SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(Amendment No. 2)
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 11, 1999
APPLIED MAGNETICS CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-6635
------------------------------ ----------------------
(State or other jurisdiction of (Commission file number)
incorporation or organization)
95-1950506
----------------------------------
(I.R.S. Employer Identification No.)
75 Robin Hill Road, Goleta, CA 93117
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 683-5353
--------------
The undersigned hereby amends Item 7 of its Current Report on Form 8-K/A
(Amendment No. 1) filed with the Commission on March 5, 1999 to read as follows:
Page 1 of 34
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Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Owners of DAS Devices, Inc. (Applied
Magnetics Corporation):
We have audited the balance sheet of DAS Devices, Inc. (the "Company") as of
September 30, 1998, and the related statement of operations, stockholders'
equity, and cash flows for the nine month period then ended. 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 financial statements referred to above present fairly, in
all material respects, the financial position of DAS Devices, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
period then ended, 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 recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 11, 1999
Page 2 of 34
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Das Devices, Inc.
BALANCE SHEET
September 30,
1998
-------------
ASSETS
CURRENT ASSETS:
Restricted cash investment $ 500,000
Funds receivable 2,751,037
Trade receivables 30,855
Prepaid expenses and other current assets 865,443
------------
Total current assets 4,147,335
PROPERTY AND EQUIPMENT - net 23,949,508
CAPITAL EQUIPMENT DEPOSITS 151,596
OTHER ASSETS 2,219,186
TOTAL $ 30,467,625
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable $ 3,731,131
Payable due to equipment vendors 1,704,124
Bank overdraft 668,754
Accrued compensation and related benefits 345,487
Other accrued liabilities 967,647
Current portion of long term debt 4,660,458
------------
Total current liabilities 12,077,601
LONG-TERM DEBT 11,070,491
------------
Total liabilities 23,148,092
------------
SHAREHOLDER'S EQUITY:
Convertible preferred stocks $.0001 par value,
124,900,117 shares authorized; 88,880,365
shares issued and outstanding 8,888
Common stock, $.0001 par value, 250,000,000
shares authorized; 24,011,762 shares issued
and outstanding 2,401
Additional paid in capital 53,605,155
Stockholders' notes receivable (472,212)
Accumulated deficit (45,824,699)
------------
Total stockholders' equity 7,319,533
------------
TOTAL $ 30,467,625
============
See accompanying notes to financial statements.
Page 3 of 34
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Das Devices, Inc.
STATEMENT OF OPERATIONS
Nine Months ended
September 30,
1998
-----------------
PRODUCT REVENUE $ 274,965
COST OF REVENUE 17,662,061
------------
GROSS MARGIN (17,387,096)
OPERATING EXPENSES
Selling, general & administrative 2,323,518
Research and development 10,266,739
------------
Total operating expenses 12,590,257
------------
LOSS FROM OPERATIONS (29,977,353)
OTHER INCOME (EXPENSES):
Interest income 271,928
Interest expense (1,281,380)
Other income, net (39,456)
------------
NET LOSS
$(31,026,261)
============
See accompanying notes to financial statements
Page 4 of 34
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Das Devices, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Total
Preferred Stock Common Stock Additional Stockholder Stockholders'
-------------------- ------------------- Paid In Notes Accumulated Equity
Shares Amount Shares Amount Capital Receivable Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 67,958,619 $6,796 23,553,846 $2,355 $29,797,988 $(450,975) $(14,798,438) $ 14,557,726
Issuance of Series E preferred
stock, net of issuance costs
of $302,921,746 20,921,746 2,092 22,709,151 22,711,243
Issuance of Series E warrants
to lenders 1,087,070 1,087,070
Stock options exercised 457,916 46 10,946 10,992
Accrued interest (21,237) (21,237)
Net loss (31,026,261) (31,026,261)
BALANCES, September 30, 1998 88,880,365 $8,888 24,011,762 $2,401 $53,605,155 $(472,212) $(45,824,699) $ 7,319,533
</TABLE>
Page 5 of 34
<PAGE>
Das Devices, Inc.
STATEMENT OF CASH FLOWS
Nine Months ended
September 30, 1998
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(31,026,261)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,275,360
Accrued interest on stockholders' notes receivable (21,237)
Accretion of terminal payments 180,414
Amortization of cost of warrants issued for services 61,739
Changes in assets and liabilities
Funds receivable (2,751,037)
Trade receivable (28,437)
Inventories 236,817
Prepaid expenses and other assets 13,483
Trade payables 2,084,233
Payables due to equipment vendors (2,130,832)
Accrued compensation and related benefits 17,780
Other accrued liabilities 722,000
------------
Net cash used in operating activities (29,365,979)
------------
CASH USED IN INVESTING ACTIVITIES
Maturities of short term investments 1,551,304
Purchase of property and equipment, net (8,204,745)
Capital equipment deposits 1,069,464
Other assets, net (704,334)
------------
Net cash used in investing activities (6,288,311)
CASH FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit 600,000
Issuance of installment notes 3,928,688
Principal payments on installment notes (992,447)
Principal payments on capital leases (1,100,006)
Issuance of common and preferred stock - net 22,742,811
------------
Net cash provided by financing services 25,179,046
------------
DECREASE IN CASH AND CASH EQUIVALENTS (10,475,244)
------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (9,806,490)
------------
BANK OVERDRAFT, END OF PERIOD $ (668,754)
------------
NON CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of warrants for services $ 1,087,070
------------
Purchase of equipment under capital lease obligations $ 7,177,209
------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the nine month period for:
Interest $ 1,283,393
------------
See accompanying notes to financial statements.
Page 6 of 34
<PAGE>
DAS DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - DAS Devices, Inc. ("DAS" or the "Company") was incorporated in
Delaware in February 1994. The Company designs, manufactures and markets
recording heads as head gimble assemblies for the disk drive industry. The
Company markets its products through its direct sales force which is focused on
organizations located in North America and the Far East.
In July 1998, the Company modified its business. In doing so, customer orders
for its initial product, developed during fiscal 1998, ceased. Due to this
modification, the Company has increased research and development for its other
product lines.
Prior to 1998, DAS' fiscal year ended on December 31. During 1998, the Company
changed its year end to September 30.
The Company has suffered recurring losses from operations and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. The Company's viability is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to develop and
commercialize its products based on its core technologies, to obtain additional
financing to complete its research and development activities and fund its
future capital acquisitions and ultimately to attain profitability.
In November 1998, the Company entered into an Agreement and Plan of Merger,
dated November 24, 1998, amended and restated as of January 19, 1999 and
consummated on February 11, 1999, whereby a wholly owned subsidiary of Applied
Magnetics Corporation ("AMC") combined with DAS in a merger transaction in which
DAS became a wholly owned subsidiary of AMC (the "Merger"). In connection with
the Merger, AMC issued or reserved for issuance to investors, optionees and
certain consultants of DAS, an aggregate of 13,051,872 shares of the AMC common
stock. The Merger was approved by the DAS stockholders on February 11, 1999.
