-----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, WSB9VjCbKXjDPfDpC138K9WlhpQf2vmG9jvZKAHyaNjISdR06SAokBNQh4YFPU+i piuAU86cg2scN6A/Rte6Yw== 0000889810-99-000236.txt : 19990818 0000889810-99-000236.hdr.sgml : 19990818 ACCESSION NUMBER: 0000889810-99-000236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-06635 FILM NUMBER: 99694849 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 10-Q 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------- (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended July 3, 1999 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______to_______ Commission File No.1-6635 APPLIED MAGNETICS CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) A Delaware Corporation 95-1950506 ---------------------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 75 Robin Hill Road, Goleta, California 93117 -------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (805) 683-5353 (No Change) ---------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes ..X.. No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock: 45,736,741 $.10 par value common stock as of August 12, 1999. Exhibit Index on Page 25 Page 1 of 27 PART 1. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements -------------------- The unaudited condensed consolidated financial statements included herein have been prepared by Applied Magnetics Corporation and its subsidiaries (the "Company" or "Applied Magnetics") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements and selected notes included therein should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended October 3, 1998. The following unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, which, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations for the periods presented. Page 2 of 27 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations - Unaudited (In thousands except per share data)
For the three months ended For the nine months ended July 3, July 4, July 3, July 4, __________ __________ __________ __________ 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 5,320 $ 33,579 $ 36,839 $ 166,834 Cost of sales 22,920 35,514 79,614 172,126 --------- --------- --------- --------- Gross deficit (17,600) (1,935) (42,775) (5,292) --------- --------- --------- --------- Research and development expenses 25,108 30,513 86,607 82,263 Selling, general and administrative expenses 1,861 1,504 5,304 5,079 Writedown of assets and restructuring charges 11,977 - 16,477 8,400 Amortization 4,240 - 6,257 - Purchase in-process technology - - 28,700 - --------- --------- --------- --------- Total operating expenses 43,186 32,017 143,345 95,742 --------- --------- --------- --------- Loss from operations (60,786) (33,952) (186,120) (101,034) Interest income 163 1,326 1,104 4,752 Interest expense (3,414) (3,285) (10,306) (9,577) Other income (expense) 55 309 (1,230) (1,146) --------- --------- --------- --------- Loss before taxes (63,982) (35,602) (196,552) (107,005) Provision for income taxes - 240 514 517 Discontinued operations, net 25,941 - 25,941 - --------- --------- --------- --------- Net loss $ (38,041) $ (35,842) $(171,125) $(107,522) ========= ========= ========= ========= Net loss per share: Loss from continuing operations per common share $ (1.55) $ (1.50) $ (5.91) $ (4.50) Discontinued operations, net 0.63 - 0.78 - ========= ========= ========= ========= Loss per common share $ (0.92) $ (1.50) $ (5.13) $ (4.50) ========= ========= ========= ========= Loss per common share - assuming dilution $ (0.92) $ (1.50) $ (5.13) $ (4.50) ========= ========= ========= ========= Weighted average number of common shares outstanding: Common shares 41,427 23,968 33,378 23,917 ========= ========= ========= ========= Common shares - assuming dilution 41,427 23,968 33,378 23,917 ========= ========= ========= =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements are an integral part of these condensed consolidated statements. Page 3 of 27 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets - Unaudited (In thousands except share and par value data) ASSETS July 3, October 3, ---------- ---------- 1999 1998 ---- ---- Current Assets: Cash and cash equivalents $ 6,046 $ 71,674 Accounts receivable, net 1,223 7,291 Inventories 1,773 13,054 Prepaid expenses and other 11,828 15,590 --------- --------- 20,870 107,609 --------- --------- Property, plant and equipment, at cost 365,153 365,469 Less-accumulated depreciation (209,310) (188,022) --------- --------- 155,843 177,447 --------- --------- Cost in excess of net assets of business acquired, net 65,488 - Other assets 12,385 14,462 --------- --------- $ 254,586 $ 299,518 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Current portion of long-term debt $ 1,640 $ 1,610 Bank notes payable 59,268 58,468 Accounts payable 21,235 16,409 Accrued payroll and benefits 10,514 8,070 Other current liabilities 16,455 9,653 --------- --------- 109,112 94,210 --------- --------- Long-term debt, net 115,371 116,767 --------- --------- Other liabilities 2,820 2,581 --------- --------- Shareholders' Investment: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding - - Common stock, $.10 par value, authorized 120,000,000 shares, issued 41,557,887 at July 3, 1999 and 24,103,294 shares at October 3, 1998 4,156 2,410 Paid-in capital 301,931 191,225 Retained deficit (277,190) (106,065) --------- --------- 28,897 87,570 Treasury stock, at cost (130,552 shares as of July 3, 1999 and 130,233 shares at October 3, 1998) (1,581) (1,577) Unearned restricted stock compensation (33) (33) --------- --------- 27,283 85,960 --------- --------- $ 254,586 $ 299,518 ========= ========= The accompanying Selected Notes to Condensed Consolidated Financial Statements are an integral part of these condensed consolidated balance sheets. Page 4 of 27 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows - Unaudited (In thousands) For the nine months ended July 3, July 4, ------------ ----------- 1999 1998 ---- ---- Cash Flows from Operating Activities: Net loss $(171,125) $(107,522) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 38,644 33,749 Loss on sale of assets 265 - Writedown of assets and restructuring charge 16,477 8,400 Purchase in-process technology 28,700 - Changes in assets and liabilities, net of effects from business merger: Accounts receivable, net 6,716 46,099 Inventories 11,396 30,979 Prepaid expenses and other 3,326 (99) Accounts payable (6,238) (33,421) Accrued payroll and benefits 1,782 (2,132) Other assets and liabilities (1,637) (1,181) --------- --------- Net