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) 7,028,224 shares that Kennilworth Partners II LP may upon 61
days' written notice of conversion of our senior subordinated convertible
note, and (b) 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%
50
<PAGE>
MANAGEMENT
The following table provides certain information concerning each of our
directors and executive officers:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE 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.
51
<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 $100,000 during the
fiscal year ended October 3, 1998, information concerning compensation paid for
services to us in all capacities during that fiscal year, as well as the total
compensation paid to each such individual in each of our previous two fiscal
years (if such person was the Chief Executive Officer or an executive officer,
as the case may be, during any part of such fiscal year).
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------------
AWARDS PAYOUTS
---------------------------- ------------------------
ANNUAL COMPENSATION OTHER ANNUAL RESTRICTED SECURITIES
------------------------------- COMPENSATION STOCK AWARDS UNDERLYING LTIP PAYOUT
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($)(2) OPTION ($)(2)
- ------------------------------- --------- --------- --------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Craig D. Crisman
Chief Executive Officer...... 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
Peter T. Altavilla
Controller and Secretary..... 1998 138,316 0 0 0 300,000 0
1997 129,616 66,050 0 56,925 15,000 0
1996 115,866 40,431 0 0 10,000 0
</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 $450,000 per year. Upon
execution of the employment agreement Mr. Crisman received a grant of
nonqualified options to purchase 300,000 shares of our common stock at the then
fair market price of our common stock.
STOCK OPTION GRANTS AND EXERCISES
The following tables indicates the stock options granted under our stock
option plans to the executive officers named in the Summary Compensation Table,
and the options exercised by them, during the fiscal year ended October 3, 1998.
52
<PAGE>
The Option/SAR Grant Table shows hypothetical gains for the options at the
end of their respective ten-year terms, as calculated in accordance with the
rules of the SEC. Each gain is based on an arbitrarily assumed annualized rate
of compound appreciation of the market price of 5% and 10%, less the exercise
price, from the date the option was granted to the end of the option term.
Actual gains, if any, on option exercise are dependent on the future
appreciation in value of our common stock which appreciation, if any, would
benefit our stockholders as well as persons to whom options have been granted.
OPTIONS GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERM($)(3)
OPTIONS EMPLOYEES IN SHARE --------------------
NAME GRANTED(#) FISCAL 1998(1) ($/SH)(2) EXPIRATION DATE 5% 10%
- ------------------------- ----------- ----------------- ------------- ---------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Craig D. Crisman......... 100,000 8.1 4.38 September 17, 2008 275,141 697,262
Peter T. Altavilla....... 30,000 2.4 4.38 September 17, 2008 82,542 209,179
</TABLE>
- ------------------------
(1) We did not grant SARs in fiscal 1998.
(2) Options were granted in fiscal 1998 at fair market value and are exercisable
in cumulative annual installments of 25% of the shares granted beginning one
year after date of grant, and in all cases expire ten years from the grant
date.
(3) Potential realizable value is based on an assumption that the price, of the
common stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option term. Potential
realizable value is shown net of exercise price. These numbers are
calculated based on the regulations promulgated by the SEC and do not
reflect our estimate of future stock price growth.
AGGREGATED OPTION EXERCISES FISCAL 1998 AND FISCAL 1998 OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES IN-THE-MONEY-OPTIONS
UNDERLYING UNEXERCISED AT OCTOBER 3,
OPTIONS AT OCTOBER 3, 1998 1998
SHARES ACQUIRED VALUE ------------------------------- ---------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($)
- -------------------------- ----------------- --------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Craig D. Crisman.......... 0 0 119,643 700,000 7,478
Peter T. Altavilla........ 0 0 5,000 56,250 1,563
<CAPTION>
NAME UNEXERCISABLE($)
- -------------------------- ---------------------
<S> <C>
Craig D. Crisman.......... 0
Peter T. Altavilla........ 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
53
<PAGE>
share. Under the 1994 Non-Employee Directors' Stock Option Plan, so long as each
person serves as a director, he will be granted an option to purchase 5,000
shares on March 1 of each subsequent year.
The exercise price of each option granted under the 1994 Non-Employee
Directors' Stock Option Plan is set at the fair market value of the common stock
on the date of grant. If the common stock is listed on a stock exchange, fair
market value will be the closing price of the common stock on such exchange on
the date of grant. If, however, the date of grant falls on a day when such
exchange is not open for the trading, the fair market value will be set at the
closing price of the common stock on such exchange on the first trading day
immediately following the date of grant.
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.
54
<PAGE>
These agreements are intended to provide for continuity of management in the
event of a change in the control of our Company. The agreements provide that
covered executive officers and key employees could be entitled to certain
severance benefits following a change in the control of our company. If,
following a change in control, we terminate the executive officer or key
employee is terminated by us for any reason, other than for disability or for
cause, 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."
55
<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;
56
<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;
57
<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.
58
<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.
59
<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.
60
<PAGE>
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.
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 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.
61
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<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-24
Unaudited Condensed Consolidated Statements of Operations for the six months ended April 3, 1999 and
April 4, 1998.......................................................................................... F-25
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended April 3, 1999 and
April 4, 1998.......................................................................................... F-26
Notes to Condensed Consolidated Financial Statements..................................................... F-27
</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
---------- -------------
---------- -------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<S> <C> <C>
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>
TREASURY STOCK
----------------------------
COMMON STOCK UNEARNED
---------------------- RETAINED RESTRICTED
NUMBER OF PAID-IN EARNINGS NUMBER OF 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.
F-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance September 27, 1997.............................................. 2,499,912 $ 19.06
-----------
Granted............................................................... 5,242,101 $ 7.81
Exercised............................................................. (128,650) $ 5.05
Cancelled............................................................. (4,295,704) $ 16.28
-----------
Balance October 3, 1998................................................. 3,317,659 $ 5.42
-----------
</TABLE>
The following table summarizes information about the Company's stock options
outstanding and exercisable as of October 3, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------------------------
RANGE OF EXERCISE PRICES NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE 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
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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.
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS
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
F-16
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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.
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
F-17
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
effect, applicable to the Convertible Debentures. During a loss period, the
assumed exercise of in-the-money stock options and conversion of Convertible
Debentures have an antidilutive effect. As a result, those shares are not
included in the weighted average shares outstanding used in the calculation of
basic and fully diluted loss per common share as of October 3, 1998.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
----------- -------------
<S> <C> <C>
7.0% Convertible Subordinated Debentures, due March 15, 2006................ $ 114,999 $ 115,000
Secured Malaysian bank credit facilities, interest rates from 6.75% to
10.0%..................................................................... 55,482 50,188
Mortgage payable, interest rate of 8.5%..................................... 66 86
Bank advance, interest rate of 9.5%......................................... 2,986 --
Capital leases.............................................................. 3,312 1,457
----------- -------------
176,845 166,731
Less-current portion, including bank credit facilities...................... 60,078 50,701
----------- -------------
$ 116,767 $ 116,030
----------- -------------
----------- -------------
</TABLE>
The aggregate principal payments of bank notes payable and long-term debt
for the years subsequent to October 3, 1998 are: 1999-$60.1 million, 2000-$1.5
million., 2001-$0.2 million, thereafter $115.0 million.
The Company's $115.0 million 7.0% Convertible Subordinated Debentures (the
"Convertible Debentures") due in 2006 may be converted, at any time at a
conversion price of $18.60 per share.
The Company has a secured, revolving line of credit from CIT Group/Business
Credit, Inc. ("CIT") that has been in place since January, 1995. This line of
credit provides for borrowings up to $35.0 million based on eligible trade
receivables at various interest rates and is secured by trade receivables,
inventories and certain other assets. As of October 3, 1998, the total amount
available for future borrowings was $1.2 million under this facility. As of
October 3, 1998, the Company was 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
F-18
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
outstanding on these loan facilities ranged from 6.75% to 10.0%, at October 3,
1998 and had a weighted average interest of 8.58%. The Company intends to
continue its practice of repaying maturities with new borrowings under these
facilities.
7. DISPOSITIONS
During 1993, the Company sold its subsidiaries, Magnetic Data, Inc. and
Brumko Magnetics, which had been accounted for as a discontinued operation in
1992, to Delta Bravo, Inc. ("DBI"). A portion of the sales consideration
consisted of notes issued to the Company. DBI subsequently defaulted on several
note covenants and breached related pledge agreements with the Company. On July
17, 1996, the Company, through foreclosure proceedings, acquired all the common
stock of DBI and Magnetic Data Technologies ("MDT"), which was formed in
conjunction with the foreclosure for a $2.5 million reduction in debt owed to
the Company by DBI. All DBI note balances had been fully reserved by the Company
in previous years and the Company has no investment in DBI or MDT. The Company
engaged a third party consulting firm to operate and facilitate the sale of MDT.
MDT was sold subsequent to October 3, 1998. See Note 13. MDT's financial
position and results of operations are immaterial to the Company's consolidated
financial statements.
8. COMMITMENTS AND CONTINGENCIES
The Company has been identified as a potentially responsible party in
connection with a hazardous waste facility in Whittier, California. A site
remediation plan is being prepared for submission to the U.S. Environmental
Protection Agency. Separately, the California Regional Water Quality Control
Board ("CRWQCB") issued a clean up and abatement order to the Company concerning
property previously used and owned by the Company. As a result of this order,
the Company performed an environmental study to determine the extent of
contamination related to 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
F-19
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
equipment expire over the next five years with renewal options in certain
instances. Future minimum lease payments under capital and operating leases as
of October 3, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASES
-------------------------------
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1999........................................................ $ 1,763 $ 30,991
2000........................................................ 1,606 25,883
2001........................................................ 236 21,522
2002........................................................ -- 12,655
Thereafter.................................................. -- 2,260
------------- -------
Total minimum payments...................................... 3,605 $ 93,311
------------- -------
------------- -------
Less imputed interest....................................... (293)
-------------
Present value of minimum payments under capital leases...... 3,312
Less current portion........................................ (1,590)
-------------
Long-term lease obligation.................................. $ 1,722
-------------
-------------
</TABLE>
Manufacturing and other equipment at October 3, 1998 include assets under
capitalized leases of $5.2 million with related accumulated depreciation of $0.1
million.
Purchase commitments associated with capital expenditures were $3.6 million
at October 3, 1998.
The Company entered into $3.3 million of capital leases during fiscal 1998.
The Company's Malaysian subsidiary has a credit facility with a Malaysian
bank that includes security interest in the Company's real property holdings in
Malaysia, with a net book value of $25.4 million at October 3, 1998.
Total rental expense, net of sublease rental income, for the years ended
October 3, 1998, September 27, 1997 and September 28, 1996, including items on a
month-to-month basis, was approximately $32.5 million, $23.7 million and $15.2
million, respectively.
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.
F-20
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BENEFIT PLANS (CONTINUED)
Compensation expense recorded under the cash profit sharing plan during 1997 and
1996 was approximately $4.5 million and $3.3 million, respectively, of which
approximately $0.6 million and $0.5 million was contributed to participating
employees' 401(k) accounts, respectively.
10. TERMINATED MERGER COSTS
Terminated merger costs of $2.9 million for fiscal 1997 include legal and
accounting fees, financial advisory fees and miscellaneous expenses related to
the February 1997 proposed business combination between the Company and
Read-Rite Corporation. On March 14, 1997, the Company announced its withdrawal
of the proposal.
11. PROVISION FOR CUSTOMER BANKRUPTCY
On November 10, 1997, Singapore Technologies announced plans to shut down
its subsidiary, Micropolis, one of the Company's customers. As a result, the
Company recorded a provision for customer bankruptcy of $4.2 million in the
fourth quarter of fiscal 1997 related to potentially uncollectible accounts
receivable.
12. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of approximately $8.4 million in
the first quarter of fiscal 1998. Of this amount, approximately $2.9 million
pertains to severance and related expenses at the Ireland facility and
approximately $5.5 million represents the write-off of the unamortized book
value of inductive thin-film equipment. The shut down of the Ireland plant was
completed in March 1998 as part of a plan to consolidate foreign manufacturing
operations. Approximately 300 employees were terminated at the Ireland plant.
