-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JH3raAEYv5cJiyV2q/lB0U8C8QTbYf4nX1ewMyMAYRjk6bfpS3qBP4KloAoF4bNM 0iwWyDMWOZCW35TFqaOXtA== 0000889810-96-000277.txt : 19961204 0000889810-96-000277.hdr.sgml : 19961204 ACCESSION NUMBER: 0000889810-96-000277 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960717 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961203 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MAGNETICS CORP CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06635 FILM NUMBER: 96675079 BUSINESS ADDRESS: STREET 1: 75 ROBIN HILL RD CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056835353 MAIL ADDRESS: STREET 1: 75 ROBIN HILL ROAD CITY: GOLETA STATE: CA ZIP: 93117 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 8-K/A 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): July 17, 1996 APPLIED MAGNETICS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-6635 95-1950506 -------- ------ ---------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification incorporation Number) Registrant's telephone number, including area code: (805) 683-5353 -------------- The purpose of this Amendment No. 2 is to amend Item 7 of Applied Magnetics Corporation's Current Report on Form 8-K for July 17, 1996 to add (i) Financial Statements of Delta Bravo, Inc. and subsidiaries for the nine month period ended September 28, 1996 and (ii) a statement regarding Registrant's position that pro forma financial statements are not required to be filed with the Commission. -1- ITEM 7 FINANCIAL STATEMENT AND EXHIBITS - ------ -------------------------------- (a) Financial statements of businesses acquired. Nine Months Ended September 28, 1996 Report of Independent Public Accountants (Arthur Anderson LLP)..........................................6 Consolidated Balance Sheet as of September 28, 1996....................7 Consolidated Statement of Operations for the Nine Months Ended September 28, 1996...........................9 Consolidated Statement of Shareholders' Deficiency for the Nine Months Ended September 28, 1996..................10 Consolidated Statement of Cash Flows for the Nine Months Ended September 28, 1996..........................11 Notes to Consolidated Financial Statements............................13 (b) Proforma Financial Statements The proforma effect of the "reacquisition" of the Delta Bravo Inc. subsidiaries (DBI) has no impact on the consolidated financial statements of Applied Magnetics Corporation (AMC). AMC obtained a controlling interest in DBI common stock through foreclosure proceedings in July, 1996 following several DBI defaults of covenants and payments under notes issued to AMC at the time of sale in 1993. AMC has no investment in DBI since the notes have been fully reserved. At the time of foreclosure AMC designated DBI a discontinued operation under the provisions of APB No. 30. Since the net investment in the assets held for sale is zero, there is no impact on the AMC consolidated financial statements as a result of the reacquisition. -2- 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 Date: December 3, 1996 By: /s/ Craig D. Crisman ------------------------- Craig D. Crisman Chief Executive Officer Chief Financial Officer (Principal Financial Officer) -3- DELTA BRAVO, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 TOGETHER WITH INDEPENDENT AUDITORS' REPORT -4- CONTENTS -------- INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENTS Consolidated Balance Sheet as of September 28, 1996 Consolidated Statement of Operations for the nine months ended September 28, 1996 Consolidated Statement of Shareholders' Deficiency for the nine months ended September 28, 1996 Consolidated Statement of Cash Flows for the nine months ended September 28, 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -5- INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors and Shareholders of Delta Bravo, Inc. and Subsidiaries: We have audited the consolidated balance sheet of DELTA BRAVO, INC. AND SUBSIDIARIES (the "Company") as of September 28, 1996, and the related consolidated statement of operations, shareholders' deficiency, and cash flows for the nine months 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, based on our audit, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta Bravo, Inc. and Subsidiaries as of September 28, 1996, and the results of its operations and its cash flows for the nine months then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations, working capital deficiency, shareholders' deficiency and debt covenant violations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP Los Angeles, California November 25, 1996 -6- DELTA BRAVO, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- AS OF SEPTEMBER 28, 1996 ------------------------ ASSETS ------ CURRENT ASSETS: Cash $ 947,000 Accounts receivable, less allowance for doubtful