Certain officers and directors of the Company are entitled to receive payments
of approximately $1,625,000 from the Merger consideration under non-compete
agreements entered into with AMC. The Merger also provides for repayment of
secured bridge notes from the Merger consideration, which is discussed in more
detail in Note 9.
Upon completion of the Merger, the books and records of the Company were
transferred to AMC's corporate offices in Goleta, California. The financial
viability of the Company is now dependent on continued financial support from
its subsequent parent company, AMC.
Financial Statement Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and expenses during the reporting period. Actual results could
differ materially from those estimates.
Page 7 of 34
<PAGE>
Restricted Cash Investment - Under the terms of the Company's facility operating
lease, the Company is required to maintain a restricted deposit with a financial
institution to be used as collateral against future minimum lease obligations.
The estimated fair value (which approximates cost) as of September 30, 1998 was
$500,000.
Funds Receivable - In connection with certain additional borrowings (see Note
5), the Company had funds receivable from a third party lender of approximately
$2,750,000. This amount was received subsequent to period-end.
Property and Equipment - Property and equipment, including leasehold
improvements, are stated at cost. Depreciation and amortization are computed
using the straight-line method over the shorter of the estimated useful lives,
generally three to six years, or the lease term, as appropriate.
Capital Equipment Deposits - Deposits made for property and equipment, including
leasehold improvements that are not yet received are recorded as a current
assets. When equipment is placed in service, amounts are capitalized and
classified into property and equipment.
Revenue Recognition - Revenue from product sales to customers is recognized at
the time of shipment.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees". The Company did not recognize compensation expense in the financial
statements for employee stock arrangements, which are granted with exercise
prices equal to fair market value at the grant date (see Note 6).
Income Taxes - Income taxes are provided under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
which requires an asset and liability approach for financial
reporting of income taxes (see Note 7).
Certain Significant Risks and Uncertainties - Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash, cash equivalents, short-term cash investments, trade
receivables and restricted cash investment. Although no cash was maintained as
of September 30, 1998, the Company maintains cash balances during the normal
course of operations. The Company invests in a variety of financial instruments
with an investment credit rating of A and better. By policy, the Company places
its investments only with a high-credit-quality financial institution and, other
than U.S. Government Treasury instruments, limits the amount of credit exposure
with any one financial instrument or commercial issuer.
Page 8 of 34
<PAGE>
The Company intends to rely on certain offshore subcontractors for a substantial
portion of its backend manufacturing operations. Although management believes
other contractors could provide comparable services on similar terms, it
believes changes in subcontractors could adversely effect the Company's business
plan.
The Company operates in a dynamic industry and, accordingly, can be affected by
a variety of factors. Management believes that changes in any of the following
areas, among others, could have a negative adverse effect on the Company in
terms of its future financial position, results of operations and cash flows:
(1) ability to obtain additional financing, (2) regulatory changes, (3)
fundamental changes in the technology underlying semiconductor products, (4)
market acceptance of the Company's products under development, (5) development
of sales channels, (6) litigation or other intellectual property claims against
the Company, (7) the hiring, training and retention of key employees, (8)
successful and timely completion of product development efforts and (9) new
product introductions by competitors.
2. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1998 consist of the following:
Machinery and equipment $22,119,185
Furniture, fixtures and computer equipment 731,727
Leasehold improvements 4,984,738
-------------
27,835,650
Accumulated depreciation and amortization (3,886,142)
-------------
Property and equipment, net $23,949,508
============
As of September 30, 1998, machinery and equipment with an aggregate cost and net
book value of $7,394,438 were leased under capital lease obligation (see Note
4).
3. COMMITMENTS & CONTINGENCIES
Purchase Commitments - Commitments for equipment and leasehold improvements
totaled approximately $2,414,412 as of September 30, 1998.
Legal Claims and Contingencies - The Company has been named as defendants in a
number of lawsuits and claims. The Company has accrued reserves at the most
likely cost to be incurred in those proceedings where it is probable that the
Company will incur costs that can be reasonably estimated. It is impossible at
this time to determine the ultimate liabilities that the Company may incur
resulting from these lawsuits and claims. Several of these matters may involve
substantial amounts, and if these were to be ultimately resolved unfavorably to
the full or maximum exposure, an event not currently anticipated, it is possible
that such event could have a material effect on the financial position or
results of operations. However, in management's opinion, after taking into
account recorded reserves, it is unlikely that any of these matters will have a
material effect on the financial position or results of operations.
Page 9 of 34
<PAGE>
4. FINANCING ARRANGEMENTS
Revolving Line - The Company has available a $750,000 revolving line of credit
facility which bears interest at prime (8.5% as of September 30, 1998) plus 0.5%
per annum and is collateralized by the Company's assets. The credit facility
expired in October 1998. As of September 30, 1998, the Company had borrowings of
$600,000 against the credit facility and was in default of certain covenants.
Subsequent to the Merger, the amount was paid in full (see Note 9).
During 1997, the Company entered into an equipment lease line, which provides
$2,000,000 to finance machinery and equipment purchases. In connection with the
lease financing, the Company issued warrants in February 1998, ("Capital Lease
Line Warrant") to purchase shares of common stock (see Note 6). The value of
these warrants were determined using the Black-Scholes model, and the valuation
was not significant.
Operating Leases - The Company leases its facilities under a noncancelable
five-year operating lease agreement which expires on January 31, 2002. The
Company is responsible for certain maintenance costs, taxes and insurance. Under
the terms of the facility lease, the Company issued a standby letter of credit
totaling $500,000, which is collateralized by a one year certificate of deposit
with a financial institution, which is recorded as a restricted cash investment
as of September 30, 1998.
The Company leases certain equipment under operating lease agreements expiring
on various dates through 2001. During 1998, the Company, in connection with
certain lease agreements, issued warrants ("Equipment Lease Warrant") to the
lessor to purchase Series E convertible preferred stock (see Note 6). The value
of the warrants issued of approximately $58,000 was determined using the
Black-Scholes model, of which $7,000 was amortized to interest expense during
the period ended September 30, 1998.
Future minimum annual operating and capital lease commitments at September 30,
1998 are as follows:
Year Ending September 30 Operating Capital
1999 $3,142,188 $2,508,630
2000 3,175,089 2,508,630
2001 3,206,426 2,508,630
2002 2,423,702 1,220,794
2003 63,730 59,940
-----------------------
Total minimum lease payments $12,011,135 $8,806,624
=========== ==========
Amount representing average
interest of approximately 11.0% (1,517,578)
-----------
Present value of minimum lease payments 7,289,046
Current portion (1,807,518)
-----------
Long-term portion $5,481,528
===========
Rent expense under operating leases for the nine months ended September 30, 1998
was $2,871,618.