All amounts for severance 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-
F-21
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
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 $39.6 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-22
<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
------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
------------ ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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-23
<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.................................. 69,293 --
Other assets............................................................................ 13,681 14,462
----------- -----------
$ 307,676 $ 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............................................................. 13,764 9,653
----------- -----------
114,085 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
----------- -----------
$ 307,676 $ 299,518
----------- -----------
----------- -----------
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated balance sheets.
F-24
<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-25
<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-26
<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 $39.6 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.
Management has recorded a current liability of $2 million with a
corresponding adjustment to the previously recorded goodwill of $37.6 million to
reflect the issuance of 276,626 common shares, which are expected to be issued
as DAS preferred stock warrants vest. No adjustment has been made to the
previously recorded goodwill amortization for the three and six month periods
ended April 3, 1999, as the additional amortization amount is insignificant.
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
F-27
<PAGE>
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
(APRIL 3, 1999)
products have already been disposed of, and the remaining estimated cost of
disposal is expected to be approximately equal to the scrap value.
The Company recorded a $4.5 million charge in the second fiscal quarter of
1999 related to the write-off of the unamortized book value of obsolete assets
and the remaining book value of assets associated with the discontinuation of an
in-house suspension assembly operation. The obsolete assets and the in-house
suspension assembly assets, which were no longer usable to the Company, are in
the process of being abandoned due to changing technology and product
discontinuation. Management separately isolated the assets. The assets have not
yet been disposed of; however, the estimated costs of disposal are expected to
be approximately equal to scrap value.
NOTE D: CREDIT FACILITIES
The Company's Malaysian subsidiary has credit facility agreements with five
Malaysian banks. These credit facilities allow for borrowings of up to $62.7
million of which $62.4 million was outstanding as of April 3, 1999. All the
Malaysian credit facilities are callable on demand, have no termination date and
are guaranteed by the Company. Credit facilities with one bank are secured by
the Company's real property holdings in Malaysia and include financial covenants
and certain covenants which preclude the Company from granting liens and
security interests in other assets in Malaysia. Credit facilities with the four
other banks are unsecured.
The Company also has a secured, asset-based revolving line of credit of up
to $35.0 million from CIT Group/Business Credit, Inc. As of April 3, 1999, the
Company was not in compliance with the financial covenants under this line of
credit, but has received notification from the Company's lender waiving the area
of non-compliance until June 30, 1999. The Company expects to successfully
renegotiate terms of the covenants with the lender. As of April 3, 1999, the
total amount available under this line of credit was fully utilized.
NOTE E: EARNINGS (LOSS) PER SHARE COMPUTATION
Effective in fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
replaces the presentation of primary income (loss) per share ("EPS") with the
presentation of basic EPS. Loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during
the period. Loss per common share assuming dilution is computed based on
weighted average number of shares of common stock and common stock equivalents
outstanding during the period and as if the Company's 7.0% Convertible
Subordinated Debentures due March 15, 2006 (the "Convertible Debentures") were
converted into common stock at the beginning of the period after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the Convertible Debentures. During a loss period, the
assumed exercise of in-the-money stock options and conversion of Convertible
Debentures has an antidilutive effect. As a result, these shares are not
included in the weighted average shares outstanding of 34,728,792 used in the
calculation of loss per common share and common share-assuming dilution at April
3, 1999.
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
F-28
<PAGE>
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
(APRIL 3, 1999)
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.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPLIED MAGNETICS CORPORATION
RIGHTS OFFERING OF _____ SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
JULY , 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............... $ *
Printing and engraving expenses................................... 25,000*
Accounting fees and expenses...................................... 25,000*
Legal fees and expenses........................................... 50,000*
Miscellaneous expenses............................................ 7,500*
---------
Total......................................................... $ 142,680
---------
---------
</TABLE>
- ------------------------
* estimate
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The indemnification of officers and directors of the Registrant is governed
by Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") and the Certificate of Incorporation and By-Laws of the Registrant.
Subsection (a) of DGCL Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Subsection (b) of DGCL Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust 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
II-1
<PAGE>
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith. In all cases in
which indemnification is permitted under subsections (a) and (b) of Section 145
(unless ordered by a court), it shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director, officer, employee or agent is proper in the
circumstances because the applicable standard of conduct has been met by the
party to be indemnified. Such determination must be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
The statute authorizes the corporation to pay expenses incurred by an officer or
director in advance of the final disposition of a proceeding upon receipt of an
undertaking by or on behalf of the person to whom the advance will be made, to
repay the advances if it shall ultimately be determined that he was not entitled
to indemnification. DGCL Section 145 also provides that indemnification and
advancement of expenses permitted thereunder are not to be exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-law, agreement, vote of stockholders or
disinterested directors, or otherwise. DGCL Section 145 also authorizes the
corporation to purchase and maintain liability insurance on behalf of its
directors, officers, employees and agents regardless of whether the corporation
would have the statutory power to indemnify such persons against the liabilities
insured.
The Certificate of Incorporation of the Registrant (the "Certificate")
provides that no director of the Registrant shall be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for paying a dividend or approving a stock repurchase in violation of
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
The Registrant's By-laws provide that the Registrant shall indemnify an
officer or director for any costs incurred by such officer or director in
connection with a proceeding against such officer or director by reason of the
fact that he is or was an officer or director of the Registrant, unless such
indemnification is prohibited under applicable law. Pursuant to the By-laws, the
Registrant may also be required to advance funds to an officer or director who
is entitled to indemnification upon receipt of an undertaking by or on behalf of
the officer or director to repay the amount if it is ultimately determined that
such person is not entitled to indemnification. The By-laws further provide that
the Registrant may provide indemnification 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>
<S> <C>
4.1 Form of Subscription Warrant
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
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 (included on II-5)
99.1 Form of Subscription Agent Agreement between Applied Magnetics Corporation and
ChaseMellon Shareholder Services, L.L.C.
99.2 Form of Information Agent Agreement between Applied Magnetics Corporation and
ChaseMellon Shareholder Services, L.L.C.
99.3 Form of Instructions as to Use of Subscription Warrant
99.4 Form of Notice of Guaranteed Delivery
99.5 Form of Letter to Stockholders of Record
99.6 Form of Letter from Brokers or Other Nominees to Beneficial Owners of Common Stock
99.7 Form of Instructions by Beneficial Owners to Brokers or Other Nominees
99.8 Form of Announcement of Filing Registration Statement*
99.9 Form of Letter to Dealers and Other Nominees
</TABLE>
- ------------------------
* To be filed by amendment
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
II-3
<PAGE>
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Goleta, State of California, on July 23, 1999.
<TABLE>
<S> <C> <C>
APPLIED MAGNETICS CORPORATION
By: /s/ CRAIG D. CRISMAN
-----------------------------------------
Craig D. Crisman
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Craig D. Crisman and Jerry Goldress, and each of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this registration statement and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ CRAIG D. CRISMAN Chief Executive Officer
- ------------------------------ (principal executive July 23, 1999
Craig D. Crisman officer, principal
financial officer)
/s/ PETER T. ALTAVILLA Secretary and Controller
- ------------------------------ (principal accounting July 23, 1999
Peter T. Altavilla officer)
/s/ HERBERT DWIGHT, JR.
- ------------------------------ Director July 23, 1999
Herbert Dwight, Jr.
/s/ HAROLD FRANK
- ------------------------------ Director July 23, 1999
Harold Frank
/s/ JERRY GOLDRESS
- ------------------------------ Director July 23, 1999
Jerry Goldress
/s/ R. C. MERCURE
- ------------------------------ Director July 23, 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>
APPLIED MAGNETICS CORPORATION
SUBSCRIPTION WARRANT FOR RIGHTS OFFERING
FOR HOLDERS OF RECORD ON __________, 1999
---------------------------- ------------------------
Subscription Warrant Number Cusip Number
---------------------------- -------- ------------------------
Shares Eligible to Subscribe Rights Record Date Shares
Applied Magnetics Corporation (the "Company") is conducting a rights
offering (the "Rights Offering") which entitles the holders of shares of the
Company's common stock (the "Common Stock"), as of the close of business on
____________, 1999 (the "Record Date") to receive one transferable right (each,
a "Right") for each share of Common Stock held of record on the Record Date.
Holders of Rights are entitled to subscribe for and purchase one share of Common
Stock for every one Right (the "Basic Subscription Privilege") at a subscription
price of $______ per share. If any shares of Common Stock are not purchased by
holders of Rights pursuant to the Basic Subscription Privilege (the "Excess
Shares"), any holder purchasing all of the shares of Common Stock available to
that holer may purchase an additional number of Excess Shares at $________ per
share, a _____% discount to the Basic Subscription Privilege, if so specified in
the subscription documents, subject to proration. Set forth above is the number
of shares of Common Stock held by such holder, and the number of shares to which
each holder is entitled to subscribe pursuant to the Basic Subscription
Privilege.
For a more complete description of the terms and conditions of the Rights
Offering, please refer to the Prospectus dated ________, 1999 (the
"Prospectus"), which is incorporated herein by reference. Copies of the
Prospectus are available upon request from ChaseMellon Shareholder Services,
L.L.C. (toll free (888) 224-2745).
This Subscription Warrant (or a Notice of Guaranteed Delivery) must be
received by ChaseMellon Shareholder Services, L.L.C. together with payment in
full of the subscription price by 5:00 p.m. New York City time, on ________,
1999 (unless extended in the sole discretion of the Company) (as it may be
extended, the "Expiration Date"). Any Rights not exercised prior to the
Expiration Date will be null and void. Any subscription for shares of Common
Stock in the Rights Offering made hereby is irrevocable.
The Rights represented by this Subscription Warrant may be exercised by
duly completing Form 1; may be transferred, assigned, exercised or sold through
a bank or broker by duly completing Form 2; and may be sold through ChaseMellon
shareholder Services. L.L.C. by duly completing Form 3. Rights holders are
advised to review the Prospectus and instructions, copies of which are available
from ChaseMellon Shareholder Services, L.L.C., before exercising or selling
their Rights.
SUBSCRIPTION PRICE: $_____ PER SHARE
The registered owner whose name is inscribed hereon, or its assigns, is
entitled to subscribe for shares of Common Stock of the Company upon the terms
and subject to the conditions set forth in the Prospectus and the instructions
relating to the use hereof.
The Subscription Warrant is transferable, and may be combined or divided at
the office of ChaseMellon Shareholder Services, L.L.C.
Rights holders should be aware that if they choose to exercise or transfer
only part of their Rights, they may not receive a new Subscription Warrant in
sufficient time to exercise the remaining Rights evidenced thereby.
-1-
<PAGE>
FORM 1 (on reverse of Subscription Warrant)
EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises one
or more Rights to subscribe for shares of Common Stock as indicated below, on
the terms and subject to the conditions specified in the Prospectus, receipt
of which is hereby acknowledge.
(a) Number of shares subscribed for pursuant to the Basic Subscription
Privilege ____ X $____ = $____ payment.
(b) Number of shares subscribed for pursuant to the Oversubscription Privilege
____ X $____ = $____ payment.
(c) Total Subscription (sum of payment amounts on lines (a) and (b)) = $______
payment.*
METHOD OF PAYMENT (CHECK AND COMPLETE APPROPRIATE BOX(ES)):
[__] Check, bank draft, or U.S. postal money order payable to "ChaseMellon
Shareholder Services, L.L.C., as Subscription Agent" or
[__] Wire transfer directed to the Chase Manhattan Bank, New York, NY, ABA
No. 021000021-Attention: ChaseMellon Shareholder Services Reorg.
Account __________-(Applied Magnetics Corporation).
(d) If the Rights being exercised pursuant to the Basic Subscription Privilege
do not constitute all of the Rights represented by the Subscription Warrants
(check only one):
[__] Deliver to the undersigned a new Subscription Warrant evidencing the
remaining Rights to which the undersigned is entitled.