cash flows used in operating activities (71,694) (25,128) --------- --------- Cash Flows from Investing Activities: Additions to property, plant and equipment (10,750) (33,208) Proceeds from sale of property, plant and equipment, net 401 - Purchase of business (703) - Notes receivable 87 88 --------- --------- Net cash flows used in investing activities (10,965) (33,120) --------- --------- Cash Flows from Financing Activities: Proceeds from issuance of debt 106,508 201,259 Repayment of debt (108,453) (199,918) Proceeds from stock options exercised, net 18,950 578 --------- --------- Net cash flows provided by financing activities 17,005 1,919 --------- --------- Effect of exchange rate changes on cash and cash equivalents 26 (1,069) --------- --------- Net decrease in cash and cash equivalents (65,628) (57,398) --------- --------- Cash and cash equivalents at beginning of period 71,674 162,302 --------- --------- Cash and cash equivalents at end of period $ 6,046 $ 104,904 ========= ========= Supplemental Cash Flow Data: Stock issued to purchase business $ 93,498 $ - ========= ========= The accompanying Selected Notes to Condensed Consolidated Financial Statements are an integral part of these condensed consolidated statements. Page 5 of 27 Selected Notes to Condensed Consolidated Financial Statements Unaudited (July 3, 1999) Note A: Merger with DAS Devices, Inc. (DAS) - -------------------------------------------- On February 11, 1999, the Company completed its merger with DAS, a research and development company. The consideration exchanged was 13,051,872 shares of the Company's common stock for all of the outstanding preferred and common shares of DAS. The acquisition was accounted for as a purchase, and the acquisition price of approximately $99.7 million was allocated to assets acquired, including the fair value of in-process technology, and liabilities assumed based on their fair values. It was determined that in-process technology of $28.7 million was acquired. Since the technology has no future economic value to the Company, it was written-off during the three months ended April 3, 1999. The excess of the purchase price plus related transaction costs over the fair value of tangible and intangible assets acquired and liabilities assumed has been allocated to (1) developed technology and know-how of approximately $30.1 million, which will be amortized on a straight line basis over 3 years, the estimated period of future benefit and (2) goodwill of approximately $39.6 million (including a value of $1.6 million associated with assembled workforce), which will be amortized on a straight line basis over the estimated period of future benefit of 7 years. Concurrent with this acquisition and contingent on the merger, a private investor group purchased 4,641,089 shares of the Company's common stock in exchange for $18.75 million. Note B: Inventories - -------------------- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory costs consist of purchased materials and services, direct production labor and manufacturing overhead expense. The components of inventory are as follows (in thousands): July 3, October 3, -------- ---------- 1999 1999 ---- ---- Purchased parts and manufacturing supplies $ 1,500 $ 8,578 Work-in-process 273 2,414 Finished goods - 2,062 ---------- ---------- 1,773 13,054 ========== ========== Page 6 of 27 Note C: Writedown of Assets and Restructuring Charge - ----------------------------------------------------- The Company recorded a restructuring charge of approximately $8.4 million in the first quarter of fiscal 1998. Of this amount, approximately $2.9 million pertains to severance and related expenses at the Ireland facility and approximately $5.5 million represents the write-off of the unamortized book value of inductive thin-film equipment. The shut down of the Ireland facility was completed in March 1998 as part of a plan to consolidate foreign manufacturing operations. Approximately 300 employees were terminated at the Ireland plant. All amounts for severance, outplacement and relocation at the Ireland facility were paid during 1998. The inductive thin-film equipment, which is no longer usable to the Company, are in the process of being abandoned due to changing technology. Management separately isolated the idle equipment. Many of the products have already been disposed of, and the remaining estimated cost of disposal is expected to be approximately equal to the scrap value. The Company recorded a $4.5 million charge in the second fiscal quarter of 1999 related to the write-off of the unamortized book value of obsolete assets and the remaining book value of assets associated with the discontinuation of an in-house suspension assembly operation. The obsolete assets and the in-house suspension assembly assets, which were no longer usable to the Company, are in the process of being abandoned due to changing technology and product discontinuation. Management separately isolated the assets. The assets have not yet been disposed of; however, the estimated costs of disposal are expected to be approximately equal to scrap value. The Company recorded a $12 million charge in the third fiscal quarter of 1999 in connection with the closure of its facility in Milpitas, California and workforce reduction in its Goleta, California headquarters, which were completed in May 1999. Of this amount, approximately $2.1 million was related to severance and related expenses and $9.9 million represents the unamortized book value of the assets at the Milpitas facility. The assets were primarily equipment under capital lease, which were taken out of service before quarter-end. The closure of the Milpitas facility and the workforce reduction in the Goleta location were part of a cost reduction program that was in response to the industry softness in demand for recording heads and in part due to the Company being late to market with certain key products. Note D: Credit Facilities - -------------------------- The Company's Malaysian subsidiary has credit facility agreements with five Malaysian banks. These credit facilities allow for borrowings of up to $62.7 million of which $59.3 million was outstanding as of July 3, 1999. All the Malaysian credit facilities are callable on demand, have no termination date and are guaranteed by the Company. Credit facilities with one bank are secured by the Company's real property holdings in Malaysia and include financial covenants and certain covenants which preclude the Company from granting liens and security interests in other assets in Malaysia. Credit facilities with the four other banks are unsecured. Page 7 of 27 The Company also has a secured, asset-based revolving line of credit of up to $35.0 million from CIT Group/Business Credit, Inc. As of August 17, 1999, the Company was not in compliance with the financial covenants under this line of credit. The Company has the ability to receive a waiver through August 31, 1999. The Company expects to successfully renegotiate the terms of the covenants under this line of credit with the lender. As of July 3, 1999, the total amount available under this line of credit was fully utilized. Note E: Earnings (Loss) Per Share Computation - ---------------------------------------------- Effective in fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaces the presentation of primary income (loss) per share ("EPS") with the presentation of basic EPS. Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Loss per common share - assuming dilution is computed based on weighted average number of shares of common stock and common stock equivalents outstanding during the period and as if the Company's 7.0% Convertible Subordinated Debentures due March 15, 2006 (the "Convertible Debentures") were converted into common stock at the beginning of the period after giving retroactive effect to the elimination of interest expense, net of income tax effect, applicable to the Convertible Debentures. During a loss period, the assumed exercise of in-the-money stock options and conversion of Convertible Debentures has an antidilutive effect. As a result, these shares are not included in the weighted average shares outstanding of 41,427,335 used in the calculation of loss per common share and common share -assuming dilution at July 3, 1999. Note F: Subsequent Events - -------------------------- On July 14, 1999, the Company sold to Kennilworth Partners II LP, four million shares of its common stock for $16 million. Kennilworth also purchased from the Company a senior subordinated convertible note for $25 million. The Company received approximately $25 million after quarter-end, on July 14, 1999. The note bears interest at 14% per year commencing October 1, 2002 and will mature in July 2005, at which time the note will be payable in the principal amount of $37.8 million. The note is convertible into approximately seven million shares of common stock. The Company also redeemed $16 million principal amount of its 7% convertible subordinated debentures due 2006 at par. The Company announced that it entered into an agreement for this transaction on May 12, 1999 and the shares were issued on July 14, 1999. On July 14, 1999, the Company also announced its intention to proceed with a rights offering that will allow stockholders to purchase shares of common stock at a price discounted to the market price at the time of the offering. The rights will be transferable. Holders of the rights will have the option to subscribe for additional shares of stock not purchased by other stockholders. The Company expects to complete this transaction in its fourth fiscal quarter. Page 8 of 27 Item 2: Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations --------------------- On February 11, 1999, the Company completed its merger with DAS, a research and development company. The consideration exchanged was 13,051,872 shares of the Company's common stock for all of the outstanding preferred and common shares of DAS. The acquisition was accounted for as a purchase, and the acquisition price of approximately $99.7 million was allocated to assets acquired, including the fair value of in-process technology, and liabilities assumed based on their fair values. It was determined that in-process technology of $28.7 million was acquired. Since the technology has no future economic value to the Company, it was written-off during the three months ended April 3, 1999. The excess of the purchase price plus related transaction costs over the fair value of tangible and intangible assets acquired and liabilities assumed has been allocated to (1) developed technology and know-how of approximately $30.1 million, which will be amortized on a straight line basis over 3 years, the estimated period of future benefit and (2) goodwill of approximately $39.6 million (including a value of $1.6 million associated with assembled workforce), which will be amortized on a straight line basis over the estimated period of future benefit of 7 years. Concurrent with this acquisition and contingent on the merger, a private investor group purchased 4,641,089 shares of the Company's common stock in exchange for $18.75 million. On April 12, 1999, the Company completed its previously announced sale of its subsidiary, Magnetic Data Technologies, LLC ("MDT") to Dubilier & Company. MDT is a leading provider of outsourced post-sales services to original equipment manufacturers ("OEM's") of electronic components and systems. The Company realized a net gain from discontinued operations of approximately $25.9 million on the transaction upon receipt of the proceeds in the quarter ended July 3, 1999. On May 12, 1999, the Company embarked on a significant cost reduction program in order to realign expenses to respond to the reduced projections for revenue and cash flow from operations for the balance of calendar 1999. The change in forecast was partly due to the recent industry softness in demand for recording heads and in part due to the Company being late to market with its 4.3 gigabyte per 3.5" disk MR product. As a result, the Company reduced its California workforce by approximately 35% by closing its facility in Milpitas as well as making additional reductions at its headquarters in Goleta, California. Wafer development, which had been centered in the Milpitas facility, was consolidated into the Goleta location. The Company's results for the quarter ended July 3, 1999, included a charge of approximately $12 million in connection with the closure of the Milpitas facility and the workforce reductions in Goleta, California. Page 9 of 27 On July 14, 1999, the Company sold to Kennilworth Partners II LP, four million shares of its common stock for $16 million. Kennilworth also purchased from the Company a senior subordinated convertible note for $25 million. The Company received approximately $25 million after quarter-end, on July 14, 1999. The note bears interest at 14% per year commencing October 1, 2002 and will mature in July 2005, at which time the note will be payable in the principal amount of $37.8 million. The note is convertible into approximately seven