accounts of $455,000 8,694,000 Inventories, net 4,123,000 Other 553,000 ----------- Total current assets 14,317,000 ----------- PROPERTY, PLANT AND EQUIPMENT: Land and buildings 2,879,000 Leasehold improvements 1,686,000 Manufacturing equipment 5,878,000 Office equipment 1,047,000 ----------- Total property, plant and equipment 11,490,000 ----------- Less accumulated depreciation 5,072,000 ----------- Total property, plant and equipment, net 6,418,000 ----------- OTHER ASSETS 41,000 ----------- TOTAL $20,776,000 =========== The accompanying notes are an integral part of this consolidated balance sheet. -7- DELTA BRAVO, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- AS OF SEPTEMBER 28, 1996 ------------------------ LIABILITIES AND SHAREHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 4,998,000 Current portion of debt 16,159,000 Accounts payable 4,557,000 Accrued payroll and related costs 2,020,000 Income taxes payable 550,000 Accrued interest 3,234,000 Other current liabilities 7,210,000 ------------ Total current liabilities 38,728,000 ------------ LONG-TERM LIABILITIES: Debt, less current portion 721,000 ------------ Total liabilities 39,449,000 COMMITMENTS Redeemable Preferred stock, $100 par value; 200,000 shares authorized; 112,526 issued and outstanding; liquidation value $12,765,000 9,227,000 SHAREHOLDERS' DEFICIENCY: common stock: Class A, without par value; 10,000 shares authorized; 1,333 issued and outstanding 1,000 Class B, without par value, 5,000 shares authorized; none issued and outstanding Additional paid in capital 2,500,000 Accumulated deficit (30,389,000) Cumulative foreign currency translation adjustment (12,000) ------------ Total shareholders' deficiency (27,900,000) ------------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 20,776,000 ============ The accompanying notes are an integral part of this consolidated balance sheet. -8- DELTA BRAVO, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 -------------------------------------------- NET SALES $ 39,317,000 COST OF SALES 31,902,000 ------------ GROSS PROFIT 7,415,000 ------------ OPERATING EXPENSES: Product development and engineering 332,000 Selling 2,300,000 General and administrative 3,472,000 Restructuring costs 3,250,000 ------------ Total operating expenses 9,354,000 ------------ LOSS FROM OPERATIONS 1,939,000 OTHER INCOME (EXPENSE): Interest expense (1,831,000) Other 134,000 ------------ Total other expense (1,697,000) ------------ LOSS BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEMS 3,636,000 EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 636,000 ------------ LOSS BEFORE TAXES 3,000,000 INCOME TAX PROVISION 564,000 ------------ NET LOSS $ 3,564,000 ============ PREFERRED DIVIDENDS 468,000 ------------ NET LOSS-COMMON SHAREHOLDER $ 4,032,000 ============ PER SHARE DATA: Weighted average of common shares outstanding 1,333 ============ NET LOSS PER COMMON SHARE $ 3,025 ============ The accompanying notes are an integral part of these consolidated financial statements. -9- DELTA BRAVO, INC. AND SUBSIDIARIES ---------------------------------- CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY -------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 28, 1996 ------------------------------------
Total Common stock Cumulative Shareholders' -------------- Additional Accumulated Translation Equity/ Shares Amount Paid in Capital Deficit Adjustments Deficiency ------ ------ --------------- ----------- ----------- ------------- BALANCE, JANUARY 1, 1996 1,333 $ 1,000 $(26,357,000) $ 272,000 $(26,084,000) Additional paid in capital $ 2,500,000 2,500,000 Dividends accreted on preferred stock (468,000) (468,000) Translation adjustment (284,000) (284,000) Net loss (3,564,000) (3,564,000) ----- ------- ------------ ------------ ------------ ------------ BALANCE SEPTEMBER 28, 1996 1,333 $ 1,000 $ 2,500,000 $(30,389,000) $ (12,000) $(27,900,000) ===== ======= ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. -10- DELTA BRAVO, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,564,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,515,000 Interest accrued and accreted 1,235,000 Exchange rate effect on operating activities (142,000) Loss on disposal of fixed assets 6,000 Restructuring charge 3,250,000 Changes in operating assets and liabilities: Accounts receivable (1,364,000) Inventories (284,000) Other current assets (19,000) Other assets 119,000 Accounts payable 1,362,000 Accrued payroll and related costs 445,000 Income taxes payable 500,000 Other current liabilities (30,000) ----------- Net cash provided by operating activities 3,029,000 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (695,000) ----------- Net cash used in investing activities (695,000) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Gain on extinguishment of debt (636,000) Payments on notes payable (397,000) Net