Page 10 of 34
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations include principal payments due under capital lease
obligations (see Note 4).
During 1998, the Company, in connection with additional borrowings, issued the
lender warrants ("Installment Note Warrant") to purchase shares of the Company's
Series E convertible preferred stock (see Note 6). The value of the warrants
issued of approximately $1,029,000 were determined using the Black-Scholes model
and will be amortized to interest expense ratably over the term of the note.
Principal payments due under the installment term notes as of September 30, 1998
are as follows:
Year Ending
September 30,
1999 $2,852,940
2000 2,554,689
2001 2,461,999
2002 572,275
2003 -
-----------
$8,441,903
===========
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock - As of September 30, 1998, convertible preferred
stock consists of:
Amount (net
Shares Shares of Issuance Liquidation
Designated Outstanding costs) Preference
Series A 9,978,013 9,978,013 $ 1,767,189 $ 1,995,603
Series B 39,348,871 38,708,981 8,039,790 8,063,081
Series C 10,573,333 -- -- 4,229,333
Series D 25,000,000 19,271,625 19,215,958 19,271,625
Series E 40,000,000 20,921,746 22,711,243 23,013,921
----------- ----------- ----------- -----------
124,900,217 88,880,365 $51,734,180 $56,573,563
=========== =========== =========== ===========
Page 11 of 34
<PAGE>
Significant terms of the convertible preferred stock are as follows:
o The holders of Series B, C, D and E shall be entitled to annual
noncumulative dividends, prior to any payments of dividends declared
on Series A preferred stock or common stock, of $0.02083, $0.040,
$0.10 and $0.125 per share, respectively. The holders of Series A
shall be entitled to annual noncumulative dividends, prior to any
payments of dividends declared on common stock, of $0.06 per share.
Holders are entitled to such dividends when and if declared by the
Board of Directors. No dividends were declared in 1998.
o In the event of liquidation, dissolution or winding up of the
Company, the preferred stockholders shall be entitled to receive, on
a pro rata basis, the liquidation preferences disclosed in the table
above plus an amount equal to all declared by unpaid dividends. Such
liquidation preferences will be paid first to holders of Series B, C,
D and E and second to Series A. Any remaining assets will be
distributed ratably among the holders of preferred stock (up to an
additional 300% of the liquidated preference) and common stock, pro
rata, based on the number of shares of common stock held by each
shareholder on an as-converted basis.
o All series of preferred stock are nonredeemable.
o Each share is convertible, at the option of the holder, into one share of
common stock (subject to adjustment for events of dilution) and has the
same voting rights as the common stock into which it is convertible.
Shares will automatically be converted upon written consent of not less
than 75% of the outstanding shares of preferred stock voting together as a
single class.
Capital Lease Line Warrant - In connection with the equipment capital lease
obligation (see Note 4), the Company issued warrants to purchase 100,000 shares
of common stock. The warrants are exercisable at $1.00 per share and expire in
January 31, 2008.
Installment Note Warrant - In connection with the installment note obligations
(see Note 5), the Company issued warrants to purchase 940,000 shares of Series E
preferred stock. The warrants are exercisable at $0.01 per share and expire
December 31, 2004.
Equipment Lease Warrant - In connection with certain equipment operating leases
(see Note 4), the Company issued warrants to purchase 86,367 shares of Series E
preferred stock. The warrants are exercisable at $1.10 per share and expire
April 24, 2003.
Stock Split - On July 27, 1998, the Company reduced the par value of the Series
E preferred stock by from $1.25 to $1.10 per share (1.13636 to 1). These
financial statements reflect this change accordingly.
Page 12 of 34
<PAGE>
Stock Option Plan - Under the Company's 1998 Stock Option Plan (the Plan) the
Board of Directors is authorized to grant to employees, directors and
consultants up to 25,000,000 shares of common stock at prices not less than the
fair market value at date of grant for incentive stock options and not less than
85% of fair market value for nonstatutory options. These options generally
expire ten years from the date of grant and become exercisable ratably over a
four-year period.
A summary of option activity is as follows:
Outstanding
---------------
Weighted
Number Average
of Shares Price
--------- -----
Outstanding, January 1, 1998 14,287,250 $0.026
Granted (weighted average fair
value of $.0275 per share) 10,404,800 0.154
Exercised (457,916) 0.022
Canceled (4,297,584) 0.039
---------- ------
Outstanding, September 30, 1998 19,936,550 $0.093
========== ======
As of September 30, 1998, 4,351,582 shares were exercisable and 3,105,534 shares
were available for future grant under the Plan.
Additional information regarding options outstanding as of September 30, 1998 is
as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted
Remaining Average
Exercise Number Contractual Number Exercise
Price Outsourcing Life (Years) Exercisable Price
$0.0208 9,118,750 8.6 4,191,213 $0.021
$0.1500 8,931,300 9.4 150,078 0.150
$0.1700 1,886,500 9.8 291 0.170
---------- --- --------- ------
19,936,550 9.1 4,341,582 $0.026
========== === ========= ======
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements,
which are granted with exercise prices equal to fair market value at grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma
Page 13 of 34
<PAGE>
net income or loss had the Company adopted the fair value method as of the
beginning of January 1, 1997. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value model with the following weighted
average assumptions: expected option life, one year following vesting; risk-free
interest rate of approximately 5.5%; and no dividends during the expected term.
The Company's calculations are based on a multiple option valuation approach,
and forfeitures are recognized as they occur. If the computed fair values of
1998 awards had been amortized to expense, pro forma net loss would not have
been materially different from the reported amount.
Common Shares Reserved for Issuance - As of September 30, 1998, the Company had
reserved shares of common stock for issuance as follows:
Conversion of Series A preferred stock 9,978,013
Conversion of Series B preferred stock 38,708,981
Conversion of Series D preferred stock 19,271,625
Conversion of Series E preferred stock 20,921,746
Exercise and conversion of Series B warrants 638,890
Exercise and conversion of Series C warrants 10,573,333
Exercise and conversion of Series D warrants 310,000
Exercise and conversion of Series E warrants 1,026,367
Exercise of common stock warrants 405,418
Exercise of common stock options 23,042,084
-----------
Total 124,876,457
===========
Stockholder Notes Receivable - As of September 30, 1998, the Company held notes
receivable and accrued interest from certain shareholders of $472,212 resulting
from the issuance of common stock to the Company's founders. The principal and
interest have been recorded as a component of shareholders' equity (see Note 9).
7. INCOME TAXES
Due to the Company's net loss, there was no provision for income taxes for the
period ended September 30, 1998.
Net deferred tax assets as of September 30, 1998 consisted primarily of
reserves, accruals and net operating loss and research and development credit
carryforwards. As a result of the Company's history of recent operating losses,
management believes that the recognition of the deferred tax asset is considered
less likely than not. Accordingly, the Company has recorded a valuation
allowance against the full amount of its net deferred tax assets.