[__] Deliver a new Subscription Warrant in accordance with the
undersigned's form 2 instructions (which include any required signature
guarantees).
[__] Sell the remaining unexercised Rights in accordance with the
undersigned's Form 3 instructions.
[__] Do not deliver any new Subscription Warrants to me.
(e) [__] Check here if Rights are being exercised pursuant to the Notice of
Guaranteed Delivery delivered to the Subscription Agent prior to the date hereof
and complete the following:
Name(s) of Registered Holder(s) __________________________________
Window Ticket Number (if any) ____________________________________
Date of Execution of Notice of Guaranteed Delivery _______________
Name of Institution Which Guaranteed Delivery ____________________
* If the aggregate Subscription Price enclosed or transmitted is insufficient
to purchase the total number of shares included in lines (a) and (b), or if the
number of shares being subscribed for is not specified, the Rights holder
exercising this Subscription Warrant shall be deemed to have subscribed for the
maximum amount of shares that could be subscribed for upon payment of such
amount. If the number of shares to be subscribed for pursuant to the
Oversubscription Privilege is not specified and the amount enclosed or
transmitted exceeds in aggregate Subscription Price for all shares represented
by this Subscription Warrant (the "Subscription Excess"), the Rights holder
exercising this Subscription Warrant shall be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, that number of
shares of Common Stock equal to the quotient obtained by dividing the
Subscription Excess by the Subscription Price, subject to proration as described
in the Prospectus. To the extent any portion of the aggregate Subscription
Price enclosed or transmitted remains after the foregoing procedures, such funds
shall be mailed to the subscriber without interest or deduction as soon as
practicable.
Subscriber's Signature _________________ Telephone No. (___) __________
-2-
<PAGE>
FORM 2 (on reverse of Subscription Warrant)
TO TRANSFER YOUR SUBSCRIPTION WARRANT OR SOME OR ALL OF YOUR RIGHTS, OR TO
EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER: For value received, Rights
represented by this Subscription Warrant are hereby assigned to (please print in
full name and address and Taxpayer Identification Number of Social Security
Number of transferee):
Name:
--------------------------------------------------
Address:
----------------------------------------------
- -------------------------------------------------------
Signature(s) of Transferee(s)
Signatures Guaranteed by:
------------------------------
Proceeds from the sale of Rights may be subject to withholding of U.S. taxes
unless the Seller's certified U.S. taxpayer identification number (or
certificate regarding foreign status) is on file with the Subscription Agent
and the seller is not otherwise subject to U.S. backup withholding.
FORM 3 (on reverse of Subscription Warrant)
TO SELL SOME OR ALL OF YOUR UNEXERCISED RIGHTS THROUGH THE SUBSCRIPTION AGENT:
The undersigned hereby authorizes the Subscription Agent to sell ______________
Rights represented by this Subscription Warrant but not exercised hereby and to
deliver to the undersigned a check for the proceeds, if any, from the sale
thereof, less any applicable brokerage commissions, taxes or other direct
expenses of sale. The Subscription Agent's obligation to execute orders is
subject to its ability to find buyers for the Rights.
- ------------------------------------------
Subscriber's Signature
In order to sell Rights through the Subscription Agent, you must complete and
sign the substitute Form W-9 as provided in Section 8 of the instructions.
FORM 4 (on reverse of Subscription Warrant)
DELIVERY INSTRUCTIONS: Address for mailing of stock or new Subscription Warrant
or any cash payment in accordance with the Prospectus, if different from the
address shown on the face of this Subscription Warrant.
Name:
-------------------------------------------------
Address:
----------------------------------------------
-3-
<PAGE>
MXW-68460
July __, 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- (the "Registration Statement"), registering a
maximum of _________ shares of AMC's Common Stock, $0.10 par value (the
"Shares"), to be sold pursuant to a rights offering (the "Offering"), we have
been requested to render this opinion.
For the purposes 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 28, 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
<PAGE>
Applied Magnetics Corporation
July __, 1999
Page 2
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 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 he 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,
Sheppard, Mullin, Richter & Hampton LLP
<PAGE>
Exhibit 23.2
ARTHUR ANDERSEN LLP
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
July 23, 1999
<PAGE>
[LETTERHEAD OF APPLIED MAGNETICS CORPORATION]
Date _____, 1999
ChaseMellon Shareholder Services, LLC
85 Challenger Road
Ridgefield Park, New Jersey 07660
Attention: Reorganization Department
Gentlemen:
Applied Magnetics Corporation, a Delaware corporation (the
"Company") is making an offer to issue (the "Subscription Offer") to the
holders of record of its outstanding shares of Common Stock par value $0.01
per share (the "Common Stock"), at the close of business on __________, 1999
(the "Record Date"), the right to subscribe for and purchase (each a "Right")
shares of Common Stock (the "Additional Common Stock") at a purchase price of
$_____ per share of Additional Common Stock (the "Subscription Price"),
payable by cashier's or certified check or other acceptable methods as may be
specified in the Registration Statement referenced below, upon the terms and
conditions set forth herein. The term "Subscribed" shall mean submitted for
purchase from the Company by a stockholder in accordance with the terms of
the Subscription Offer, and the term "Subscription" shall mean any such
submission. The Subscription Offer will expire at 5:00 p.m. New York City
Time, on ______, 1999 (the "Expiration Time"), unless the Company shall have
extended the period of time for which the Subscription Offer is open, in
which event the term "Expiration Time" shall mean the latest time and date at
which the Subscription Offer, as so extended by the Company from time to
time, shall expire.
This Subscription Agent Agreement ("Agreement") will define the
activities and related compensation which ChaseMellon Shareholder Services
LLC ("ChaseMellon") will provide to the Company in conjunction with the
Subscription Offer.
The Company filed a Registration Statement relating to the
Additional Common Stock with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, on ________, 1999. Said Registration
Statement was declared effective on ________, 1999. The terms of the
Additional Common Stock are more fully described in the Prospectus forming
part of the Registration Statement as it was declared effective, and the
accompanying Letter of Instruction. Copies of the Prospectus, the Letter of
Instruction and the Notice of Guaranteed Delivery are
-1-
<PAGE>
annexed hereto as Exhibit 1, Exhibit 2 and Exhibit 3, respectively. All terms
used and not defined herein shall have the same meaning as in the Prospectus.
Promptly after the Record Date, the Company will provide ChaseMellon with a
list of holders of Common Stock as of the Record Date (the "Record
Stockholders List").
The Rights are evidenced by transferable subscription warrants (the
"Warrants"), a copy of the form of which is annexed hereto as Exhibit 4. The
Warrants entitle the holders to subscribe, upon payment of the Subscription
Price, for shares of Additional Common Stock at the rate of one (1) share for
each one (1) Right evidenced by a Warrant (the "Basic Subscription
Privilege"). No fractional shares will be issued. Rights are freely
transferable among their holders and ChaseMellon will not make any
distinction between Rights issued directly to subscribing shareholders and
those Rights which have been validly and lawfully acquired by the subscribing
shareholder from another.
Further, the Subscription Offer provides that subscribing
shareholders, and only those subscribing shareholders who exercise their
Rights in full, may exercise an Oversubscription Privilege as more fully
described in the Registration Statement. ChaseMellon shall, after the
initial allocation of Additional Common Stock to those shareholders
exercising their Basic Subscription Privilege, allocate any remaining shares
(and only to the extent possible) to those shareholders who exercise the
Oversubscription Privilege on a pro-rata basis to their Basic Subscription,
as more fully described in the Registration Statement.
The Company hereby appoints ChaseMellon as Subscription Agent (the
"Subscription Agent") for the Subscription Offer and agrees with ChaseMellon
as follows:
1. As Subscription Agent, ChaseMellon is authorized and directed to:
a. Issue the Warrants in accordance with this Agreement in the names of
the holders of the Common Stock of record on the Record Date, keep
such records as are necessary for the purpose of recording such
issuance, and furnish a copy of such records to the Company. The
Warrants may be signed on behalf of the Subscription Agent by the
manual or facsimile signature of a Vice President or Assistant Vice
President of the Subscription Agent, or by the manual signature of any
of its other authorized officers.
b. Promptly after ChaseMellon receives the Record Stockholders List:
i. mail or cause to be mailed, by first class mail, to each holder
of Common Stock of record on the Record Date whose address of
-2-
<PAGE>
record is within the United States and Canada, (i) a Warrant
evidencing the Rights to which such stockholder is entitled under
the Subscription Offer, (ii) a copy of the Prospectus, (iii) a
Letter of Instruction, (iv) a Notice of Guaranteed Delivery and
(v) a return envelope addressed to the Subscription Agent; and
ii. mail or cause to be mailed, by air mail, to each holder of Common
Stock of record on the Record Date whose address of record is
outside the United States and Canada, or is an A.P.O. or F.P.O.
address (i) a copy of the Prospectus, (ii) a Notice of Guaranteed
Delivery and (iii) a Letter of Instruction (different from the
Letter of Instruction sent to stockholders whose address of
record is within the United States and Canada). ChaseMellon
shall refrain from mailing Warrants issuable to any holder of
Common Stock of record on the Record Date whose address of record
is outside the United States and Canada, or is an A.P.O. or
F.P.O. address, and hold such Warrants for the account of such
stockholder subject to such stockholder making satisfactory
arrangements with the Subscription Agent for the exercise or
other disposition of the Rights evidenced thereby, and follow the
instructions of such stockholder for the exercise, sale or other
disposition of such Rights if such instructions are received at
or before 11:00 a.m., New York City Time, on _________, 1999.
c. Mail or deliver a copy of the Prospectus (i) to each assignee or
transferee of Warrants upon ChaseMellon's receiving appropriate
documents to register the assignment or transfer thereof and (ii) with
certificates for shares of Additional Common Stock when such are
issued to persons other than the registered holder of the Warrant.
c. Accept Subscriptions upon the due exercise (including payment of the
Subscription Price) on or prior to the Expiration Time of Rights in
accordance with the terms of the Warrants and the Prospectus.
e. Subject to the next sentence, accept Subscriptions from stockholders
whose Warrants are alleged to have been lost, stolen or destroyed upon
receipt by ChaseMellon of an affidavit of theft, loss or destruction
and a bond of indemnity in form and substance satisfactory to
ChaseMellon accompanied by payment of the Subscription Price for the
total number of shares of Additional Common Stock subscribed for.