reduction on line of credit (769,000) Exchange rate effect on financing activities (44,000) ----------- Net cash used in financing activities (1,846,000) ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (25,000) ----------- NET INCREASE IN CASH 463,000 CASH AS OF JANUARY 1, 1996 484,000 ----------- CASH AS OF SEPTEMBER 28, 1996 $ 947,000 =========== -11- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $563,000 ======== Income taxes $ 64,000 ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Dividends accreted on preferred stock $468,000 ======== The accompanying notes are an integral part of these consolidated financial statements. -12- DELTA BRAVO, INC. AND SUBSIDIARIES ---------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 -------------------------------------------- 1. Summary of Significant Accounting Policies ------------------------------------------ Business Activity - ----------------- Delta Bravo, Inc. and its subsidiaries ("DBI" or the "Company") manufacture and perform repair and restoration services for disk drives and other computer peripheral equipment. The Company's operations are principally conducted within North America and Western Europe and the company routinely grants credit to its customers throughout these regions. Such customers are primarily in the computer or computer peripheral industries. Principles of Consolidation - --------------------------- The consolidated financial statements present the accounts of the Company and its subsidiaries, all of which are wholly- owned. Significant intercompany accounts and transactions have been eliminated in consolidation. The Company's subsidiaries are Magnetic Data, Inc. and Brum-Ko Magnetics Corporation. Magnetic Data, Inc. owns 100% of the following subsidiaries: Magnetic Data Belgium, N.V. AM Belgium, N.V. Magnetic Data United Magnetic Data Inc., Kingdom, Ltd. California Magnetic Data Inc., Magnetic Data Inc., Minnesota France, S.A.R.L. Magnetic Data Inc., Germany GmbH 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 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. Going Concern and Restructuring Costs - ------------------------------------- The consolidated financial statements 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 -13- shown in the financial statements, the Company incurred a loss of $3,564,000 in 1996, has a shareholder's deficiency of $27,900,000, and a working capital deficiency of $24,411,000 at September 28, 1996, and is not in compliance with its borrowing agreements. The working capital deficiency at September 28, 1996 includes the result of the current classification of the Company's notes payable to AMC resulting from the Company defaulting on its debt commitments, including violations of certain debt covenants. See Notes 5 and 10. Certain of the Company's operations have experienced significant operating losses and negative cash flows. Accordingly management approved a formal plan to dispose of certain operations. Management has identified assets to be disposed of, the expected method of disposal and expects the completion of disposal to occur in 1997. Management estimated the loss from the proposed sale or abandonment of those operations to be approximately $3,250,000 primarily consisting of shutdown costs and estimated loss on the disposal of assets. Accordingly, the Company recorded a restructuring charge of $3,250,000 for the planned disposition of those certain operations. Management's focus is to improve the operating units' profitability through increased sales activity in targeted areas and aggressive cost reduction programs to ensure the Company's ability to meet its financial obligations. 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 might be necessary should the Company be unable to continue as a going concern. Inventories - ----------- Inventories are stated at the lower of standard cost, which approximates cost determined on a first-in, first-out (FIFO) basis, or market. Inventories consist of purchased materials, direct production labor and manufacturing overhead. Property, Plant and Equipment - ----------------------------- Purchases of property, plant and equipment are recorded at cost or, in the case of equipment under capital leases, the present value of future lease payments; and through a business combination, at its respective fair market values. Maintenance, repairs and minor tooling costs are expensed as incurred. Depreciation and amortization are computed on the straight-line method over the -14- estimated useful lives of the assets. Estimated useful lives are as follows: Buildings 20 - 30 years Leasehold improvements 3 - 10 years Manufacturing Equipment 2 - 10 years Office Equipment 3 - 10 years Revenue Recognition - ------------------- Revenue is generally recognized upon shipment of product. Product Development and Engineering - ----------------------------------- Costs incurred by the Company in the design, maintenance or refinement of its existing product line and new product research and development are expensed when incurred. Total research and development expenses were approximately $332,000 in 1996. Income Taxes - ------------ The Company's income tax provision/benefit has been determined under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This Statement requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial and income tax reporting purposes. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized. See Note 8. Foreign Currency Translation - ---------------------------- Foreign assets and liabilities are translated to their United States dollar equivalents based on rates of exchange prevailing at the end of each respective period. Income statement information is translated using the average rate for the year. Gains and losses resulting from foreign currency transactions, other than those directly related to intercompany loans between the Company's foreign and domestic entities, are included in the consolidated statements of operations. Gains and losses resulting from translation of foreign financial statements and from foreign currency translations on intercompany loans are included as a separate component of shareholders' deficiency. -15- Change in Fiscal Year - --------------------- As a result of the reacquisition of the Company by Applied Magnetics Corporation ("AMC") the Company changed its fiscal year- end from December 31st to the Saturday closest to September 30th in order to coincide with AMC's year-end date. This change is effective as of September 28, 1996 for the Company's domestic entities and September 30, 1997 for its foreign operations. 2. Inventories ----------- Inventories consist of the following: Raw materials $ 5,261,000 Work in process 1,427,000 Finished goods 3,048,000 Less reserves for obsolescence (5,613,000) ----------- Total 4,123,000 ========== 3. Segments of Business -------------------- The Company operates in one business segment, component manufacturing, refurbishment and repair. Total foreign sales were $13,410,000. Of this amount sales by operations in the United States to customers in other countries were $1,098,000. Sales by operations in Europe to customers in the United States were $760,000. Identifiable assets, capital expenditures, pre-tax operating loss, and depreciation are as follows: Identifiable assets: United States $13,196,000 Europe 7,580,000 ------------ Total $20,776,000 ============ Capital expenditures: United States $ 582,000 Europe 113,000 ----------- Total $ 695,000 =========== Pre-tax operating income (loss) before extraordinary gain: United States $(4,009,000) Europe 373,000 ----------- Total $(3,636,000) =========== -16- Depreciation: United States $1,332,000 Europe 183,000 ---------- Total $1,515,000 ========== 4. Short Term Borrowings --------------------- The Company has a line of credit (the "credit line") that is secured by accounts receivable and inventories of its domestic operating subsidiaries, which expires on March 18, 1997. The credit line allows borrowings equal to 85% of qualified accounts receivable and 20% of inventory with an $8,000,000 maximum. At September 28, 1996, outstanding borrowings under the credit line were $3,948,000, with availability of approximately $1,000,000 based upon September 28, 1996 accounts receivable and inventory balances. The credit line bears interest at the prime commercial interest rate (8.25% at September 28, 1996) plus 2.5%. The Company is required to meet certain financial covenants under the terms of the credit line agreement. These covenants include, among other things, minimum levels of domestic working capital and net worth requirements. The Company was not in compliance with these covenants of the credit line as of September 28, 1996. The Company also maintains a credit line ("foreign line") with a Belgian financial institution in the amount of 37,500,000 Belgian Francs (US$1,200,000 based upon year-end exchange rates), which is secured by accounts receivable and inventories of its foreign operating subsidiaries. At September 28, 1996, approximately 33,000,000 Belgian Francs (US$1,050,000) were outstanding. The foreign line is renegotiated every six months, and the interest rate is adjusted to current rates (6.75% at September 28, 1996). The foreign line also requires, among other requirements, the Company's foreign subsidiaries to maintain certain solvency and working capital ratios. At September 28, 1996 the Company was not in compliance with the required ratios; however, the Belgian financial institution has agreed to extend the line through December 1996, and on a month-to-month basis thereafter. 