Page 14 of 34
<PAGE>
As of September 30, 1998, the Company had net operating loss carryforwards to
offset both future federal and California taxable income. Such federal and
California carryforwards expire through 2012 and 2002, respectively.
As of September 30, 1998, the Company also had research and development tax
credit carryforwards available for federal and California. The federal
carryforwards expire through 2012 and the state tax credit carryforwards have no
expiration.
Current federal and California tax law includes provisions limiting the annual
use of net operating loss and credit carryforwards in the event of certain
defined changes in stock ownership. The Company's capitalization described
herein may have resulted in such a change. Accordingly, the annual use of the
Company's net operating loss and credit carryforwards would be limited according
to these provisions. Management has not yet determined the extent of such
limitation. Such limitation may result in the loss of carryforward benefits due
to their expiration.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) tax-deferred savings plan (the Plan) for all
employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 2% and 15% of their annual compensation,
but not to exceed a maximum contribution amount pursuant to Section 401(k) of
the Internal Revenue Code. The Company is not required to contribute, nor has it
contributed, to the Plan for the period ended September 30, 1998.
9. SUBSEQUENT EVENTS
Merger - The Company entered into an Agreement and Plan of Merger, dated
November 24, 1998, amended and restated as of January 19, 1999 and consummated
on February 11, 1999, whereby a wholly owned subsidiary of Applied Magnetics
Corporation ("AMC") combined with DAS in a merger transaction in which DAS
became a wholly owned subsidiary of AMC (the "Merger"). In connection with the
Merger, AMC issued or reserved for issuance to investors, optionees and certain
consultants of DAS, an aggregate of 13,051,872 shares of the AMC common stock.
The Merger was approved by the DAS stockholders on February 11, 1999. Certain
officers and directors of the Company are entitled to receive payments of
approximately $1,625,000 from the Merger consideration under non-compete
agreements entered into with the Company. The Merger also provides for repayment
of the secured bridge notes from the Merger consideration, as discussed below.
The carrying value of the assets and liabilities and ultimate resolution of
contingent obligations of the Company are partly dependent on the
Company's integration into AMC. AMC's integration plans include employee
separation due to the consolidation of operations and processes, elimination of
duplicate research and development processes and other restructuring actions.
AMC plans, among other things, to dispose of operating equipment and to
negotiate cancellations of operating and capital leases. Although management
believes the assets, liabilities and contingent obligations of the Company are
properly reflected in these financial statements as of September 30, 1998,
actual amounts may differ from those estimates as a result of integration
activities by AMC.
Page 15 of 34
<PAGE>
Bridge Financing - On November 6, 1998, the Company issued junior secured bridge
notes aggregating $2,100,000 and bearing interest at 8.5%. These notes were
repaid at the closing of the Merger at face value plus $4.2 million to release
the notes' collateral consisting of the Company's technology rights. Repayment
was made through the issuance of 1,247,525 shares of AMC Common Stock.
On November 25, 1998, the Company issued promissory notes aggregating $7,900,000
bearing interest at 10% per annum and payable 150 days from issuance and subject
to acceleration under certain events. These notes were repaid at the closing of
the Merger at a 50% premium through the issuance of 2,346,535 shares of AMC
Common Stock.
Stockholder Notes Receivable - As discussed in Note 6, the Company holds notes
receivable from certain shareholders received in connection with the issuance of
founders' stock. These notes were subsequently forgiven by AMC as part of the
consideration provided by AMC through the Merger with the Company.
Liquidation Preferences - The following summary sets-forth the liquidation
preferences of the Company due to the Merger with AMC (in order from first to
last):
DAS Shares AMC Shares
---------- ----------
$7.9 million senior bridge notes N/A 2,346,535
$2.1 million senior bridge notes N/A 1,247,525
$1.6 million non-compete agreement
(see Note 1) N/A 321,782
Series E preferred stock 20,921,746 4,049,557
Warrants converted into Series E 1,026,367 198,660
Series D preferred stock 19,271,625 3,391,058
Warrants converted into Series D 310,000 54,548
Series B preferred stock 38,708,981 1,418,789
Warrants converted into Series B 638,890 23,418
----------
13,051,872
==========
All other equity instruments, including stock options and common stock
outstanding, were deemed to have no value as a result of the consideration
provided by AMC in the Merger and liquidation preference thereto.
Page 16 of 34
<PAGE>
Das Devices, Inc.
UNAUDITED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,875,684
Restricted cash investment 500,000
Trade receivables 183,749
Inventories 532,005
Prepaid expenses and other current assets 1,604,324
------------
Total current assets 4,695,762
PROPERTY AND EQUIPMENT - net 24,280,914
CAPITAL EQUIPMENT DEPOSITS 642,327
OTHER ASSETS 1,226,487
------------
TOTAL $ 30,845,490
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable $ 6,590,640
Payable due to AMC 360,622
Accrued compensation and related benefits 391,121
Other accrued liabilities 794,750
Secured bridge notes 10,000,000
Current portion of long term debt 5,476,309
------------
Total current liabilities 23,613,442
LONG-TERM DEBT 9,491,382
------------
Total liabilities 33,104,824
------------
SHAREHOLDER'S EQUITY:
Convertible preferred stocks $.0001 par value, 124,900,117 shares
authorized; 88,880,365 shares issued and outstanding 8,888
Common stock, $.0001 par value, 250,000,000 shares
authorized; 24,800,095 shares issued and outstanding 2,480
Additional paid in capital 53,621,635
Stockholder notes receivable (427,291)
Accumulated deficit (55,413,046)
Total stockholders' equity (2,259,334)
------------
TOTAL $ 30,845,490
============
</TABLE>
Page 17 of 34
<PAGE>
Das Devices, Inc.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
Three Months ended
December 31,
1998
------------------
PRODUCT REVENUE $ 197,111
COST OF REVENUE 1,348,656
-----------
GROSS MARGIN (1,151,545)
OPERATING EXPENSES:
Selling, general & administrative 757,020
Research and development 7,027,534
-----------
Total operating expenses 7,784,554
LOSS FROM OPERATIONS (8,936,099)
OTHER INCOME (EXPENSES):
Interest income 18,823
Interest expense (671,941)
Other income, net 870
-----------
NET LOSS $(9,588,347)
See accompanying notes to financial statements.