Upon receipt of such affidavit and bond of indemnity and compliance
with any other applicable requirements, stop orders shall be placed on
said Warrants and ChaseMellon shall withhold delivery of the shares of
Additional
-3-
<PAGE>
Common Stock Subscribed for until after the Warrants have expired and
it has been determined that the Rights evidenced by the Warrants have
not otherwise been purported to have been exercised or otherwise
surrendered.
f. Accept Subscriptions, without further authorization or direction from
the Company, without procuring supporting legal papers or other proof
of authority to sign (including without limitation proof of
appointment of a fiduciary or other person acting in a representative
capacity), and without signatures of co-fiduciaries,
co-representatives or any other person:
i. if the Warrant is registered in the name of a fiduciary and is
executed by and the Additional Common Stock is to be issued in
the name of such fiduciary;
ii. if the Warrant is registered in the name of joint tenants and is
executed by one of the joint tenants, provided the certificate
representing the Additional Common Stock is issued in the names
of, and is to be delivered to, such joint tenants;
iii. if the Warrant is registered in the name of a corporation and is
executed by a person in a manner which appears or purports to be
done in the capacity of an officer, or agent thereof, provided
the Additional Common Stock is to be issued in the name of such
corporation; or
iv. if the Warrant is registered in the name of an individual and is
executed by a person purporting to act as such individual's
executor, administrator or personal representative, provided, the
Additional Common Stock is to be registered in the name of the
subscriber as executor or administrator of the estate of the
deceased registered holder and there is no evidence indicating
the subscriber is not the duly authorized representative that he
purports to be.
g. Accept applications to transfer Warrants and to act therein as a
Transfer Agent for this limited purpose, without further authorization
or direction from the Company, without procuring supporting legal
papers or other proof of authority to sign (including without
limitation proof of appointment of a fiduciary or other person acting
in a representative capacity), and without signatures of
co-fiduciaries, co- representatives or any other person:
-4-
<PAGE>
i. if the Warrant is registered in the name of a fiduciary and is
executed by and the Additional Common Stock is to be issued in
the name of such fiduciary;
ii. if the Warrant is registered in the name of joint tenants and is
executed by one of the joint tenants, provided the certificate
representing the Additional Common Stock is issued in the names
of, and is to be delivered to, such joint tenants;
iii. if the Warrant is registered in the name of a corporation and is
executed by a person in a manner which appears or purports to be
done in the capacity of an officer, or agent thereof, provided
the Additional Common Stock is to be issued in the name of such
corporation; or
iv. if the Warrant is registered in the name of an individual and is
executed by a person purporting to act as such individual's
executor, administrator or personal representative, provided, the
Additional Common Stock is to be registered in the name of the
subscriber as executor or administrator of the estate of the
deceased registered holder and there is no evidence indicating
the subscriber is not the duly authorized representative that he
purports to be.
h. Accept Subscriptions not accompanied by Warrants if submitted by a
firm having membership in the New York Stock Exchange or another
national securities exchange or by a commercial bank or trust company
having an office in the United States together with the Notice of
Guaranteed Delivery and accompanied by proper payment for the total
number of shares of Additional Common Stock Subscribed for.
i. Accept Subscriptions even though unaccompanied by Warrants, under the
circumstances and in compliance with the terms and conditions set
forth in the Prospectus under the heading "The Rights
Offering--Special Procedure Under Notice of Guaranteed Delivery Form."
j. Refer to the Company for specific instructions as to acceptance or
rejection, Subscriptions received after the Expiration Time,
Subscriptions not authorized to be accepted pursuant to this Paragraph
1, and Subscriptions otherwise failing to comply with the requirements
of the Prospectus and the terms and conditions of the Warrants.
k. Upon acceptance of a Subscription:
-5-
<PAGE>
i. hold all monies received in a special account for the benefit of
the Company. Promptly following the Expiration Time ChaseMellon
shall distribute to the Company the funds in such account and
issue certificates for shares of Additional Common Stock issuable
with respect to Subscriptions which have been accepted.
ii. advise the Company daily by telecopy and confirm by letter to
______________________________,_____________________ (the
"Company Representative"), with a copy
to____________________________ (by telecopy) as to the total
number of shares of Additional Common Stock Subscribed for, total
number of Rights sold, total number of Rights partially
Subscribed for and the amount of funds received, with cumulative
totals for each; and in addition advise the Company
Representative, by telephone to___________________________
at__________________ , confirmed by telecopy, of the amount of
funds received identified in accordance with (a) above,
deposited, available or transferred in accordance with (a) above,
with cumulative totals; and
iii. as promptly as possible but in any event on or before 3:30 p.m.,
New York City Time, on the first full business day following the
Expiration Time, advise the Company Representative in accordance
with (b) above of the number of shares Subscribed for, the number
of Subscription guarantees received and the number of shares of
Additional Common Stock unsubscribed for.
l. Upon completion of the Subscription Offer, ChaseMellon shall
requisition certificates from the Transfer Agent for the Common Stock
for shares of Additional Common Stock Subscribed for.
2. Warrants
a. The Warrants shall be issued in registered form only. The Company
shall appoint and have in office at all times a Registrar for the
Warrants, satisfactory to ChaseMellon, which shall keep books and
records of the registration and transfers and exchanges of Warrants
(such books and records are hereinafter called the "Warrant
Register"). The Company shall promptly notify the Transfer Agent and
Registrar of the exercise of any Warrants. The Company shall promptly
notify ChaseMellon of any change in the Registrar of the Warrants.
-6-
<PAGE>
b. All Warrants issued upon any registration of transfer or exchange of
Warrants shall be the valid obligations of the Company, evidencing the
same obligations, and entitled to the same benefits under this
Agreement, as the Warrants surrendered for such registration of
transfer or exchange.
c. Any Warrant when duly endorsed in blank shall be deemed negotiable,
and when a Warrant shall have been so endorsed the holder thereof may
be treated by the Company, ChaseMellon and all other persons dealing
therewith as the absolute owner thereof for any purpose and as the
person entitled to exercise the rights represented thereby, any notice
to the contrary notwithstanding, but until such transfer is registered
in the Warrant Register, the Company and ChaseMellon may treat the
registered holder thereof as the owner for all purposes.
3. ChaseMellon will follow its regular procedures to attempt to reconcile any
discrepancies between the number of shares of Additional Common Stock that
any Warrant may indicate are to be issued to a stockholder and the number
that the Record Stockholders List indicates may be issued to such
stockholder. In any instance where ChaseMellon cannot reconcile such
discrepancies by following such procedures, ChaseMellon will consult with
the Company for instructions as to the number of shares of Additional
Common Stock, if any, ChaseMellon is authorized to issue. In the absence
of such instructions, ChaseMellon is authorized not to issue any shares of
Additional Common Stock to such stockholder.
4. ChaseMellon will examine the Warrants received by it as Subscription Agent
to ascertain whether they appear to ChaseMellon to have been completed and
executed in accordance with the applicable Letter of Instruction. In the
event ChaseMellon determine that any Warrant does not appear to it to have
been properly completed or executed, or where the Warrants do not appear to
ChaseMellon to be in proper form for Subscription, or any other
irregularity in connection with the Subscription appears to ChaseMellon to
exist, it will follow, where possible, its regular procedures to attempt to
cause such irregularity to be corrected. ChaseMellon is not authorized to
waive any irregularity in connection with the Subscription, unless it shall
have received from the Company the Warrant which was delivered, duly dated
and signed by an authorized officer of the Company, indicating that any
irregularity in such Warrant has been cured or waived and that such Warrant
has been accepted by the Company. If any such irregularity is neither
corrected nor waived, ChaseMellon will return to the subscribing
stockholder (at ChaseMellon's option by either first class mail under a
blanket surety bond or insurance protecting ChaseMellon and the Company
from losses or liabilities arising out of the non- receipt or nondelivery
of Warrants or by registered mail insured
-7-
<PAGE>
separately for the value of such Warrants) to such stockholder's address
as set forth in the Subscription any Warrants surrendered in connection
therewith and any other documents received with such Warrants, and a
letter of notice to be furnished by the Company explaining the reasons
for the return of the Warrants and other documents.
5. Each document received by ChaseMellon relating to its duties hereunder
shall be dated and time stamped when received.
6. a. For so long as this Agreement shall be in effect, the Company will
reserve for issuance and keep available free from preemptive rights a
sufficient number of shares of Additional Common Stock to permit the
exercise in full of all Rights issued pursuant to the Subscription
Offer. Subject to the terms and conditions of this Agreement,
ChaseMellon will request the Transfer Agent for the Common Stock to
issue certificates evidencing the appropriate number of shares of
Additional Common Stock as required from time to time in order to
effectuate the Subscriptions.
b. The Company shall take any and all action, including without
limitation obtaining the authorization, consent, lack of objection,
registration or approval of any governmental authority, or the taking
of any other action under the laws of the United States of America or
any political subdivision thereof, to insure that all shares of
Additional Common Stock issuable upon the exercise of the Warrants at
the time of delivery of the certificates therefor (subject to payment
of the Subscription Price) will be duly and validly issued and fully
paid and nonassessable shares of Common Stock, free from all
preemptive rights and taxes, liens, charges and security interests
created by or imposed upon the Company with respect thereto.
c. The Company shall from time to time take all action necessary or
appropriate to obtain and keep effective all registrations, permits,
consents and approvals of the Securities and Exchange Commission and
any other governmental agency or authority and make such filings under
Federal and state laws which may be necessary or appropriate in
connection with the issuance, sale, transfer and delivery of Warrants
or Additional Common Stock issued upon exercise of Warrants.
7. If certificates representing shares of Additional Common Stock are to be
delivered by ChaseMellon to a person other than the person in whose name a
surrendered Warrant is registered, ChaseMellon will issue no certificate
for Additional Common Stock until the Warrant so surrendered has been
properly
-8-
<PAGE>
endorsed (or otherwise put in proper form for transfer) and the person
requesting such exchange has paid any transfer or other taxes or
governmental charges required by reason of the issuance of a certificate
for Additional Common Stock in a name other than that of the registered
holder of the Warrant surrendered, or has established to ChaseMellon's
satisfaction that any such tax or charge either has been paid or is not
payable.
8. Should any issue arise regarding federal income tax reporting or
withholding, ChaseMellon will take such action as the Company instructs
ChaseMellon in writing.
9. The Company may terminate this Agreement at any time by so notifying
ChaseMellon in writing. ChaseMellon may terminate this Agreement upon 30
days' prior notice to the Company. Upon any such termination, ChaseMellon
shall be relieved and discharged of any further responsibilities with
respect to its duties hereunder. Upon payment of all outstanding
ChaseMellon fees and expenses, ChaseMellon will forward to the Company or
its designee promptly any Warrant or other document relating to
ChaseMellon's duties hereunder that ChaseMellon may receive after its
appointment has so terminated. Sections 11, 12, and 14 of this Agreement
shall survive any termination of this Agreement.
10. As agent for the Company hereunder ChaseMellon:
a. shall have no duties or obligations other than those specifically set
forth herein or as may subsequently be agreed to in writing by
ChaseMellon and the Company;
b. shall have no obligation to issue any shares of Additional Common
Stock unless the Company shall have provided a sufficient number of
certificates for such Additional Common Stock;
c. shall be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value, or
genuineness of any Warrants surrendered to ChaseMellon hereunder or
shares of Additional Common Stock issued in exchange therefor, and
will not be required to or be responsible for and will make no
representations as to, the validity, sufficiency, value or genuineness
of the Subscription Offer;
d. shall not be obligated to take any legal action hereunder; if,
however, ChaseMellon determines to take any legal action hereunder,
and where the taking of such action might, in its judgment, subject or
expose ChaseMellon to any expense or liability it shall not be
required to act
-9-
<PAGE>
unless ChaseMellon shall have been furnished with an indemnity
satisfactory to it;
e. may rely on and shall be fully authorized and protected in acting or
failing to act upon any certificate, instrument, opinion, notice,
letter, telegram, telex, facsimile transmission or other document or
security delivered to ChaseMellon and believed by it to be genuine and
to have been signed by the proper party or parties;
f. shall not be liable or responsible for any recital or statement
contained in the Prospectus or any other documents relating thereto;
g. shall not be liable or responsible for any failure on the part of the
Company to comply with any of its covenants and obligations relating
to the Subscription Offer, including without limitation obligations
under applicable securities laws;
h. may rely on and shall be fully authorized and protected in acting or
failing to act upon the written, telephonic or oral instructions with
respect to any matter relating to ChaseMellon acting as Subscription
Agent covered by this Agreement (or supplementing or qualifying any
such actions) of officers of the Company;
i. may consult with counsel satisfactory to ChaseMellon, including
_______________________, counsel of the Company, and the advice of
such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered, or omitted by ChaseMellon
hereunder in good faith and in accordance with the advice of such
counsel;
j. may perform any of ChaseMellon's duties hereunder either directly or
by or through agents or attorneys and ChaseMellon shall not be liable
or responsible for any misconduct or negligence on the part of any
agent or attorney appointed with reasonable care by ChaseMellon
hereunder; and
k. are not authorized, and shall have no obligation, to pay any brokers,
dealers, or soliciting fees to any person.
11. In the event any question or dispute arises with respect to the proper
interpretation of the Subscription Offer or ChaseMellon's duties hereunder
or the rights of the Company or of any stockholders surrendering Warrants
pursuant to the Subscription Offer, ChaseMellon shall not be required to
act and shall not be held liable or responsible for its refusal to act
until the question or
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<PAGE>
dispute has been judicially settled (and, if appropriate, ChaseMellon
may file a suit in interpleader or for a declaratory judgment for such
purpose) by final judgment rendered by a court of competent
jurisdiction, binding on all parties interested in the matter which is
no longer subject to review or appeal, or settled by a written document
in form and substance satisfactory to ChaseMellon and executed by the
Company and each such stockholder and party. In addition, ChaseMellon
may require for such purpose, but shall not be obligated to require, the
execution of such written settlement by all the stockholders and all
other parties that may have an interest in the settlement.