million shares of common stock. The Company also redeemed $16 million principal amount of its 7% convertible subordinated debentures due 2006 at par. The Company announced that it entered into an agreement for this transaction on May 12, 1999 and the shares were issued on July 14, 1999. On July 14, 1999, the Company also announced its intention to proceed with a rights offering that will allow stockholders to purchase shares of common stock at a price discounted to the market price at the time of the offering. Stockholders will have the option to subscribe for additional shares of stock not purchased by other stockholders. The Company expects to complete this transaction in its fourth fiscal quarter. The Company incurred operating losses and declining revenues due to the lack of production orders during the third fiscal quarter on the 4.3 gigabyte per 3.5" disk heads and due to soft demand experienced by component suppliers in the disk drive industry. After the end of the third fiscal quarter, the Company received initial production orders for delivery of 4.3 gigabyte per 3.5" disk heads in the fourth fiscal quarter and is currently ramping production while completing the final qualification requirements. Additionally, the Company is proceeding with its GMR qualifications at capacities up to 8.6 gigabytes per 3.5" disk and production is anticipated during the fourth quarter of calendar year 1999. The Company's ability to fund its operating and capital requirements for fiscal 1999 is heavily dependent on the Company's ability to receive qualification and begin volume production of the Company's magnetoresistive ("MR") and giant magnetoresistive ("GMR") head products on a timely basis. After the end of the third fiscal quarter, the Company received initial production orders for delivery of 4.3 gigabyte per 3.5" disk heads in the fourth fiscal quarter and is currently ramping production while completing the final qualification requirements. The Company is also attempting to raise capital, which is required immediately to fund current operating activities, and the Company will be required to raise significant additional capital in the near term to fund the anticipated magnetoresistive head production ramp up and related working capital requirements. If the Company is unable to achieve magnetoresistive head production shipments during the fourth quarter of fiscal 1999 or raise significant capital in the near term, there will be a material adverse effect on the Company's financial condition, competitive position and ability to continue as a going concern. Due to the significant uncertainties described above, the Company's auditors have re-issued their report on the Company's October 3, 1998 financial statements. The re-issued report, dated June 1, 1999, includes an uncertainty paragraph regarding the Company's ability to continue as a going concern. The Company's auditors have also advised management that based on current conditions, it is likely that this going concern uncertainty will also continue with respect to the Company's fiscal 1999 financial statements. Page 10 of 27 Three Months Ended July 3, 1999 - -------------------------------- Net Sales. Net sales of $5.3 million in the third quarter of fiscal 1999 decreased 84.2% from net sales of $33.6 million in the third quarter of fiscal 1998. Due to production process problems with new MR products, the Company has been unable to maintain sales volumes experienced with inductive thin film products during the same period in the prior year. Gross Deficit. As a percentage of net sales, gross deficit was negative 330.8% and negative 5.8%, for the third quarter of fiscal 1999 and the third quarter of fiscal 1998, respectively. The increase in gross deficit in the third quarter of fiscal 1999 as compared to the same quarter in the prior fiscal year was due to the reasons discussed under "Net Sales". Research and Development. Research and development ("R&D") expenses as a percentage of net sales were 472% and 90.9% for the third quarter of fiscal 1999 and the third quarter of fiscal 1998, respectively. Expenses in dollars in the third quarter of fiscal 1999 of $25.1 million decreased $5.4 million from $30.5 million in the third quarter of fiscal 1998. The Company has been focusing the majority of its technical resources on its new production program qualifications utilizing MR head technology and on development of GMR head technology. The reduction in R&D expenses reflects the impact of the U.S. headcount reductions over the past three quarters. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.9 million in the third quarter of fiscal 1999 an increase of $0.4 million from $1.5 million in the third quarter of fiscal 1998. Amortization. Amortization of the excess of the purchase price plus related transaction costs over the fair value of the tangible and intangible assets acquired and liabilities assumed through the merger with DAS were $4.2 million for the third quarter of fiscal 1999. Interest Income and Expense. Interest income of $.2 million in the third quarter of fiscal 1999 decreased $1.1 million compared to interest income of $1.3 million the third quarter of fiscal 1998 due to lower average cash balances. Interest expense of $3.4 million in the third quarter of fiscal 1999 increased by $.1 million compared to $3.3 million in the third quarter of fiscal 1998 due to varying interest rates and higher average debt balances. Other Income and Expense. Other expense was negligible for the third quarter of fiscal 1999 compared to other expense of $.3 million in the third quarter of fiscal 1998. The balances represent primarily foreign currency exchange gains and losses. The Company has manufacturing operations in Asia that experienced volatility in exchange rates during fiscal 1998. Discontinued Operations, net. Discontinued operations, net reflects the $25.9 million gain recorded in the third quarter of fiscal 1999 due to the sale of the Company's subsidiary, Magnetic Data Technologies, LLC. Page 11 of 27 Nine Months Ended July 3, 1999 - ------------------------------ Net Sales. Net sales of $36.8 million in the first nine months of fiscal 1999 decreased 77.9% from net sales of $166.8 million in the first nine months of fiscal 1998 as inductive thin film products reach end of life. Due to production process problems with new MR products, the Company has been unable to maintain sales volume experienced with inductive thin film products during the same period in the prior year. Gross Deficit. As a percentage of net sales, gross deficit was