Page 18 of 34
<PAGE>
Das Devices, Inc.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended
December 31, 1998
------------------
CASH FLOWS FROM OPERATION ACTIVITIES
Net Loss $ (9,588,347)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,590,070
Accrued interest on stockholders notes receivables (7,079)
Changes in assets and liabilities
Funds receivables 2,751,037
Trade receivables (152,894)
Inventories (532,005)
Prepaid expenses and other assets (738,881)
Trade payables 2,859,509
Payables due to equipment vendors (1,704,124)
Payable due to AMC 360,622
Accrued compensation and related benefits 45,634
Other accrued liabilities (172,897)
------------
Net cash used in operating activities (5,289,355)
------------
CASH USED IN INVESTING ACTIVITIES
Purchase of property and equipment, net (1,921,476)
Capital equipment deposits (490,731)
Other assets, net 992,699
------------
Net cash used in investing activities (1,419,508)
CASH FROM FINANCING ACTIVITIES
Issuance of bridge loan 10,000,000
Principal payments on installment notes and capital leases (763,258)
Issuance of common and preferred stock - net 16,559
------------
Net cash provided by financing services 9,253,301
------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,544,438
------------
BANK OVERDRAFT, BEGINNING OF PERIOD (668,754)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,875,684
------------
NON CASH FINANCING AND INVESTING ACTIVITIES
Purchase of equipment under capital lease obligations $ 2,751,037
------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
interest $ 1,875,684
------------
See accompanying notes to financial statements.
Page 19 of 34
<PAGE>
DAS DEVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. GOING CONCERN BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements for the period ended
December 31, 1998 have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements, the Company
incurred net losses of approximately $10 million and had a negative working
capital of approximately $7 million. These factors among others may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that may be necessary should the Company become a
going concern. The Company has suffered recurring losses from operations and has
a net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. The Company's viability is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to develop and commercialize its products based on its core technologies,
to obtain additional financing to complete its research and development
activities and fund its future capital acquisitions and ultimately to attain
profitability.
Prior to 1998, DAS' fiscal year ended on December 31. During 1998, the Company
changed its year end to September 30.
In November 1998, the Company entered into an Agreement and Plan of Merger,
dated November 24, 1998, amended and restated as of January 19, 1999 and
consummated on February 11, 1999, whereby a wholly owned subsidiary of Applied
Magnetics Corporation ("AMC") combined with DAS in a merger transaction in which
DAS became a wholly owned subsidiary of AMC (the "Merger"). In connection with
the Merger, AMC issued or reserved for issuance to investors, optionees and
certain consultants of DAS, an aggregate of 13,051,872 shares of the AMC common
stock. The Merger was approved by the DAS stockholders on February 11, 1999.
Certain officers and directors of the Company are entitled to receive payments
of approximately $1,625,000 from the Merger consideration under non-compete
agreements entered into with AMC. The Merger also provides for repayment of
secured bridge notes from the Merger consideration, which is discussed in more
detail in Note 8.
Upon completion of the Merger, the books and records of the Company were
transferred to AMC's corporate offices in Goleta, California. The financial
viability of the Company is now dependent on continued financial support from
its subsequent parent company, AMC.
2. INTERIM FINANCIAL INFORMATION
The unaudited condensed financial statements included herein have been prepared
in accordance with generally accepted accounting principles and rules and
regulations of the Securities Exchange Commission for interim statements.
Page 20 of 34
<PAGE>
Accordingly, interim statements do not included all the information and
disclosures required for annual financial statements. In the opinion of the
Company's management, all adjustments (consisting solely of adjustments of a
normal recurring nature) necessary for a fair presentation of these interim
financial results have been included. These condensed financial statements and
related notes should be read in conjunction with the audited financial
statements for the as of and for the nine-months ended September 30, 1998.
3. PRODUCT REVENUES, COST OF REVENUES & RESEARCH AND DEVELOPMENT
In the three months ended December 31, 1998, the Company began to fill orders
for a newly qualified MR program. Accordingly, a majority of the sales for the
three months ended December 31, 1998 are attributable to this program. However,
the Company continues to incur research and development costs in advancement of
the MR technology. Only the costs that are directly attributed to the qualified
MR program are classified as cost of sales. The majority of the MR program is
still developmental; therefore, classified as research and development.
4. LEGAL CLAIMS AND CONTINGENCIES
The Company has been named as defendants in a number of lawsuits and claims. The
Company has accrued reserves at the most likely cost to be incurred in those
proceedings where it is probable that the Company will incur costs that can be
reasonably estimated. It is impossible at this time to determine the ultimate
liabilities that the Company may incur resulting from these lawsuits and claims.
Several of these matters may involve substantial amounts, and if these were to
be ultimately resolved unfavorably to the full or maximum exposure, an event not
currently anticipated, it is possible that such event could have a material
adverse effect on the financial position or results of operations. However, 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 financial
position or results of operations.
5. FINANCING ARRANGEMENTS
Revolving Line - The Company had a $750,000 revolving line of credit facility,
which expired in October 1998. The credit facility bore interest at prime (7.8%
at December 31, 1998) plus 0.5% per annum and was collateralized by the
Company's assets. As of December 31, 1998, the Company has borrowings of
$600,000 against the credit facility and is currently in default. Subsequent to
the merger, the amount was paid in full.
6. SECURED BRIDGE NOTES
On November 6, 1998, the Company issued junior secured bridge notes aggregating
$2,100,000 and bearing interest at 8.5%. These notes were repaid at the closing
of the Merger at face value plus $4.2 million to release the notes' collateral
consisting of the Company's technology rights. Repayment was made through the
issuance of 1,247,525 shares of AMC Common Stock.
Page 21 of 34
<PAGE>
On November 25, 1998, the Company issued promissory notes aggregating $7,900,000
bearing interest at 10% per annum and payable 150 days from issuance and subject
to acceleration under certain events. These notes were repaid at the closing of
the Merger at a 50% premium through the issuance of 2,346,535 shares of AMC
Common Stock.
7. STOCKHOLDERS' EQUITY
During the three months ended December 31, 1998, the Company issued 790,000
shares of common stock resulting from the exercise of employee stock options.
The condensed financial statements as of and for the period ended December 31,
1998 reflect these issuances. As a result of the Merger, the common stock and
employee stock options of the Company were deemed to have no value as a result
of the consideration provided by AMC in the Merger and liquidation preference
thereto (see Note 8).
Option Re-pricing - In November 1998, the Company re-priced options to purchase
approximately 17,750,000 shares of the common stock at $0.01 per share. The
re-priced options retained their original vesting terms.
8. SUBSEQUENT EVENTS
Merger - The Company entered into an Agreement and Plan of Merger, dated
November 24, 1998, amended and restated as of January 19, 1999 and consummated
on February 11, 1999, whereby a wholly owned subsidiary of Applied Magnetics
Corporation ("AMC") combined with DAS in a merger transaction in which DAS
became a wholly owned subsidiary of AMC (the "Merger"). In connection with the
Merger, AMC issued or reserved for issuance to investors, optionees and certain
consultants of DAS, an aggregate of 13,051,872 shares of the AMC common stock.
The Merger was approved by the DAS stockholders on February 11, 1999. Certain
officers and directors of the Company are entitled to receive payments of
approximately $1,625,000 from the Merger consideration under non-compete
agreements entered into with the Company. The Merger also provides for repayment
of the secured bridge notes from the Merger consideration, as discussed above in
Note 6.