12. Any instructions given to ChaseMellon orally, as permitted by any provision
of this Agreement, shall be confirmed in writing by a duly authorized
representative of the Company as soon as practicable. ChaseMellon shall
not be liable or responsible and shall be fully authorized and protected
for acting, or failing to act, in accordance with any oral instructions
which do not conform with the written confirmation received in accordance
with this Section.
13. Whether or not any Warrants are surrendered to ChaseMellon, for its
services as Subscription Agent hereunder, the Company shall pay to
ChaseMellon compensation in accordance with the fee schedule attached as
Exhibit A hereto, together with reimbursement for out-of-pocket expenses,
including reasonable fees and disbursements of counsel.
14. The Company covenants to indemnify and hold ChaseMellon and its officers,
directors, employees, agents, contractors, subsidiaries and affiliates
harmless from and against any loss, liability, damage or expense (including
without limitation any loss, liability, damage or expense incurred for
accepting Warrants tendered without a signature guarantee and the fees and
expenses of counsel) incurred (a) without gross negligence or bad faith or
(b) as a result of ChaseMellon's acting or failing to act upon the
Company's instructions, arising out of or in connection with the
Subscription Offer, this Agreement or the administration of ChaseMellon's
duties hereunder, including without limitation the costs and expenses of
defending and appealing against any action, proceeding, suit or claim in
the premises. ChaseMellon shall promptly notify the Company of any action,
proceeding, suit or claim by letter or telex or facsimile transmission
confirmed by letter. The Company shall be entitled to participate at its
own expense in the defense of any such action, proceeding, suit or claim.
Anything in this agreement to the contrary notwithstanding, in no event
shall ChaseMellon be liable for special, indirect or consequential loss or
damages of any kind whatsoever (including but not limited to lost profits),
even if ChaseMellon have been advised of the likelihood of such loss or
damage and regardless of the form of action. Any liability of ChaseMellon's
will be limited to the amount of fees paid by the Company hereunder.
-11-
<PAGE>
15. If any provision of this Agreement shall be held illegal, invalid, or
unenforceable by any court, this Agreement shall be construed and enforced
as if such provision had not been contained herein and shall be deemed an
Agreement among us to the full extent permitted by applicable law.
16. The Company represents and warrants that (a) it is duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, (b) the making and consummation of the Subscription Offer
and the execution, delivery and performance of all transactions
contemplated thereby (including without limitation this Agreement) have
been duly authorized by all necessary corporate action and will not result
in a breach of or constitute a default under the certificate of
incorporation or bylaws of the Company or any indenture, agreement or
instrument to which it is a party or is bound, (c) this Agreement has been
duly executed and delivered by the Company and constitutes the legal,
valid, binding and enforceable obligation of it, (d) the Subscription Offer
will comply in all material respects with all applicable requirements of
law and (e) to the best of its knowledge, there is no litigation pending or
threatened as of the date hereof in connection with the Subscription Offer.
17. In the event that any claim of inconsistency between this Agreement and the
terms of the Subscription Offer arise, as they may from time to time be
amended, the terms of the Subscription Offer shall control, except with
respect to the duties, liabilities and rights, including compensation and
indemnification of ChaseMellon as Subscription Agent, which shall be
controlled by the terms of this Agreement.
18. Set forth in Exhibit B hereto is a list of the names and specimen
signatures of the persons authorized to act for the Company under this
Agreement. The Secretary of the Company shall, from time to time, certify
to ChaseMellon the names and signatures of any other persons authorized to
act for the Company under this Agreement.
19. Except as expressly set forth elsewhere in this Agreement, all notices,
instructions and communications under this Agreement shall be in writing,
shall be effective upon receipt and shall be addressed, if to the Company,
to Applied Magnetics Corporation, 75 Robin Hill Road, Goleta, California
93117, Attention: _________________, or, if to the Subscription Agent, to
ChaseMellon Shareholder Services LLC, 450 West 33rd Street, New York, New
York 10001, Attention: Reorganization Department, or to such other address
as a party hereto shall notify the other parties.
-12-
<PAGE>
20. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to conflict of laws
rules or principles, and shall inure to the benefit of and be binding upon
the successors and assigns of the parties hereto; provided that this
Agreement may not be assigned by any party without the prior written
consent of all other parties.
21. No provision of this Agreement may be amended, modified or waived, except
in a written document signed by both parties.
-13-
<PAGE>
Please acknowledge receipt of this letter and confirm ChaseMellon's
agreement concerning ChaseMellon's appointment as Subscription Agent and
Transfer Agent, and the arrangements herein provided, by signing and returning
the enclosed copy hereof, whereupon this Agreement and ChaseMellon's acceptance
of the terms and conditions herein provided shall constitute a binding Agreement
between the parties hereto.
Very truly yours,
APPLIED MAGNETICS CORPORATION
By:
-----------------------------------
Name:
Title:
Accepted as of the date first written above:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
AS SUBSCRIPTION AGENT AND TRANSFER AGENT
By:
---------------------------------
Name:
Title:
-14-
<PAGE>
EXHIBIT "1"
The Registration Statement shall be incorporated herein.
-15-
<PAGE>
EXHIBIT "2"
The Letter of Instruction shall be incorporated herein.
-16-
<PAGE>
EXHIBIT "3"
The Notice of Guaranteed Delivery shall be incorporated herein.
-17-
<PAGE>
EXHIBIT "4"
The Form of Warrant shall be incorporated herein.
-18-
<PAGE>
EXHIBIT "A"
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Schedule of Fees as Subscription Agent
For
Applied Magnetics Corporation
<TABLE>
<S> <C> <C>
I. Set Up and Administrative Fee $7,500.00
II. Processing Basic subscriptions, each $ 14.00
III. Transferring warrants, subscription certificates, split-ups, reissuing
new certificates, round-ups, each $ 10.00
IV. Issuing subscription certificates to record date holders,
each, and follow-up mailings $ 5.00
V. Processing oversubscriptions, including proration and refunds,
each $ 10.00
VI. Sale of Rights for holders, each $ 10.00
VII. Subscriptions requiring additional handling (window items,
defective presentations, correspondence items, legal items,
and items not providing a taxpayer identification number),
each $ 10.00
VIII. Processing Guarantee of Delivery items, each $ 10.00
IX. Handling Soliciting Dealer payments, each By Appraisal
X. Special Services By Appraisal
XI. Out-of-pocket Expenses (including but not limited to
postage, stationery, telephones, overnight couriers,
messengers, overtime, dinners, transportation, shipping
and trucking) Additional
</TABLE>
A minimum aggregate fee of $25,000.00 shall apply, inclusive of fees above
which are paid on a utilization basis.
-19-
<PAGE>
EXHIBIT "B"
[Letterhead of Applied Magentics Corporation]
<TABLE>
<CAPTION>
Name Position Specimen Signatures
---- -------- -------------------
<S> <C> <C>
</TABLE>
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<PAGE>
[LETTERHEAD OF APPLIED MAGNETICS CORPORTION]
Date _________, 1999
ChaseMellon Shareholder Services LLP
450 West 33rd Street, 14th Floor
New York, New York 10001
Attention: ____________________
This letter of agreement ("Services Agreement") sets forth the terms
and conditions by which ChaseMellon Shareholder Services LLP ("ChaseMellon")
shall provide to Applied Magnetics Corporation ("Company") certain shareholder
information agent services (the "Services") with respect to the Company's
proposed Equity Rights Offering (the "Offering").
This Services Agreement is for separate services than those described
in a related Subscription Agent Agreement executed (or proposed to be executed)
between the Company and ChaseMellon.
THE SERVICES:
(i) Counseling you concerning the organization and timing of the
offering.
(ii) Assist in the coordination of all printing activities and if
deemed appropriate, advertisement placement.
(iii) Establishing contacts with brokers, dealers, banks and other
nominees on your behalf.
(iv) Determining the material requirements.
(v) Assistance with drafting and reviewing documents.
(vi) Facilitate the distribution of materials to the beneficial owners
of the Company's common stock and to other interested parties.
(vii) Building a file of eligible participants, including registered
holders and beneficial holders identified through our research.
-1-
<PAGE>
(viii) Status reporting to Company management.
(ix) Payment of all broker forwarding invoices, subject to collection
from you of monies for this purpose.
FEE FOR THE SERVICES:
The fee for performing the Services shall be $7,500, plus all
out-of pocket expense incurred by ChaseMellon, including, without limitation,
documentation preparation, telephone, Bank/Broker listings, and postage
costs. Such fees shall be payable upon the execution of this agreement.
Invoices for out-of-pocket expenses shall be rendered monthly as incurred and
shall be payable upon receipt. ChaseMellon's services shall commence upon
receipt of a signed copy of this contract and expire thirty days after the
expiration of the Rights Offering.
RESPONSIBILITY:
The Company agrees to indemnify and hold ChaseMellon, its directors,
officers, employees, agents harmless from and against any and all claims,
liabilities, losses, damages and/or expenses, including reasonable attorneys'
fees, which any of them shall or may incur or sustain in connection with the
performance of the services or this Services Agreement, except to the extent
caused directly by ChaseMellon's negligence or willful misconduct. This
indemnification obligation shall survive the termination of this Services
Agreement.
Any liability to you we may incur in connection with our provision
of services hereunder (including any additional services mutually agreed to by
you and us) shall be limited to and not exceed the fees actually paid to us
for provision of the services described above. Anything in this Services
Agreement to the contrary notwithstanding, in no event shall ChaseMellon be
liable for special, indirect or consequential loss or damage of any kind
whatsoever, even if ChaseMellon has been advised of the likelihood of such
loss or damage and regardless of the form of action.
MISCELLANEOUS:
This Services Agreement shall be made in, governed by, and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
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<PAGE>
All information due to the Company from ChaseMellon shall be sent to
the Company's address as above written or such other address as the Company may
advise us in writing, or orally provided with prompt confirmation in writing.
This Services Agreement represents the entire understanding of the
parties with respect to the subject matter hereof, superseded any and all prior
understandings, oral or written, relating hereto and may not be charged orally.
Any waiver or change of any of the provisions hereof must be in writing and
signed by the parties hereto. The failure of either party hereto at any time to
require performance by the other party of any provision hereof shall not affect
the right of such party to require performance at any time thereafter.
If the foregoing terms and conditions are acceptable to ChaseMellon,
please sign and return to us the counterpart of this Services Agreement.
Very truly yours,
Applied Magnetics Corporation
By:______________________________
Name:______________________
Title:_______________________
Accepted as of the date first written above:
CHASE MELLON SHAREHOLDER SERVICES LLP
By:__________________________
Name:________________________
Title: ________________________
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<PAGE>
INSTRUCTIONS AS TO USE OF APPLIED MAGNETICS CORPORATION
SUBSCRIPTION WARRANTS
CONSULT CHASEMELLON SHAREHOLDER SERVICES, L.L.C., YOUR BANK
OR BROKER WITH ANY QUESTIONS
The following instructions relate to a rights offering (the "Rights
Offering") by Applied Magnetics Corporation, a Delaware corporation (the
"Company"), to the holders of its Common Stock (the "Common Stock"), as
described in the Company's Prospectus dated July ___, 1999 (the
"Prospectus"). Holders of record of shares of the Common Stock at the close
of business on ________, 1999 (the "Record Date") are receiving one (1)
transferable subscription right (collectively, the "Rights") for each share
of the Common Stock held on the Record Date. Holders of Rights are entitled
to purchase one (1) share of Common Stock for every one (1) Right granted
(the "Basic Subscription Privilege"), upon payment of $[0.00] in cash per
share of Common Stock purchased (the "Subscription Price"). In this Rights
Offering, the Company is distributing an aggregate of ______ Rights
exercisable to purchase an aggregate of ______ shares of Common Stock (the
"Shares").