negative 116.1% and negative 3.2%, for the first nine months of fiscal 1999 and the first nine months of fiscal 1998, respectively. The increase in gross deficit in the first nine months of fiscal 1999 as compared to the same period in the prior fiscal year was due to the reasons discussed under "Net Sales". Research and Development. Research and development ("R&D") expenses as a percentage of net sales were 235.1% and 49.3% for the first nine months of fiscal 1999 and the first nine months of fiscal 1998, respectively. Expenses in dollars in the first nine months of fiscal 1999 of $86.6 million increased $4.3 million from $82.3 million in the first nine months of fiscal 1998. The Company has been focusing the majority of its technical resources on its new production program qualifications utilizing MR technology and on development of GMR technology. As a result, there continues to be an increase in R&D expenses as the Company continues its transition from products with inductive thin film technology to products with MR and GMR technology. Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of net sales were 14.4% and 3.0% for the first nine months of fiscal 1999 and the first nine months of fiscal 1998, respectively. The percentage increase was due to lower net sales. Expenses in dollars of $5.3 million in the first nine months of fiscal 1999 increased $0.2 million from $5.1 million in the first nine months of fiscal 1998. Amortization. Amortization of the excess of the purchase price plus related transaction costs over the fair value of the tangible and intangible assets acquired and liabilities assumed through the merger with DAS were $6.3 million for the first nine months of fiscal 1999. Purchased In-Process Technology. The purchase of DAS resulted in the write-off of purchased in-process technology of $28.7 million in the first nine months of fiscal 1999. The cost represents technology that has not reached technological feasibility and has no alternative future use. Interest Income and Expense. Interest income of $1.1 million in the first nine months of fiscal 1999 decreased $3.7 million compared to interest income of $4.8 million the first nine months of fiscal 1998 due to lower average cash balances. Interest expense of $10.3 million in the first nine months of 1999 increased by $.7 million compared to $9.6 million in the first nine months of fiscal 1998 due to varying interest rates and higher average debt balances. Other Income and Expense. Other expense was a loss of $1.2 million for the first nine months of fiscal 1999 compared to other expense of $1.1 million in the first nine months of fiscal 1998. The balances represent primarily foreign Page 12 of 27 currency exchange gains and losses. The Company has manufacturing operations in Asia that experienced volatility in exchange rates during fiscal 1998 which continued into the first fiscal quarter of 1999. Discontinued Operations, net. Discontinued operations, net reflects the after tax-gain of $25.9 million recorded in the third quarter of fiscal 1999 due to the sale of the Company's subsidiary, Magnetic Data Technologies, LLC. Purchased In-Process Technology Methodology - ------------------------------------------- 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. 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 the Company's 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 forecasted 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 the Company'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. 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 was 35 percent. In the selection of the appropriate discount rate, Page 13 of 27 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. The Company believed that the foregoing assumptions used in the DAS in-process R&D analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. The Company currently believes that actual product introductions may be delayed by one or more quarters compared to earlier estimates. Because the Company does not account for expenses by product, it is not possible to determine the actual expenses associated with each acquired technology. However, the Company believes that expenses incurred to date associated with the development and integration of the in-process R&D projects are approximately consistent with the Company's previous estimates. Liquidity and Capital Resources - ------------------------------- At July 3, 1999, the Company's cash and cash equivalents decreased to $6.0 million from $71.7 million at October 3, 1998. Total debt, including notes payable, was $176.3 million, a decrease of $.5 million from the balance outstanding at October 3, 1998. Total debt included $115.0 million of 7.0% Convertible Subordinated Debentures, due 2006. Also included in total debt at July 3, 1999, was $59.3 million in Malaysian bank borrowings. All the Malaysian credit facilities are callable on demand, have no termination date and are guaranteed by the Company. Credit facilities with one bank, which have been in place since June 1990, are secured by the Company's real property holdings in Malaysia and include certain financial covenants and certain covenants which preclude the Company from granting liens and security interests in other assets in Malaysia. Credit facilities with four other banks, established in fiscal 1997, are unsecured. No additional borrowings were available under the existing facilities at July 3, 1999. Should all or any significant portion of the Malaysian credit facilities become unavailable for any reason, the Company would need to pursue alternative financing sources. The Company was in compliance with all of its covenants at July 3, 1999. The Company also has a secured, asset-based revolving line of credit of up to $35.0 million from CIT Group/Business Credit, Inc. As of August 17, 1999, the Company was not in compliance with the financial covenants under this line of credit. The Company has the ability to receive a waiver through August 31, 1999. The Company expects to successfully renegotiate the terms of the covenants under this line of credit with the lender. As of July 3, 1999, the total amount available under this line of credit was fully utilized. Page 14 of 27 The Company has made significant reductions in its workforce during fiscal 1999 in response to the wind down of its inductive thin film product, being late to market with its 4.3 gigabyte per 3.5" disk MR product and industry softness in demand for recording heads. The Company had 3,000 employees as of July 3, 1999, which is a reduction of