The carrying value of the assets and liabilities and ultimate resolution of
contingent obligations of the Company are partly dependent on the Company's
integration into AMC. AMC's integration plans include employee separation due to
the consolidation of operations and processes, elimination of duplicate research
and development processes and other restructuring actions. AMC plans, among
other things, to dispose of operating equipment and to negotiate cancellations
of operating and capital leases. Although management believes the assets,
liabilities and contingent obligations of the Company are properly relected in
these financial statements as of December 31, 1998, actual amounts may differ
from those estimates as a result of integration activities by AMC. Liquidation
Preferences - The following summary sets-forth the liquidation preferences of
the Company due to the Merger with AMC (in order from first to last):
Page 22 of 34
<PAGE>
DAS Shares AMC Shares
---------- ----------
$7.9 million senior bridge notes N/A 2,346,535
$2.1 million senior bridge notes N/A 1,247,525
$1.6 million non-compete agreement
(see Note 1) N/A 321,782
Series E preferred stock 20,921,746 4,049,557
Warrants converted into Series E 1,026,367 198,660
Series D preferred stock 19,271,625 3,391,058
Warrants converted into Series D 310,000 54,548
Series B preferred stock 38,708,981 1,418,789
Warrants converted into Series B 638,890 23,418
----------
13,051,872
==========
All other equity instruments, including stock options and common stock
outstanding, were deemed to have no value as a result of the consideration
provided by AMC in the Merger and liquidation preference thereto.
(b) Pro Forma Financial Information
UNAUDITED COMBINED PRO FORMA FINANCIAL DATA
The following unaudited combined pro forma financial data reflects the
accounting for the Merger with DAS Devices, Inc. (DAS) as a purchase, whereby
Applied Magnetics Corporation (AMC) has allocated the purchase price to assets
acquired including the estimated fair market value of in-process technology,
which was expensed upon consummation of the Merger and liabilities assumed based
on their fair values. The excess of the purchase price plus related transaction
costs over the fair value of tangible and intangible assets acquired and
liabilities assumed has been allocated to (1) developed technology and know-how,
which will be amortized on a straight line basis over 3 years, the estimated
period of future benefit and (2) goodwill (including a value of $1.6 million
associated with assembled workforce), which will be amortized on a straight line
basis over the estimated period of future benefit of 7 years. DAS is a research
and development company with only nominal sales.
Page 23 of 34
<PAGE>
The following summarizes the purchase price and the allocation of such price as
of the effective date of the Merger, February 11, 1999 (in millions):
Value of AMC's common shares to be issued in the Merger $ 95.5
Merger related costs 4.2
-------
Total purchase price 99.7
Net assets of DAS acquired at February 11, 1999 (0.6)
Decrease in fair value of property acquired 0.9
Covenant not to compete (1.6)
Developed technology & know-how (30.1)
Estimated value of in process technology (28.7)
-------
Residual goodwill $ 39.6
=======
The following sets forth the unaudited pro forma combined balance sheet of AMC
and DAS as if the Merger had occurred on December 31, 1998 and combines AMC's
unaudited January 2, 1999 consolidated balance sheet information with the DAS
unaudited balance sheet information as of December 31, 1998. The unaudited pro
forma combined statement of operations assumes the Merger took place at the
beginning of the period presented and combines (1) AMC's unaudited consolidated
statement of operations for the 53-week period ended October 3,1998 with the DAS
unaudited statement of operations for the year ended September 30, 1998 and (2)
AMC's unaudited consolidated statement of operations for the three month period
ended January 2, 1999 with the DAS unaudited statement of operations for the
three months ended December 31, 1998.
Management's integration plans include employee separation due to the
consolidation of operations and processes, elimination of duplicate research and
development processes and other restructuring actions. The estimated costs of
these activities have not been included in the unaudited combined pro forma
financial statements.
The Merger agreement also requires an investment of up to $20 million, but not
less than $15 million, through the purchase of AMC common shares by GM Pension
and other investors. This investment is contingent on the Merger, and the share
price and corresponding number of shares issued is based on 80 percent of the
lesser of the average closing price at the five trading days prior to the Merger
agreement or at the time of the closing. On this basis, 4,641,089 shares were
reserved for issuance at $4.04 per share. The actual equity investment made of
$18.75 million is reflected in the unaudited combined pro forma balance sheet.
As part of the Merger agreement, DAS received approximately $10.0 million of
bridge financing in the form of a $7.9 million senior secured note and a $2.1
million junior note (secured by technology rights) from third party investors to
provide working capital and general corporate funds until the merger was
consummated. In addition, DAS acquired covenants not to compete for
approximately $1.625 million. These notes and covenants have been settled at
closing of the Merger in AMC Common Stock, valued at approximately $28.7
million. The effect of these transactions, including the repayment of the notes,
has been reflected in the unaudited combined pro forma balance sheet and the
Merger purchase price.
Page 24 of 34
<PAGE>
Based upon the finalization of the integration plans, the final purchase price
allocation may differ from the pro forma adjustments presented in the following
unaudited combined pro forma financial statements.
The unaudited combined pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the Merger been completed during the
specified periods. The unaudited combined pro forma financial information,
including the notes thereto, are qualified in their entirety by reference to,
and should be read in conjunction with, the historical consolidated financial
statements of AMC and DAS, including the notes thereto, incorporated herein by
reference and/or contained elsewhere in this filing.