In addition, subject to the proration described below, each holder
of Rights who fully exercises the Basic Subscription Privilege also has the
right to subscribe at the Subscription Price for additional Shares (the
"Oversubscription Privilege"). Shares will be available for purchase
pursuant to the Oversubscription Privilege only to the extent that all the
Shares are not subscribed for through the exercise of the Basic Subscription
Privilege by the Expiration Date. If the Shares so available (the "Excess
Shares") are not sufficient to satisfy all subscriptions pursuant to the
Oversubscription Privilege, the available Excess Shares will be allocated pro
rata among holders of the Rights exercising the Oversubscription Privilege,
in proportion to the number of Shares each such holder has purchased pursuant
to his or her respective Basic Subscription Privilege; provided, however,
that if such pro rata allocation results in any holder being allocated a
greater number of Excess Shares than such holder subscribed for pursuant to
the exercise of such holder's Oversubscription Privilege, then such holder
will be allocated only such number of Excess Shares as such holder subscribed
for and the remaining Excess Shares will be allocated among all other holders
exercising Oversubscription Privileges. See discussion set forth under "The
Rights Offering" in the Prospectus.
No fractional shares or cash in lieu thereof will be issued or
paid. The number of shares which may be purchased by the exercise of Rights
distributed to record holders by the Company or Rights which have been
transferred must be rounded down to the nearest whole number in order to
avoid issuing fractional shares.
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<PAGE>
The Rights will expire at 5:00 p.m., New York City time, on ____,
1999, unless extended (the "Expiration Date"). The Rights are eligible for
trading on the New York Stock Exchange under the symbol "___ Rt".
The number of Rights to which you are entitled is printed on the
face of your Subscription Warrant. You should indicate your wishes with
regard to the exercise or sale of your Rights by completing the appropriate
form or forms on your Subscription Warrant and returning the certificate to
ChaseMellon Shareholder Services, L.L.C. in the envelope provided.
In order to exercise Rights, on or before 5:00 p.m., New York
City time, on the Expiration Date, ChaseMellon Shareholder Services, L.L.C. must
have received from you (1) your Subscription Warrant, or you must have timely
complied with the guaranteed delivery requirements for your Subscription
Warrants, and (2) payment of the full Subscription Price, including final
clearance of any checks. You may not revoke any exercise of a Right.
1. SUBSCRIPTION PRIVILEGE.
To exercise Rights, complete Form 1 and send your properly
completed and executed Subscription Warrant, together with payment in full of
the Subscription Price for each share of Common Stock subscribed for pursuant
to the Basic Subscription Privilege and the Oversubscription Privilege, to
the Subscription Agent. Payment of the Subscription Price must be made in
U.S. dollars for the full number of Shares being subscribed for by (a) check
or bank draft drawn upon a U.S. bank or U.S. postal money order payable to
ChaseMellon Shareholder Services, L.L.C., as Subscription Agent, or (b) wire
transfer of same day funds to the account maintained by the Subscription
Agent for such purpose at The Chase Manhattan Bank, New York, NY, ABA No. 021
000 021, Attention: ChaseMellon Shareholder Services Reorg. Account: ________
(Applied Magnetics Corporation).
The Subscription Price will be deemed to have been received by
ChaseMellon Shareholder Services, L.L.C. only upon (i) the clearance of any
uncertified check, (ii) the receipt by ChaseMellon Shareholder Services, L.L.C.
of any certified check or bank draft drawn upon a U.S. bank or any U.S. postal
money order, or (iii) the receipt of good funds in ChaseMellon Shareholder
Services, L.L.C.'s account designated above. If you are paying by uncertified
personal check, please note that the funds paid thereby may take at least five
business days to clear. Accordingly, holders of the Rights who wish to pay the
Subscription Price by means of uncertified personal check are urged to make
payment sufficiently in advance of the Expiration Date to ensure that such
payment is received and clears by such date and are urged to consider payment by
means of certified or cashier's check, U.S. postal money order or wire transfer
of funds.
-2-
<PAGE>
Alternatively, you may cause a written guarantee substantially
in the form of Exhibit A to these instructions (the "Notice of Guaranteed
Delivery") to be received by the Subscription Agent at or prior to the
Expiration Date together with payment in full of the applicable Subscription
Price. A Notice of Guaranteed Delivery must be properly signed and completed
by both (i) the holder of a Subscription Warrant, and (ii) a commercial bank,
trust company, securities broker or dealer, credit union, savings association
or other eligible guarantor institution which is a member of or a participant
in a signature guarantee program acceptable to the Subscription Agent (each
of the foregoing being an "Eligible Institution"). Such Notice of Guaranteed
Delivery must state your name, the number of Rights represented by your
Subscription Warrant, the number of Rights being exercised pursuant to the
Basic Subscription Privilege, and the number of Shares of Common Stock, if
any, being subscribed for pursuant to the Oversubscription Privilege, and
must guarantee the delivery to ChaseMellon Shareholder Services, L.L.C. of
your properly completed and executed Subscription Warrants within three New
York Stock Exchange trading days following the date of the Notice of
Guaranteed Delivery. If this procedure is followed, your Subscription
Warrant must be received by ChaseMellon Shareholder Services, L.L.C. within
three New York Stock Exchange trading days of the Notice of Guaranteed
Delivery. Additional copies of the Notice of Guaranteed Delivery may be
obtained upon request from ChaseMellon Shareholder Services, L.L.C., at the
address, or by calling the telephone number, indicated below.
You may also sell or transfer your Subscription Warrant, or request
your broker or bank to exercise your Subscription Warrant on your behalf, in
accordance with the procedures specified in instruction 3 below.
Banks, brokers or other nominee holders of the Rights who exercise
the Rights and the Oversubscription Privilege on behalf of beneficial owners
of Rights will be required to certify to the Subscription Agent and the
Company, in connection with the exercise of the Oversubscription Privilege,
as to the aggregate number of Rights that have been exercised, and the number
of Shares that are being subscribed for pursuant to the Oversubscription
Privilege, by each beneficial owner of Rights on whose behalf such nominee
holder is acting. If more Shares of Common Stock are subscribed for pursuant
to the Oversubscription Privilege than are available for sale, such Shares
will be allocated, as described above, among persons exercising the
Oversubscription Privilege in proportion to such persons' exercise of Rights
pursuant to the Basic Subscription Privilege.
The address and telecopier numbers of the Subscription Agent are as
follows:
<TABLE>
<CAPTION>
By Mail:
Facsimile Transmission By Hand:
(eligible institutions only):
<S> <C> <C>
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<PAGE>
ChaseMellon Shareholder (201) 296-4293 ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C
- -----------------------------------------------------------------------------------------------------
Post Office Box 3301 120 Broadway, 13th Floor
- -----------------------------------------------------------------------------------------------------
South Hackensack, NJ 07606 To confirm receipt of facsimile New York, NY 10271
only:
- -----------------------------------------------------------------------------------------------------
Attn: Reorganization Department (201) 296-4860 Attn: Reorganization Department
- -----------------------------------------------------------------------------------------------------
If by Overnight Courier:
- -----------------------------------------------------------------------------------------------------
ChaseMellon Shareholder
Services, L.L.C.
- -----------------------------------------------------------------------------------------------------
85 Challenger Road--Mail
Drop--Reorg
- -----------------------------------------------------------------------------------------------------
Ridgefield Park, NJ 07660
- -----------------------------------------------------------------------------------------------------
Attn: Reorganization Department
- -----------------------------------------------------------------------------------------------------
</TABLE>
The address, telephone and telecopier numbers of ChaseMellon
Shareholder Services, L.L.C., for inquiries, information or requests for
additional documentation is as follows:
450 W. 33rd Street, 14th Floor
New York, NY 10001
(212) 273-8070
(banks and brokers call collect)
CALL TOLL-FREE
(888) 224-2745
If you exercise less than all of the Rights evidenced by your
Subscription Warrant by so indicating in Form 1 of your Subscription Warrant,
ChaseMellon Shareholder Services, L.L.C. will issue to you a new Subscription
Warrant evidencing the unexercised Rights. However, if you choose to have a
new Subscription Warrant sent to you, you may not receive the new
Subscription Warrant in sufficient time to permit you to sell or exercise the
Rights evidenced thereby. If you have not indicated the number of Rights
being exercised, or if you have not forwarded full payment of the
Subscription Price for the number of Shares to be purchased according to the
number of Rights that you have indicated are being exercised, you will be
deemed to have exercised the Basic Subscription Privilege with respect to the
maximum number of Rights which may be exercised for the Subscription Price
payment delivered by you;
-4-
<PAGE>
and, to the extent that the Subscription Price payment delivered by you
exceeds the product of the Subscription Price multiplied by the number of
Rights evidenced by the Subscription Warrants delivered by you (such excess
being the "Subscription Excess"), you will be deemed to have exercised your
Oversubscription Privilege to purchase, to the extent available, that number
of whole Shares equal to the quotient obtained by dividing the Subscription
Excess by the Subscription Price.
2. DELIVERY OF COMMON STOCK.
The following deliveries and payments will be made to the address
shown on the face of your Subscription Warrant unless you provide instructions
to the contrary on Form 4.
(a) Basic Subscription Privilege. As soon as practicable after
the Expiration Date, ChaseMellon Shareholder Services, L.L.C. will mail to each
Rights holder who validly exercises the Basic Subscription Privilege
certificates representing Shares purchased pursuant to the Basic Subscription
Privilege.
(b) Oversubscription Privilege. As soon as practicable after
the Expiration Date, ChaseMellon Shareholder Services, L.L.C. will mail to each
Rights holder who validly exercises the Oversubscription Privilege the number of
Shares allocated to such Rights holder pursuant to the Oversubscription
Privilege. See "The Rights Offering--Basic and Oversubscription Privileges" in
the Prospectus.
(c) Cash Payments. As soon as practicable after the Expiration
Date, ChaseMellon Shareholder Services, L.L.C. will mail to each Rights holder
who exercises the Oversubscription Privilege any excess funds, without interest,
received in payment of the Subscription Price for each Share that is subscribed
for by such Rights holder but not allocated to such Rights holder pursuant to
the Oversubscription Privilege.
3. TO SELL OR TRANSFER RIGHTS.
(a) Sale or Exercise of Rights through a Bank or Broker. To
sell or exercise all the Rights evidenced by a Subscription Warrant through your
bank or broker, so indicate on Form 2 and deliver your properly completed and
executed Subscription Warrant to your bank or broker. Your Subscription Warrant
should be delivered to your bank or broker in ample time for it to be exercised.
If Form 2 is completed without designating a transferee, ChaseMellon Shareholder
Services, L.L.C. may thereafter treat the bearer of the Subscription Warrant as
the absolute owner of all of the Rights evidenced by such Subscription Warrant
for all purposes, and ChaseMellon Shareholder Services, L.L.C. shall not be
affected by any notice to the contrary. Because your bank or broker cannot
issue subscription warrants, if you wish
-5-
<PAGE>
to sell or exercise less than all of the Rights evidenced by a Subscription
Warrant, either you or your bank or broker must instruct ChaseMellon
Shareholder Services, L.L.C. as to the action to be taken with respect to the
Rights not sold, or you or your bank or broker must first have your
Subscription Warrant divided into Subscription Warrants of appropriate
denominations by following the instructions in instruction 4 of these
instructions. The Subscription Warrants evidencing the number of Rights you
intend to sell can then be transferred by your bank or broker in accordance
with the instructions in this instruction 3(a).