approximately 1,700 from the end of its first fiscal quarter. The Company's capital expenditure plan for fiscal 1999 is approximately $20 million, which includes equipment to be obtained through operating leases. In comparison, capital expenditures for fiscal 1998 were $79.5 million, which included equipment obtained through operating leases. Capital equipment expenditures for the first nine months of 1999 were $10.8 million. In addition, the Company leased $3.3 million of production equipment through operating leases. Purchase commitments were approximately $3.7 million at July 3, 1999. During the third quarter of fiscal 1999, the Company received proceeds and realized a gain of approximately $25.9 million from the completion of the sale of its MDT subsidiary. After quarter-end, the Company received approximately $25 million in exchange for a convertible note to Kennilworth. In addition, the Company is seeking to arrange additional private financing and has announced a rights offering. The Company believes these actions will enable it to fund the transition to MR and GMR production. Future revenues, profitability and cash flows will depend upon the Company's ability to achieve qualification status with its customers, achievement of satisfactory production yields and successful execution of planned production ramps on its MR and GMR products. While the Company is devoting significant engineering and manufacturing resources to these efforts, there can be no assurance that the Company will realize satisfactory product and process development results. To the extent that the Company is unable to do so, there would be a continued material adverse effect on the Company's operating results and liquidity. This may require the Company to either obtain additional capital from external sources or to curtail its capital, research and development and working capital expenditures. Such curtailment would have a material adverse affect on the Company's future operations and competitive position and ability to continue as a going concern. The Company continues to work with its customers to qualify on two MR head programs. After the end of the third fiscal quarter, the Company received initial production orders for delivery of 4.3 gigabyte per 3.5" disk heads in the fourth fiscal quarter and is currently ramping production while completing the final qualification requirements. The Company's liquidity and ability to fund its operating and capital expenditure requirements during fiscal 1999 are heavily dependent on its ability to receive qualification and begin volume production of the Company's MR and GMR head products on a timely basis. Although the Company has completed its plant capacity expansion and conversion of the Company's existing fabrication facilities to enable manufacturing of MR and GMR heads and is devoting substantial engineering and manufacturing resources to those efforts, there can be no assurances that the Company will receive qualification and achieve planned production levels on a timely basis. Additional fourth quarter fiscal 1999 planned financing arrangements are required in order to fund the Company through MR and GMR head production ramp up in the second half of calendar 1999. If the Company is unable to achieve any of the factors on which the second half of calendar 1999 liquidity depends on a timely basis and is unable to obtain adequate alternative financing, there will be a material adverse effect on the Company's financial condition, competitive position and ability to continue as a going concern. Page 15 of 27 The Company's effort to address Year 2000 issues began in 1997. In fiscal 1998, the Company spent $7.5 million to complete the implementation of a worldwide management information system that addresses the Year 2000 issue and also provides fully integrated manufacturing and financial capabilities. In addressing the issues, the Company has employed a five-step process consisting of 1) conducting a company-wide inventory, 2) assessing Year 2000 compliance, 3) remediation of non-compliant hardware and software, 4) testing remediation of hardware and software and 5) certifying Year 2000 compliance. Personnel from operations and from functional disciplines, as well as information technology professionals, are involved in the process. Inventory and assessment activities are estimated at approximately 85 percent complete. This data is continuously updated as new information becomes available and the Company expects this to continue. Overall remediation efforts are estimated at approximately 60 percent complete. Management believes that the remaining remediation efforts will be completed by September 1999. Based on the results of testing performed to date, the Company is confident that it is appropriately addressing the Year 2000 issues. Critical systems supplied by outside vendors have undergone testing not only by us, but other customers of the vendors as well. Communication with customers and suppliers to determine the extent of their Year 2000 efforts is an integral part of the program. The Company is tracking the progress of its key suppliers toward their Year 2000 compliance. Sumitomo Corporation and Hutchinson Technology, Incorporated are critical suppliers of components. These suppliers have indicated that they will complete their Year 2000 compliance in the third calendar quarter of 1999. Sumitomo supplies wafer substrates for production and Hutchinson Technology, Incorporated supplies suspension assemblies. The Company has no means of ensuring that the Suppliers will be Year 2000 compliant. Costs for Year 2000 efforts are not being accumulated separately. Much of the cost is being accounted for as part of normal operating budgets. Overall, the costs are not expected to have significant effect on the Company's financial condition or results of operations. The Company believes it will not have significant exposure to Year 2000 issues and that the risk to its operations and financial condition is not significant. While the Company currently expects that the Year 2000 issues will not pose significant operational problems, delays in the implementation of changes in or replacements of information systems or a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have a material adverse effect on the Company's business, financial condition and results of operations. As a contingency plan related to information systems, the Company is in the process of developing internal operating procedures that would enable departments to function for a period of time until the primary