Page 25 of 34
<PAGE>
Applied Magnetics Corporation
Unaudited Pro Forma Combined Balance Sheet
<TABLE>
<CAPTION>
Applied Magnetics as of DAS Devices as of Pro forma Adjustments Pro Forma
Assets January 2, 1999 December 31, 1998 Debit Credit Combined
- ------ -------------------- ----------------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and Equivalents $ 34,933 $ 1,876 18,750 a -- 55,559
Restricted Cash -- 500 -- -- 500
Accounts Receivable, net 5,438 184 -- -- 5,622
Inventory 5,820 532 -- -- 6,352
Prepaid Expenses and Other 13,511 1,604 -- -- 15,115
--------- --------- --------- --------- ---------
59,702 4,696 18,750 -- 83,155
--------- --------- --------- --------- ---------
Property & Equipment 366,829 29,397 -- -- 396,226
Less - accumulated depreciation and
amortization (195,796) (5,116) -- 888 b (201,800)
--------- --------- --------- --------- ---------
Net Property & Equipment 171,033 24,281 -- 888 194,426
--------- --------- --------- --------- ---------
Other Assets 13,355 1,868 --
Covenant not to compete 1,625 b
Developed technology & know-how 30,100 b --
Goodwill 39,600 b,c
86,548
--------- --------- --------- --------- ---------
Total Assets $ 244,090 $ 30,845 $ 90,075 $ 888 $ 364,122
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 1,629 $ 5,476 -- -- $ 7,105
Notes Payable 53,801 10,361 $ 7,900 b
2,100 b
54,162
Accounts Payable 11,310 6,591 -- -- 17,901
Accrued Payroll and Benefits 7,501 390 -- -- 7,891
Other Current Liabilities 9,998 795 -- 1,900 c 12,693
--------- --------- --------- --------- ---------
84,239 23,613 10,000 1,900 99,752
--------- --------- --------- --------- ---------
Long Term Debt, net of Current Portion 116,328 9,491 -- -- 125,819
Other Long-Term Liabilities 3,015 -- -- -- 3,015
Page 26 of 34
<PAGE>
Applied Magnetics Corporation
Unaudited Pro Forma Combined Balance Sheet
Applied Magnetics as of DAS Devices as of Pro forma Adjustments Pro Forma
Assets January 2, 1999 December 31, 1998 Debit Credit Combined
- ------ -------------------- ----------------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Shareholder's Equity:
Preferred Stock -- 9 9 b -- --
Common Stock 2,413 2
-- 1,769 a,b
-- 120 c
2 b 4,302
Paid-in Capital 191,349 53,622 -- 2,180 c
-- 18,286 a
53,622 b 101,373 b
313,188
Stockholder Notes Receivable -- (479) -- 479 b --
Retained Earnings (151,640) (55,413)
28,700 b 55,413 b
(180,340)
--------- --------- --------- --------- ---------
42,122 (2,259) 82,333 179,620 137,150
Treasury, at cost (1,581) -- -- -- (1,581)
Unearned Restricted Stock Compensation (33) -- -- -- (33)
--------- --------- --------- --------- ---------
Stockholders Equity 40,508 (2,259) 82,333 179,620 135,536
--------- --------- --------- --------- ---------
$ 244,090 $ 30,845 $ 92,333 $ 181,520 $ 364,122
========= ========= ========= ========= =========
</TABLE>
Page 27 of 34
<PAGE>
Applied Magnetics Corporation
Unaudited Pro forma Combined Statement of Operations
<TABLE>
<CAPTION>
Applied Magnetics DAS Pro forma
53 weeks ended Twelve Months Ended Adjustments Pro forma
October 3, 1998 September 30, 1998 Debit Credit Combined
--------------- ------------------ ----- ------ --------
<S> <C> <C> <C> <C> <C>
Net Sales $ 183,597 $ 277 $ -- $ -- $ 183,874
Cost of Sales 198,742 21,452 -- -- 220,194
----------- --------- ---------
Gross Profit (15,145) (21,175) -- -- (36,320)
----------- --------- ------- ------- ---------
Research and Development Expenses (114,659) (11,380) -- -- (126,039)
Selling, General, and Administrative Expenses (6,514) (3,350) 933 d --
178 e
10,000 f --
5,330 g
(25,949)
--
Restructuring Charges (8,400) -- -- -- (8,400)
Interest Income 5,877 450 -- -- 6,327
Interest Expense (12,627) (1,492) -- -- (14,119)
Other Expense, net (1,495) (32) -- -- (1,527)
----------- --------- ------- ------- ---------
Loss Before Provision for Income Taxes (152,963) (36,979) 16,263 178 (206,027)
Provision for Income Taxes 2,405 -- -- -- 2,405
----------- --------- ------- ------- ---------
Net Loss $ (155,366) $ (36,979) $16,263 $ 178 $(208,432)
=========== ========= ======= ======= =========
Net Loss per Share:
Loss per Common Share $ (6.49) $ (5.01)
=========== =========
Weighted Average Number of Common Shares
Outstanding:
Common Shares 23,931 41,624
====== ======
</TABLE>
Page 28 of 34
<PAGE>
Applied Magnetics Corporation
Unaudited Pro forma Combined Statement of Operations
<TABLE>
<CAPTION>
Applied Magnetics DAS Pro forma
Three Months ended Three Months Ended Adjustments Pro forma
January 2, 1999 December 31, 1998 Debit Credit Combined
--------------- ----------------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Net Sales $ 23,530 $ 197 $ -- $ -- $ 23,727
Cost of Sales 33,123 1,349 -- -- 34,472
----------- -------- ------- -------- ---------
Gross Profit (9,593) (1,152) -- -- (10,745)
----------- -------- ------- -------- ---------
Research and Development Expenses (29,497) (7,028) -- -- (36,525)
Selling, General, and Administrative Expenses --
(1,592) (757) 233 d
45 e
2,500 f
1,333 g (6,370)
Restructuring Charges -- -- -- -- --
Interest Income 621 19 -- -- 640
Interest Expense (3,430) (672) -- -- (4,102)
Other Expense, Net (1,313) 1 -- -- (1,312)
----------- -------- ------- -------- ---------
Loss Before Provision for Income Taxes (44,804) (9,589) 4,066 45 (58,414)
Provision for Income Taxes 771 -- -- -- 771
----------- -------- ------- -------- ---------
Net Loss $ (45,575) $ (9,589) $ 4,066 $ 45 $ (59,185)
=========== ======== ======= ======== =========
Net Loss per Share:
Loss per Common Share $ (1.90) $ (1.42)
=========== =========
Weighted Average Number of Common Shares
Outstanding:
Common Shares 23,978 41,671
====== ======
</TABLE>
Page 29 of 34
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma combined balance sheet gives effect to the Merger
of AMC and DAS as if the Merger had occurred as of December 31, 1998 and
combines AMC's unaudited January 2, 1999 consolidated balance sheet and DAS'
unaudited December 31, 1998 balance sheet. The unaudited pro forma combined
statement of operations assumes the proposed merger took place as of the
beginning of the period presented and combines (1) AMC's consolidated statement
of operations for the 53-week period ended October 3, 1998 with the DAS
unaudited statement of operations for the twelve months ended September 30, 1998
and (2) AMC's consolidated statement of operations for the three month period
ended January 2, 1999 with the DAS unaudited statement of operations for the
three months ended December 31, 1998. DAS' 1998 fiscal year ended on December
31, 1998. DAS' twelve-month period ended September 30, 1998 has been derived by
combining the unaudited results for nine months ended September 30, 1998 with
the unaudited results of operations for the three months ended December 31,
1997.
On a combined basis, there were no material transactions between AMC and
DAS during the period presented. There are no material differences between the
accounting policies of AMC and DAS. The pro forma combined provision for income
taxes may not represent the amounts that would have resulted had AMC and DAS
filed consolidated income tax returns during the period presented.
Note 2. Allocation of Purchase Price
The pro forma adjustments are based on AMC management's estimates of the
value of the tangible and intangible assets acquired. The net assets acquired
will change to the extent of the operating losses of DAS through the effective
date of the Merger, February 11, 1999.
Management estimates, based upon appraisal, that approximately $28.7
million of the purchase price represents purchased in-process technology that
has not yet reached technological feasibility and has no alternative future use.