5. Debt ---- Debt consists of the following: Note payable to Applied Magnetics Corporation ("AMC"), principal and interest (at 10%), due March 18, 1996. Due to debt covenant violations, the note is due and payable on demand. The note is secured by real and -17- personal property, stock pledged of DBI and outstanding stock of domestic subsidiaries, and guaranteed by the Company and the former majority shareholder. $ 2,650,000 Note payable to AMC, with interest payable quarterly at the stated rate of 8%, unpaid interest and principal due March 18, 2000. Due to debt covenant violations, and default in interest payments, the note is due and payable on demand. The note is secured by real and personal property, stock pledged of DBI and outstanding stock of domestic subsidiaries, and guaranteed by the Company and the former majority shareholder. 13,200,000 Net present value of note payable to vendor payable in various installments with final payment due March 15, 1999. $ 807,000 Capitalized lease obligations, secured by related equipment, interest at 8.9% to 12%, due in monthly installments through August, 2000. See Note 6 223,000 ----------- Total debt 16,880,000 Current portion of debt 16,159,000 ----------- Debt, less current portion $ 721,000 =========== The Company is required to meet certain financial covenants under the terms of the notes payable to AMC. These covenants include, among other things, a maximum debt to equity ratio, minimum net worth requirements and specified levels of working capital. The Company was not in compliance with certain of these covenants at September 28, 1996. In addition, the Company has defaulted on its note obligation to AMC, and was found by a Delaware Court to be in default with its obligations to AMC as a result of violating its Pledge Agreement with AMC. Upon occurrence of an event of default, all outstanding secured obligations owed by the Company to AMC are automatically accelerated; and become due and payable upon demand. Accordingly, the notes payable to AMC have been classified as current in the accompanying financial statements. On July 17, 1996, AMC, through a foreclosure proceeding which followed the Company's breach of its Pledge Agreement with AMC, acquired 100% of the outstanding common stock of the Company in satisfaction of $2.5 million of debt owed by the Company to AMC. Accordingly, the outstanding debt due to AMC has been reduced by $2.5 million as of September 28, 1996, and a corresponding additional paid in capital was recorded in the financial statements. See Note 11. -18- During 1996 the Company renegotiated its note obligations with a vendor whereby the vendor forgave a portion of the outstanding debt. Accordingly, the Company recognized a gain from the extinguishment of debt in the amount of $636,000. The aggregate maturities of debt for the years subsequent to September 28, 1996 (exclusive of capital lease obligations) are as follows: 1997 16,090,000 1998 330,000 1999 237,000 2000 - 2001 - Thereafter - ------------ Total $ 16,657,000 ============ 6. Lease Commitments ----------------- The Company leases various equipment and building facilities under capital and operating leases. Rent expense for the nine months ended September 28, 1996 was $966,000. Future minimum rental payments under these leases with an initial term of one year or more are as follows: Capital Operating Leases Leases ------- --------- 1997 $88,000 $1,272,000 1998 85,000 1,244,000 1999 62,000 1,229,000 2000 25,000 1,226,000 2001 -0- 423,000 Thereafter -0- -0- --------- ---------- Total minimum lease payments 260,000 $5,394,000 ========== Amount representing interest (37,000) ---------- Present value of net minimum lease payments $ 223,000 ---------- -19- 7. Capital Stock ------------- Preferred Stock --------------- The Company issued 112,526 shares of convertible preferred stock to AMC with a face value of $11,253,000 on March, 18, 1993 in connection with the acquisition of its subsidiaries Magnetic Data, Inc. and Brum-ko Magnetics Corporation. A summary of AMC's preferred stock rights is as follows: * Cumulative 7.5% dividend payable semi-annually. * Preferential rights on liquidation. * Mandatory redemption right commencing in the year 2000. * Convertible into one share of common stock for each 225.052 shares of preferred. The preferred stock has been valued at its fair market value on the acquisition date using the discounted cash flow method and assuming a fair market rate of return for the security of 16%. Accordingly, the Company is accreting dividends on an annual basis so as to adjust the carrying value of the security to its face value upon its redemption dates which commence in the year 2000. As of September 28, 1996, total dividends accreted amount to $2,337,000. Stock Options - ------------- The Company's subsidiary, Magnetic Data, Inc. ("MDI") has two stock option plans, which were established in 1988 and 1992. Under the stock option plans, MDI may issue nonqualified and incentive stock options to officers, directors