system could be restored to operations. The Company anticipates that the worst case scenario would be the inability of water and power utilities and/or the inability of our key suppliers to deliver their products. A contingency plan is being developed to place a limited amount of finished goods as well as key supplier components on hand to enable the Company to continue its revenue generation, if this were to occur. The Company expects its contingency plan to be completed by September 30, 1999. Page 16 of 27 Certain Additional Business Factors - ----------------------------------- Technology Transitions The magnetic recording head industry has been characterized by rapidly changing technology, short product life cycles and price erosion, as recently experienced with the faster acceleration from inductive thin film to MR disk head technology. The Company estimates that the industry product life cycle is currently running as short as 9 to 12 months. The demand for greater data storage capacity requires disk drive and disk head manufacturers to continue to build greater performance into their respective products. There is no assurance that the Company's products will achieve such performance or that the Company will continue to qualify as a supplier for disk drive manufacturers' programs. During fiscal 1996 and 1997, the Company experienced increased customer demand and significant revenue growth and profitability. This success was due primarily to continued timely production ramps on a number of inductive thin film programs and continued successful transition to advanced inductive thin film disk head products as a result of achievement of profitable yields. During fiscal 1998, the Company experienced significant losses as it attempted to transition from inductive thin film to MR disk head technology. Fiscal 1999 will be another technology transition year for the Company as it works to achieve both MR and GMR qualifications. There can be no assurance that the Company will qualify for disk drive manufacturing programs or that it will not experience manufacturing and product quality problems in the future. The inability of the Company to develop and qualify new products on a timely basis and to manufacture them in sufficient quantities that compete effectively on the basis of price and performance would have a material adverse affect on the Company's future operating results. Fluctuations in Quarterly and Annual Operating Results The Company's operating results have fluctuated and may continue to fluctuate from quarter to quarter and year to year. The Company's sales are generally made pursuant to individual purchase orders and customer-specific materials are ordered on the basis of such purchase orders. As customer programs reach end of life, the Company may have to write-down inventory and equipment. In addition, the Company must qualify on future programs to sell its products. The Company, on occasion, and as recently as the first quarter of fiscal 1998, experienced cancellations and rescheduling of orders and reductions in quantities ordered as customer requirements changed. Cancellations, rescheduling and reductions of orders resulted in under utilization of production capacity and had a material adverse effect on the Company's operating results for fiscal 1998. Fiscal 1999 operating results will continue to be impacted as the Company has reached end of life on its inductive thin film products and is now working with its customers to qualify on their MR and GMR disk head technology products. The Company's operating results have in the past been and likely will in the future be adversely affected during periods when production capacity is underutilized. Dependence on Cyclical Hard Disk Drive Industry Personal computers and high-end computer applications such as network servers (Internet and Intranet), workstations and mainframes are driving the demand for greater storage capacity and performance. In addition, the market growth of laptop, notebook and sub-notebook computers has increased the demand for smaller form factor disk drives. As a result, the Company experienced significant customer demand for its advanced inductive thin film products during Page 17 of 27 fiscal 1997. However, due to continued industry trends towards even greater storage capacity and performance, customer demand began to shift from inductive thin film product technology to MR technology. By the end of fiscal 1998, the Company's customers had discontinued development of new products based on inductive thin film disk head technology. MR and GMR disk heads, which generally permit greater storage capacities per disk and provide higher data transfer rates than inductive thin film disk heads, now represent the largest segments of the recording head industry. Demand for inductive thin film disk heads peaked during fiscal 1997. Fiscal 1998 was a year of significant technology transition, as the Company's customer demand went from predominantly inductive thin film to MR technology. Fiscal 1999 will see this trend continue as the Company's inductive thin film has reached end of life in the third fiscal quarter and the market is transitioning from MR to GMR products. The demand for recording heads in 1999 and 2000 is expected to be significantly lower than the demand for hard disk drives due to the decrease in the average number of heads and disks per drive. In recent years, the disk drive industry has experienced significant growth and the Company has expanded its capacity during the last two fiscal years to meet that growth. However, the disk drive industry is cyclical and historically has experienced periods of oversupply and reduced production levels, resulting in significantly reduced demand for disk heads, as well as pricing pressures. The effect of these cycles on suppliers, including the Company, has been magnified by hard disk drive manufacturers' practice of ordering components, including disk heads, in excess of their needs during periods of rapid growth, which increases the severity of the drop in the demand for components during periods of reduced growth or contraction. The disk drive industry entered into an oversupply condition in early 1998 and, as a result, head suppliers, including the Company, are experiencing competitive pricing pressures for their inductive thin film and MR heads. A continued decline in demand for hard disk drives, as experienced by the industry during fiscal 1998, had a material adverse effect on the Company's operating results. A continued decline in demand for older products and