This amount will be expensed as a non-recurring, non-tax deductible charge upon
consummation of the Merger. This amount has been reflected as a reduction to
stockholders' equity and has not been included in the unaudited pro forma
combined statement of operations due to its non-recurring nature.
The value assigned to purchased in-process technology was determined by
identifying research projects in areas for which technological feasibility has
not been established. The value was determined by estimating the costs to
develop the purchased in- process technology into commercially viable 6.4 GB,
8.5 GB and 10.2 GB per 3.5 inch GMR products; estimating the resulting net cash
flows from such projects; and discounting the net cash flows back to their
present value.
Page 30 of 34
<PAGE>
The nature of the efforts to develop the purchased in-process technology
into commercially viable products principally relate to the completion of all
designing, testing, prototyping, and high-volume manufacturing activities that
are necessary to establish that the GMR products can be produced to meet its
design specifications.
The resulting net cash flows from such projects are based on AMC
management's estimates of revenues, cost of sales, research and development
costs, selling, general and administrative costs, and income taxes from such
projects. Historically, DAS has not generated any material product revenues and
has experienced significant net losses. Management has forecast future revenues
from DAS technologies to grow substantially as products are released to the
market. As a result, expenses as a percentage of revenue are projected to
decrease from historical levels.
The estimated revenues for the in-process technologies were expected to
commence as early as the third quarter of 1999 for the 6.4 GB products, assuming
the successful completion and market acceptance of the in-process technologies.
The estimated revenues for the in-process projects were expected to peak within
three years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
Assumptions related to revenue and expense levels were based on the
management's assessment of the overall market for disk drive products and its
experience in launching new products. Operating margins were assumed to be
reasonably consistent with AMC's historical results.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of DAS prior to the
close of the acquisition. Following is the estimated completion percentage,
estimated technology life and projected introduction dates for the acquired
in-process technologies:
Est.
In-Process Percent Technology Qualification Est. Ship
Technology Complete Life Period Date
- ---------- ------- ---------- ------------- ---------
6.4 GB GMR 88% 9 months 2Q 1999 3Q 1999
8.5 GB GMR 44% 9-12 months 1Q 2000 2Q 2000
10.2 GB GMR 11% 9-12 months 1Q 2001 2Q 2001
Management's estimate of net cash flow was discounted to present value. The
discount rate used in discounting the net cash flows from purchased in-process
technology is 35 percent. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model. The discount
rate utilized for the in-process technology was significantly higher than AMC's
WACC due to the inherent uncertainties in the estimates described above,
including the uncertainty surrounding the successful development of the
purchased in-process technology, the useful life of such technology, the
profitability levels of such technology and the uncertainty of technological
advances that are unknown at this time.
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If these projects are not successfully developed, the sales and
profitability of the combined AMC may be adversely affected in future periods.
Additionally, the value of other intangible assets acquired may become impaired.
AMC anticipates to begin to benefit from the purchased in-process technology in
late 1999.
Note 3: Pro Forma Adjustments
(a) Adjustment to record the equity investment in AMC common shares
from GM Pension and other investors. The Merger agreement
requires an investment of up to $20 million, but not less than
$15 million, through the purchase of AMC common shares. The
actual equity investment made was $18.75 million. The pro forma
adjustment assumes that the common share value is $4.04 which
represents 80 percent of the five day average closing price
($5.05) prior to the date of the Merger closing. On this basis,
4,641,089 AMC common shares were issued.
(b) Adjustments to record the components of the purchase price:
9,457,812 shares of AMC Common Stock will be issued in exchange
for all of the outstanding shares of DAS Common and Preferred
Stock. Included in this amount is 276,626 common shares which
will initially be reserved for issuance as DAS preferred stock
warrants vest. In addition, 3,594,060 shares of AMC Common
Stock will be issued to repay $7.9 million of senior secured
bridge financing notes provided by third-party creditors
(2,346,535 shares), $2.1 million of junior secured bridge notes
provided by third-party creditors (1,247,525 shares) and
$1.625 million to repay the covenant not to compete obligation
(321,782 shares). The terms of the settlements of the junior
and senior secured bridge financing, including the number of
shares to be issued by AMC, were determined as part of the
original merger agreement between DAS and AMC. The total number
of AMC Common Stock shares for issuance were 13,051,872. The
value of AMC Common Stock issued is based on the per share value
of approximately $7.31875 calculated as the average closing
market price during the five trading days immediately preceding
the date of the original Merger announcement and five days
immediately following the date of the original Merger
announcement. These adjustments also reflect the elimination of
DAS stockholders' equity and the estimated valuation of tangible
and intangible assets, including purchased in-process technology
which is reflected as a reduction of stockholder's equity,
resulting from the allocation of the purchase price. The excess
of the purchase price plus related transaction costs over the
fair value of tangible and intangible assets acquired and
liabilities assumed has been allocated to (1) developed
technology and know-how, which will be amortized on a straight
line basis over 3 years, the estimated period of future benefit
and (2) goodwill (including a value of $1.6 million associated with
assembled workforce), which will be amortized on a straight line basis
over the estimated period of future benefit of 7 years.
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<PAGE>
(c) Adjustment to reflect the accrual of estimated Merger-related
costs. Of the Merger related costs of $4.2 million, AMC will
satisfy approximately $2.3 million of such costs through the
issuance of 1,200,000 warrants to acquire AMC Common Stock at
the lower of the market price upon vesting of $7.00, in
accordance with an agreement with an investment bank. These
costs are consequently reflected as an equity transaction as
opposed to a liability on the pro forma balance sheet.
(d) Adjustment to reflect the amortization of the covenants not to
compete over the term of the covenants.
(e) Adjustment to record the reduction of depreciation expense that
is expected to be realized due to the write-down of the property,
plant and equipment of DAS assuming an estimated average useful
life of 5 years.
(f) Adjustment to reflect the amortization of developed technology &
know-how over its estimated useful life of 3 years on a straight-line
basis.
(g) Adjustment to reflect the amortization of goodwill over its
estimated useful life of 7 years on a straight-line basis.
Note 4. Pro Forma Basic Loss Per Common Share
Basic pro forma loss per common share is calculated based on the
historical AMC weighted average common shares outstanding during (1) the fiscal
year ended October 3, 1998 and (2) the three month period ended December 31,
1998 and the conversion of all DAS Common Stock and Preferred Stock outstanding
at December 31, 1998 into 9,457,812 million shares of AMC common shares, the
settlement of the DAS bridge financing through the issuance of 3,594,060 AMC
common shares and the sale of 4,641,089 AMC common shares to GM Pension and
other investors. Diluted loss per share has not been presented because the
effect of common stock equivalents is antidilutive.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
APPLIED MAGNETICS CORPORATION
By: /s/ Peter T. Altavilla
----------------------
Name: Peter T. Altavilla
Title: Secretary and Controller
Date: July 8, 1999
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