(b) Transfer of Rights to a Designated Transferee. To transfer
all of your Rights to a transferee other than a bank or broker, you must
complete Form 2 in its entirety, execute the Subscription Warrant and have your
signature guaranteed by an Eligible Institution. A Subscription Warrant that
has been properly transferred in its entirety may be exercised by a new holder
without having a new Subscription Warrant issued. Because only ChaseMellon
Shareholder Services, L.L.C. can issue Subscription Warrants, if you wish to
transfer less than all of the Rights evidenced by your Subscription Warrant to a
designated transferee, you must instruct ChaseMellon Shareholder Services,
L.L.C. as to the action to be taken with respect to the Rights not sold or
transferred, or you must divide your Subscription Warrant into Subscription
Warrants of appropriate smaller denominations by following the instructions in
instruction 4 below. The Subscription Warrant evidencing the number of Rights
you intend to transfer can then be transferred by following the instructions in
this instruction 3(b).
(c) Sale of Rights Through the Subscription Agent. To sell all
Rights evidenced by a Subscription Warrant through the Subscription Agent, so
indicate on Form 3 and deliver your properly completed and exercised
Subscription Warrant to the Subscription Agent. If you wish to sell less than
all of the Rights evidenced by a Subscription Warrant, you must instruct
ChaseMellon Shareholder Services, L.L.C. as to the action to be taken with
respect to the Rights not sold, or you may have your Subscription Warrant
divided into Subscription Warrants of appropriate denominations by following the
instructions in instruction 4 of these instructions. The Subscription Warrant
evidencing the number of Rights you intend to transfer can then be transferred
by following the instructions in this instruction 3(c). Promptly following the
Expiration Date, ChaseMellon Shareholder Services, L.L.C. will send the holder a
check for the net proceeds from the sale of any Rights sold. Orders to sell
Rights must be received by ChaseMellon Shareholder Services, L.L.C. on or before
11:00 a.m., New York City time on ____ ___, 1999. No assurance can be given
that a market will develop for the Rights or that ChaseMellon Shareholder
Services, L.L.C. will be able to sell any Rights.
4. TO HAVE A SUBSCRIPTION WARRANT DIVIDED INTO SMALLER DENOMINATIONS.
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<PAGE>
Send your Subscription Warrant, together with complete separate
instructions (including specification of the denominations into which you wish
your Rights to be divided) signed by you, to ChaseMellon Shareholder Services,
L.L.C., allowing a sufficient amount of time for new Subscription Warrants to be
issued and returned so that they can be used prior to the Expiration Date.
Alternatively, you may ask a bank or broker to effect such actions on your
behalf. Your signature must be guaranteed by an Eligible Institution if any of
the new Subscription Warrants are to be issued in a name other than that in
which the old Subscription Warrant was issued.
Subscription Warrants may not be exercised in a manner that would
result in the purchase of a fractional Share, and any instruction to do so will
be rejected and rounded down to the nearest whole Share to the extent of payment
actually received (with a refund to you of any excess payment actually received
for any fractional Share by ChaseMellon Shareholder Services, L.L.C.). As a
result of delays in the mail, the time of the transmittal, the necessary
processing time and other factors, you or your transferee may not receive such
new Subscription Warrants in time to enable you to complete a sale or exercise
the associated Rights by the Expiration Date. Neither the Company nor
ChaseMellon Shareholder Services, L.L.C. will be liable to either a transferor
or transferee for any such delays.
5. EXECUTION.
(a) Execution by Registered Holder. The signature on the
Subscription Warrant must correspond with the name of the registered holder
exactly as it appears on the face of the Subscription Warrant without any
alteration or change whatsoever. Persons who sign the Subscription Warrant in a
representative or other fiduciary capacity must indicate their capacity when
signing and, unless waived by ChaseMellon Shareholder Services, L.L.C. in its
sole and absolute discretion, must present to ChaseMellon Shareholder Services,
L.L.C. satisfactory evidence of their authority to so act.
(b) Execution by Person Other than Registered Holder. If the
Subscription Warrant is executed by a person other than the holder named on the
face of the Subscription Warrant, proper evidence of authority of the person
executing the Subscription Warrant must accompany the same unless, for good
cause, ChaseMellon Shareholder Services, L.L.C. dispenses with proof of
authority.
(c) Signature Guarantees. Your signature must be guaranteed by
an Eligible Institution if you wish to transfer your Rights, as specified in
instruction 3(b) above, to a transferee other than a bank or broker or
ChaseMellon Shareholder Services, L.L.C., or if you specify special payment or
delivery instructions pursuant to Form 4.
-7-
<PAGE>
6. METHOD OF DELIVERY.
The method of delivery of Subscription Warrants and payment of
the Exercise Price to ChaseMellon Shareholder Services, L.L.C. will be at the
election and risk of the Rights holder, but, if sent by mail, it is recommended
that they be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
ChaseMellon Shareholder Services, L.L.C. and the clearance of any checks sent in
payment of the Subscription Price prior to 5:00 p.m., New York City time, on the
Expiration Date.
7. SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS THROUGH THE DEPOSITORY
TRUST COMPANY.
In the case of holders of Rights that are held of record through
The Depository Trust Company ("DTC"), exercises of the Basic Subscription
Privilege (but not the Oversubscription Privilege) may be effected by
instructing DTC to transfer Rights (such Rights being "DTC Exercised Rights")
from the DTC account of such holder to the DTC account of ChaseMellon
Shareholder Services, L.L.C., together with payment of the Subscription Price
for each Share of Common Stock subscribed for pursuant to the Basic
Subscription Privilege. The Oversubscription Privilege in respect of DTC
Exercised Rights may not be exercised through DTC. The holder of a DTC
Exercised Right may exercise the Oversubscription Privilege in respect of
such DTC Exercised Right by properly executing and delivering to ChaseMellon
Shareholder Services, L.L.C. at or prior to 5:00 p.m., New York City time on
the Expiration Date, a DTC Participant Oversubscription Exercise Form, in the
form available from ChaseMellon Shareholder Services, L.L.C., together with
payment of the appropriate Subscription Price for the number of Shares for
which the Oversubscription Privilege is to be exercised.
If a Notice of Guaranteed Delivery relates to Rights with respect to
which exercise of the Basic Subscription Privilege will be made through DTC and
such Notice of Guaranteed Delivery also relates to the exercise of the
Oversubscription Privilege, a DTC Participant Oversubscription Exercise Form
must also be received by ChaseMellon Shareholder Services, L.L.C. in respect of
such exercise of the Oversubscription Privilege on or prior to the Expiration
Date.
8. SUBSTITUTE FORM W-9.
Each Rights holder who elects to exercise the Rights and those foreign
stockholders who allow ChaseMellon Shareholder Services, L.L.C. to sell such
foreign holder's Rights should provide ChaseMellon Shareholder Services, L.L.C.
with a correct Taxpayer Identification Number ("TIN") on Substitute Form W-9,
which is included as Exhibit B hereto. Additional copies of the Substitute Form
W-9 may be
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<PAGE>
obtained upon request from ChaseMellon Shareholder Services, L.L.C. at the
address, or by calling the telephone number, indicated above. Failure to
provide the information on the form may subject such holder to 31% federal
income tax withholding with respect to (i) dividends that may be paid by the
Company on Shares purchased upon the exercise of Rights (for those holders
exercising Rights), or (ii) funds to be remitted to Rights holders in respect
of Rights sold by ChaseMellon Shareholder Services, L.L.C. (for those holders
electing to have ChaseMellon Shareholder Services, L.L.C. sell their Rights).
-9-
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
SUBSCRIPTION WARRANTS
ISSUED BY
APPLIED MAGNETICS CORPORATION
This form, or one substantially equivalent hereto, must be used
to exercise Rights pursuant to the Rights Offering described in the Prospectus
dated July ___, 1999 (the "Prospectus") of Applied Magnetics Corporation, a
Delaware corporation (the "Company"), if a holder of Rights cannot deliver the
Subscription Warrant(s) evidencing the Rights to ChaseMellon Shareholder
Services, L.L.C. at or prior to 5:00 p.m. New York City time on July ___,
1999, unless extended (the "Expiration Date"). Such form must be delivered by
hand or sent by facsimile transmission or mail to ChaseMellon Shareholder
Services, L.L.C., and must be received by ChaseMellon Shareholder Services,
L.L.C. on or prior to the Expiration Date. See the discussion set forth under
"The Rights Offering--Exercise of Rights" in the Prospectus.
Regardless of the manner of delivery of the Subscription Warrant,
payment of the Subscription Price of [$0.00] per share for each share of Common
Stock subscribed for upon exercise of such Rights must be received by
ChaseMellon Shareholder Services, L.L.C. in the manner specified in the
Prospectus at or prior to 5:00 p.m. New York City time on the Expiration Date.
The Subscription Agent is:
ChaseMellon Shareholder Services, L.L.C.
By Mail:
Facsimile Transmission By Hand:
(eligible institutions
only):
ChaseMellon Shareholder (201) 296-4293 ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C
Post Office Box 3301 120 Broadway, 13th Floor
South Hackensack, NJ To confirm receipt of New York, NY 10271
07606 facsimile only:
Attn: Reorganization (201) 296-4860 Attn: Reorganization
Department Department
If by Overnight Courier:
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<PAGE>
ChaseMellon Shareholder
Services, L.L.C.
85 Challenger Road--Mail
Drop--Reorg
Ridgefield Park, NJ 07660
Attn: Reorganization
Department
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby represents that he or she is the holder of
Subscription Warrant(s) representing ____________ Rights and that such
Subscription Warrant(s) cannot be delivered to the Subscription Agent at or
before 5:00 p.m., New York City time on the Expiration Date. Upon the terms and
subject to the conditions set forth in the Prospectus, receipt of which is
hereby acknowledged, the undersigned hereby elects to exercise (i) the Basic
Subscription Privilege to subscribe for one share of Common Stock per 1.0 Rights
represented by such Subscription Warrant and (ii) the Oversubscription Privilege
relating to each such Right to subscribe, to the extent that Excess Shares (as
defined in the Instructions as to Use of Applied Magnetics Corporation
Subscription Warrants) are available, for an aggregate of up to __________
Excess Shares. The undersigned understands that payment of the Subscription
Price of $[0.00] per share for each share of the Common Stock subscribed for
pursuant to the Basic Subscription Privilege, and payment of the
Oversubscription Price of [$0.00] for each share of Common Stock subscribed for
purusant to the Oversubscription Privilege, must be received by the Subscription
Agent at or before 5:00 p.m. New York City time on the Expiration Date. The
undersigned represents that such payment, in the aggregate amount of $
__________, either (check appropriate box):
[_] is being delivered to ChaseMellon Shareholder Services, L.L.C. herewith
or
[_] has been delivered separately to ChaseMellon Shareholder Services, L.L.C.;
and is or was delivered in the manner set forth below (check appropriate box and
complete information relating thereto):
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<PAGE>
[_] wire transfer of funds
--name of transferor institution _______________________________________
--date of transfer __________________________________________________
--confirmation number (if available) __________________________________
[_] uncertified check (Payment by uncertified check will not be deemed to have
been received by the Subscription Agent until such check has cleared. Holders
paying by such means are urged to make payment sufficiently in advance of the
Expiration Date to ensure that such payment clears by such date.)
[_] certified check
[_] bank draft (cashier's check)
[_] U.S. postal money order
--name of maker __________________________________________________
--date of check, draft or money order number ___________________________
--bank on which check is drawn or issuer of money order _________________
Signature(s) ___________________________________________________________
Name(s) _____________________________________________________________
_____________________________________________________________________
Address(es) ___________________________________________________________
_____________________________________________________________________
(ZIP CODE)
Area Code and Tel. No(s). ________________________________________________
Subscription Warrant No(s). (if available) ________________________________
-3-
<PAGE>
GUARANTY OF DELIVERY
(NOT TO BE USED FOR SUBSCRIPTION WARRANT
SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or member of the National Association of Securities Dealers, Inc.,
commercial bank or trust company having an office or correspondent in the United
States, or other eligible guarantor institution which is a member of or a
participant in a signature guarantee program acceptable to ChaseMellon
Shareholder Services, L.L.C., guarantees that the undersigned will deliver to
ChaseMellon Shareholder Services, L.L.C. the certificates representing the
Rights being exercised hereby, with any required signature guarantees and any
other required documents, all within three New York Stock Exchange trading days
after the date hereof.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(ADDRESS)
______________________________________________________________________
(AREA CODE AND TELEPHONE NUMBER)
Dated: ___________________________________________________________, 1999
______________________________________________________________________
(NAME OF FIRM)
______________________________________________________________________
(AUTHORIZED SIGNATURE)
The institution which completes this form must communicate the
guarantee to ChaseMellon Shareholder Services, L.L.C. and must deliver the
Subscription Warrant(s) to ChaseMellon Shareholder Services, L.L.C. within the
time period shown herein. Failure to do so could result in a financial loss to
such institution.