and other employees to purchase Class A common stock of MDI at a price that is not less than 100% of the fair market value at the date Of grant. The right to exercise the options vest 25% a year, beginning on the first anniversary of the grant, and the options expire no later than ten years after the date of grant. There are 620,000 shares authorized for grant under the plans. As of September 28, 1996, 61,400 shares are exercisable. The following table summarizes the stock option activity: Rage of Option Shares Prices Per Share ------ ---------------- Outstanding at January 1, 1996 90,400 $6.25-$6.50 Options canceled (29,000) $6.25-$6.50 ------- Outstanding at September 28, 1996 61,400 ======= -20- 8. Income Taxes ------------ The income tax expense consists of the following: Current: Federal $ -- State 14,000 Foreign 550,000 --------- Total $ 564,000 ========= For federal income tax purposes, the Company has domestic net operating loss carryforwards totaling approximately $11.3 million at September 28, 1996, expiring between 1998 and 2010; and foreign net operating loss carryforwards of approximately $3.8 million at September 28, 1996, which do not expire. Deferred income taxes reflect the tax effects of: temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards. The tax effects of significant items comprising the Company's net deferred income tax assets are net operating loss carryforwards, certain accrued costs, depreciation, inventory reserves, and differences between the book and tax basis of property and the amortization of intangibles. The Company has provided a valuation allowance for the excess benefits of the operating loss and other deferred tax assets, since realization of these assets cannot be assured. As of September 28, 1996 the deferred income taxes consist of the following: Federal State Foreign ----------- ----------- ----------- Deferred taxes: Operating loss carryforward $ 3,843,396 $ 791,287 $ 1,520,361 Reserve for inventory obsolescence 3,845,813 791,785 174,023 Accruals and other costs 1,296,295 266,884 809,287 Differences between book and tax basis of property 82,346 16,689 14,884 ----------- ----------- ----------- Total deferred taxes 9,067,850 1,866,645 2,518,555 Valuation allowance (9,067,850) (1,866,645) (2,518,555) ----------- ----------- ----------- Deferred income taxes $ -- $ -- $ -- =========== =========== =========== -21- Reconciliation of the actual Federal provision (benefit) for income taxes to the income tax calculated at the United States Federal statutory rates for continuing operations is as follows: Income tax (benefit) at the United States Federal income tax rate (34)% Temporary differences/net operating losses not benefited 34 ---- - % ==== The consolidated effective tax rate may differ from the U.S. Federal statutory rate primarily due to the Company and its consolidated foreign subsidiaries, each filing separate income tax returns in their respective countries. As a result, the losses of one company cannot be offset against the taxable income of other companies. 9. Retirement Savings Plan ----------------------- The Company has a qualified retirement 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 may match employees' contributions with discretionary amounts as may be determined by the Board of Directors. The Board of Directors did not authorize any matching contributions in the nine months ended September 28, 1996. 10. Related Party Transactions -------------------------- Included in the current portion of debt are amounts due to Applied Magnetics Corporation ("AMC") , the sole shareholder of the Company, in the aggregate amount of $15,850,000. Also included in accrued interest is $3,141,000 related to the AMC notes and $750,000 in other current liabilities for estimated legal and settlement costs relating to the default on the AMC notes. Such costs are to be reimbursed to AMC under the terms of the note agreements. The Company had purchased products and services from AMC totaling $171,000. 11. Subsequent Events ----------------- The Company was a defendant in a lawsuit filed by two former officers and directors of the Company who claimed to be minority shareholders. Also named in this lawsuit were the Company's former majority shareholder and a corporation in which the former majority -22- shareholder is principal. These individuals had threatened to add AMC and others to the lawsuit. On November 19, 1996, the Company settled the lawsuit, and obtained full releases from the plaintiffs. Resolution of this lawsuit resulted in no claim by plaintiffs of any minority ownership in the Company and thus, AMC's ownership is 100% of the outstanding common stock of the Company. The plaintiffs have not yet filed a formal dismissal with prejudice of the lawsuit, but are obligated to do so pursuant to the settlement agreement. -23- -----END PRIVACY-ENHANCED MESSAGE-----