-----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, VACUzwLaPWaK4wDojrmQ0Kpjc43Hy31y8uqQDMrtTZhv5tTTp99+vBlnSilOPXNQ NvaM0ITClP7OsIR6w2UW1g== 0000889810-99-000199.txt : 19990709 0000889810-99-000199.hdr.sgml : 19990709 ACCESSION NUMBER: 0000889810-99-000199 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990211 ITEM INFORMATION: FILED AS OF DATE: 19990708 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: SEC FILE NUMBER: 001-06635 FILM NUMBER: 99660633 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 AMENDMENT NO. 2 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 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 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 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 Das Devices, Inc. STATEMENT OF STOCKHOLDERS' EQUITY
Convertible Total Preferred Stock Common Stock Additional Stockholder Stockholders' -------------------- ------------------- Paid In Notes Accumulated Equity Shares Amount Shares Amount Capital Receivable Deficit (Deficit) 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
Page 5 of 34 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 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 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 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 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 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 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 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 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 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 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 Das Devices, Inc. UNAUDITED CONDENSED BALANCE SHEET
December 31, 1998 ----------------- 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 ============
Page 17 of 34 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 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 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 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 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 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 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 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 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 - ------ -------------------- ----------------- ----- ------ --------- 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 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 - ------ -------------------- ----------------- ----- ------ --------- 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 ========= ========= ========= ========= =========
Page 27 of 34 Applied Magnetics Corporation Unaudited Pro forma Combined Statement of Operations
Applied Magnetics DAS Pro forma 53 weeks ended Twelve Months Ended Adjustments Pro forma October 3, 1998 September 30, 1998 Debit Credit Combined --------------- ------------------ ----- ------ -------- 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 ====== ======
Page 28 of 34 Applied Magnetics Corporation Unaudited Pro forma Combined Statement of Operations
Applied Magnetics DAS Pro forma Three Months ended Three Months Ended Adjustments Pro forma January 2, 1999 December 31, 1998 Debit Credit Combined --------------- ----------------- ----- ------ -------- 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 ====== ======
Page 29 of 34 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 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. Page 31 of 34 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. Page 32 of 34 (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. Page 33 of 34 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 Page 34 of 34 -----END PRIVACY-ENHANCED MESSAGE-----