-4-
<PAGE>
APPLIED MAGNETICS CORPORATION
________ COMMON SHARES
INITIALLY OFFERED PURSUANT TO RIGHTS
DISTRIBUTED TO STOCKHOLDERS OF
APPLIED MAGNETICS CORPORATION
Dear Stockholders:
This letter is being distributed to all holders of Common Stock
(the "Common Stock"), of record on July ___, 1999 (the "Record Date"), of
Applied Magnetics Corporation (the "Company"), in connection with a distribution
of transferable rights ("Rights") to acquire the Common Stock at a subscription
price of [$0.00] per share for each share as described in the Prospectus dated
July ___, 1999.
Each beneficial owner of shares of the Common Stock is entitled to
receive one Right for each share of Common Stock owned as of the Record Date,
and to purchase one (1) share of Common Stock for every one (1) Right held. No
fractional shares or cash in lieu thereof will be issued or paid. The number of
shares which may be purchased pursuant to the exercise of Rights distributed to
record holders by the Company, or which may be purchased pursuant to the
exercise of Rights which have been transferred, must be rounded down to the
nearest whole number (or any lesser number of whole shares) in order to avoid
issuing fractional shares.
Enclosed are copies of the following documents:
1. The Prospectus;
2. The Subscription Warrant;
3. The "Instructions as to Use of Applied Magnetics Corporation
Subscription Warrant" (including Guidelines For Certification of Taxpayer
Identification Number on Substitute Form W-9);
4. A Notice of Guaranteed Delivery for Subscription Warrants
issued by Applied Magnetics Corporation; and
5. A return envelope addressed to ChaseMellon Shareholder
Services, L.L.C., the Subscription Agent.
-1-
<PAGE>
Your prompt action is requested. The Rights will expire at 5:00
P.M., New York City time, on August ___, 1999, unless extended by the Company
(the "Expiration Date").
To exercise the Rights, a properly completed and executed
Subscription Warrant (or Notice of Guaranteed Delivery) and payment in full for
all of the Rights exercised must be delivered to ChaseMellon Shareholder
Services, L.L.C. as indicated in the Prospectus prior to 5:00 P.M., New York
City time, on the Expiration Date.
Additional copies of the enclosed materials may be obtained from
ChaseMellon Shareholder Services, L.L.C. Its toll-free telephone number is
(888) 224-2745.
Very truly yours,
APPLIED MAGNETICS CORPORATION
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<PAGE>
FORM OF LETTER FROM BROKERS OR OTHER NOMINEES
TO BENEFICIAL OWNERS
____________ SHARES OF COMMON STOCK
INITIALLY OFFERED PURSUANT TO RIGHTS DISTRIBUTED
TO
STOCKHOLDERS OF APPLIED MAGNETICS CORPORATION
To Our Clients:
Enclosed for your consideration are a Prospectus, dated _______,
1999, and the "Instructions as to Use of Applied Magnetics Corporation
Subscription Warrants" relating to the offer by Applied Magnetics Corporation
(the "Company") of shares of Common Stock (the "Common Stock") of the
Company, at a subscription price of $____ per share, in cash, pursuant to
transferable subscription rights (the "Rights") initially distributed to
holders of record ("Record Owners") of shares of Common Stock as of the close
of business on _______, 1999 (the "Record Date").
As described in the Prospectus, you will receive one transferable
Right for each share of Common Stock carried by us in your account as of the
Record Date. You are entitled to subscribe for one (1) share of the Common Stock
for every one (1) Right granted to you (the "Basic Subscription Privilege") at a
subscription price of $____ per share (the "Subscription Price"). You will also
have the right (the "Oversubscription Privilege"), subject to proration, to
subscribe for shares of the Common Stock available after satisfaction of all
subscriptions pursuant to the Basic Subscription Privilege ("Excess Shares"), at
$___ per share, a ___% discount to the Subscription Price. If there are
insufficient Excess Shares to satisfy all exercised Oversubscription Privileges,
Excess Shares will be allocated pro rata among all the holders of the Rights
exercising Oversubscription Privileges, in proportion to the number of shares
each such holder has purchased pursuant to his or her respective Basic
Subscription Privilege. Your election to exercise the Oversubscription Privilege
must be made at the time you exercise the Basic Subscription Privilege, and you
must exercise the Basic Subscription Privilege in full in order to exercise the
Oversubscription Privilege.
No fractional shares or cash in lieu thereof will be issued or paid.
The number of shares which may be purchased pursuant to the exercise of Rights
distributed to record holders by the Company, or which may be purchased under
Rights which have been transferred, must be rounded down to the nearest whole
number (or any lesser number of whole shares) in order to avoid issuing
fractional shares. Rights are transferable, and holders that wish to sell their
Rights may do so. The Rights will trade on the New York Stock Exchange (the
"NYSE") up to and including the close of business on the last trading day prior
to the Expiration Date. It
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<PAGE>
is anticipated that the Rights will trade on a "when issued" basis up to and
including the Record Date.
THE MATERIALS ENCLOSED ARE BEING FORWARDED TO YOU AS THE BENEFICIAL
OWNER OF THE SHARES OF COMMON STOCK CARRIED BY US IN YOUR ACCOUNT BUT NOT
REGISTERED IN YOUR NAME. EXERCISES AND SALES OF THE RIGHTS MAY BE MADE BY ONLY
US AS THE RECORD OWNER AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we
request instructions as to whether you wish us to elect to subscribe for any
shares of Common Stock, or sell any Rights, to which you are entitled pursuant
to the terms and subject to the conditions set forth in the enclosed Prospectus
and "Instructions as to Use of Applied Magnetics Corporation Subscription
Warrants". However, we urge you to read these documents carefully before
instructing us to exercise or sell the Rights.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exercise or sell Rights on your behalf in accordance with
the provisions of the offering described in the Prospectus. The offering will
expire at 5:00 P.M., New York City time, on _______, 1999, unless the offering
is extended by the Company. Once you have exercised a Right, such exercise may
not be revoked.
If you wish to have us, on your behalf, exercise the Rights for any
shares of the Common Stock to which you are entitled, or sell such Rights,
please so instruct us by completing, executing and returning to us the
instruction form on the reverse side of this letter.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING
SHOULD BE DIRECTED TO CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AT (888)
224-2745.
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<PAGE>
INSTRUCTIONS BY BENEFICIAL OWNERS
TO BROKERS OR OTHER NOMINEES
(accompanying letter from brokers or other nominees to beneficial owners)
The undersigned acknowledge(s) receipt of your letter and the enclosed
materials referred to therein relating to the offering of shares of Common Stock
(the "Common Stock") of Applied Magnetics Corporation (the "Company").
This will instruct you whether to exercise or sell Rights to purchase
the Common Stock distributed with respect to the Company's Common Stock held by
you for the account of the undersigned, pursuant to the terms and subject to the
conditions set forth in the Prospectus and the related "Instructions as to Use
of Applied Magnetics Corporation Subscription Warrants".
1. [_] Please do not exercise Rights for shares of the Common Stock.
2. [_] Please exercise Rights for shares of the Common Stock as set forth
below:
<TABLE>
<CAPTION>
NUMBER
OF SUBSCRIPTION
SHARES PRICE PAYMENT
------- ------------ --------
<S> <C> <C> <C>
Basic Subscription Right*: _____ X $9.25 = $ ________ (Line 1)
Oversubscription Right: _____ X $9.25 = $ ________ (Line 2)
</TABLE>
Total Payment Required = $ ________ (Sum of Lines 1 and 2; must equal
total of amounts in boxes 4 and 5 below)
* YOU MAY PURCHASE ONE (1) SHARE FOR EVERY ONE (1) RIGHT YOU HOLD; ANY RESULTING
FRACTIONAL SHARE MUST BE ROUNDED DOWN TO THE NEAREST WHOLE SHARE (OR ANY LESSER
NUMBER OF WHOLE SHARES FOR WHICH YOU ENCLOSE PAYMENT).
3. [_] Please SELL Rights.
4. [_] Payment in the following amount is enclosed: $_______________
5. [_] Please deduct payment from the following account maintained by you as
follows:
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<PAGE>
______________________________
Type of Account
______________________________
Account No.
$______________________________
Amount to be deducted
Date: __________________, 1999
______________________________________________
______________________________________________
Signature(s)
Please type or print name(s) below
_____________________________________________
_____________________________________________
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<PAGE>
LETTER TO DEALERS AND OTHER NOMINEES
APPLIED MAGNETICS CORPORATION
_____________ SHARES OF COMMON STOCK
INITIALLY OFFERED PURSUANT TO RIGHTS
DISTRIBUTED TO STOCKHOLDERS
OF
APPLIED MAGNETICS CORPORATION
To Securities Dealers, Commercial Banks, Trust Companies and Other Nominees:
This letter is being distributed to securities dealers, commercial
banks, trust companies and other nominees in connection with the offering by
Applied Magnetics Corporation (the "Company") of _________ shares of Common
Stock (the "Common Stock"), of the Company, at a subscription price of $____ per
share, pursuant to transferable subscription rights (the "Rights") initially
distributed to holders of record of the Common Stock as of the close of business
on _______, 1999 (the "Record Date"). The Rights are described in the Prospectus
and evidenced by a Subscription Warrant registered in your name or the name of
your nominee.
Each beneficial owner of shares of the Common Stock registered in your
name or the name of your nominee is entitled to one (1) Right for every one (1)
share of the Common Stock owned by such beneficial owner. Holders of Rights are
entitled to purchase one (1) share of newly issued Common Stock for every one
(1) Right granted. No fractional shares or cash in lieu thereof will be issued
or paid. The number of shares which may be purchased pursuant to the exercise of
Rights distributed to record holders by the Company, or which may be purchased
pursuant to the exercise of Rights which have been transferred, must be rounded
down to the nearest whole number (or any lesser number of whole shares) in order
to avoid issuing fractional shares.
We are asking you to contact your clients for whom you hold the Common
Stock registered in your name or in the name of your nominee to obtain
instructions with respect to the Rights. Enclosed are copies of the following
documents:
1. The Prospectus;
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<PAGE>
2. The "Instructions as to Use of Applied Magnetics Corporation
Subscription Warrant" (including Guidelines For Certification of
Taxpayer Identification Number on Substitute Form W-9);
3. A form of letter which may be sent to your clients for whose accounts
you hold Common Stock registered in your name or the name of your
nominee, with space provided for obtaining such clients' instructions
with regard to the Rights;
4. A Notice of Guaranteed Delivery for Subscription Warrants issued by
Applied Magnetics Corporation; and
5. A return envelope addressed to ChaseMellon Shareholder Services,
L.L.C., the Subscription Agent.
Your prompt action is requested. The Rights will expire at 5:00 P.M.,
New York City time, on _________, 1999, unless extended by the Company (the
"Expiration Date").
To exercise the Rights, a properly completed and executed Subscription
Warrant (unless the guaranteed delivery procedures are complied with) and
payment in full for all Rights exercised must be delivered to ChaseMellon
Shareholder Services, L.L.C. as indicated in the Prospectus prior to 5:00 P.M.,
New York City time, on the Expiration Date.
Additional copies of the enclosed materials may be obtained from
ChaseMellon Shareholder Services, L.L.C. Their toll-free telephone number is
(888) 224-2745 or they may be called collect at (212) 273-8070.
Very truly yours,
APPLIED MAGNETICS CORPORATION
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON
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