the failure to bring new products to the market would have a material adverse effect on the Company's future operating results. Significant Capital Needs The recording disk head industry is capital intensive and requires significant expenditures for research and development in order to develop and take advantage of technological improvements and new technologies. The Company believes that, in order to achieve its objectives, it will need significant additional resources over the next several years for capital expenditures, working capital and research and development. Capital expenditures for the nine months ended July 3, 1999 were $10.8 million. In addition, the Company leased $3.3 million of production equipment through operating leases during the same period. During fiscal 1999, the Company plans to spend approximately $20.0 million on capital expenditures, which includes operating lease commitments. The Company believes that it will be able to fund future expenditures from a combination of existing cash balances, existing credit facilities, and equipment lease financing arrangements along with the $25.0 million it received with the completion of the transaction with Kennilworth Partners II, LLP on July 14, 1999. In addition, the Company is seeking to arrange additional private financing and has announced a rights offering which will provide sufficient funding to support the transition to GMR production. The Company may need Page 18 of 27 additional sources of capital to meet requirements in future years. There is no assurance that such additional funds will be available to the Company or, if available, upon terms and conditions acceptable to the Company. If the Company were unable to obtain sufficient capital, it would need to curtail its operating and capital expenditures, which could have a material adverse affect on the Company's future operating results. Short-Term Borrowings At July 3, 1999, the Company had approximately $59.3 million of short-term borrowings outstanding in floating rate demand loan facilities from banks in Malaysia, where it has substantial manufacturing operations. The facilities are callable on demand, have no termination date and are guaranteed by the Company. The loan facilities are used for the purchase of manufacturing equipment and for working capital purposes. While the Company has no reason to believe the loan facilities will be called, there is no assurance that the banks will continue to make this credit available. Concentration of Revenues The disk head industry is intensely competitive and largely dependent on sales to a limited number of major disk drive manufacturers. The Company had one customer, Western Digital, that accounted for 72% of the Company's net sales in fiscal 1998. Samsung Electronics accounted for 27% of net sales in fiscal 1998. The Company's ability to obtain new customers depends on its ability to anticipate technological changes, develop products to meet individualized customer requirements and to achieve delivery of products that meet customer specifications at competitive prices. In addition, the disk drive industry is also intensely competitive and disk drive manufacturers may quickly lose market share as a result of successful deployment of new technologies by their competitors or various other factors. A significant reduction in orders, the loss of a major customer or the inability to increase the customer base, which could occur for any variety of reasons, could have a material adverse effect on the Company's operating results. The Company believes that disk drive manufacturers that are not vertically integrated represent significant sales opportunities for the Company's disk head products. Moreover, the Company believes that certain vertically integrated companies will continue to rely on independent suppliers of disk heads as alternative sources of supply for individual disk drive programs. Competition The Company competes with other independent recording head suppliers, as well as disk drive manufacturers that produce magnetic recording heads used in their own products. Fujitsu Ltd., Hitachi Ltd., IBM and Seagate produce some or all inductive thin film, MR, and/or GMR heads for their own use. All these companies have significantly greater financial, technical and marketing resources than the Company. IBM also makes its recording head products available in the original equipment manufacturers ("OEM") market to competing drive manufacturers, in direct competition with the Company. Read-Rite Corporation ("Read-Rite") has had substantially greater sales of disk head products than the Company and has been the largest domestic competitor among independent head manufacturers. Read-Rite and Sumitomo Metal Industries, Ltd. ("SMI") have a joint venture in Japan to make MR and/or GMR wafers. Another domestic supplier of MR and GMR recording heads is Headway Technologies. Page 19 of 27 Several large Japanese companies, all with considerably more resources than the Company, compete in the independent head market. Alps Electric Corporation, Ltd., TDK Corporation (and its SAE Magnetics, Ltd. subsidiary) and Yamaha Corporation continue to aggressively develop and market recording heads. Consolidation of the Disk Drive Industry Consolidation of the disk drive industry may reduce the number of disk drive programs requiring the Company's products and may increase business risks for the Company due to the concentration of its customers. As a result, there is no assurance that further vertical integration of disk drive and system companies and consolidation within the disk drive industry will not have a material adverse effect on the Company's future operating results. Dependence on Foreign Operations The Company conducts substantially all of its slider production, assembly and test operations in its facilities in Korea, Malaysia and the People's Republic of China ("PRC"). In addition, the Company has contractual relationships with unaffiliated parties who conduct manufacturing and assembly operations for the Company in Malaysia and the PRC. The Company's operations in Korea have, from time to time in recent years, been affected by labor disruptions and slow downs. The Company's production facility in Malaysia faced potential labor shortages during fiscal 1996 and may face potential labor shortages in the future, as other disk drive and component manufacturers expand their production facilities in Malaysia. In addition to risks of labor disruption, civil unrest and political instability, the Company's foreign operations may be subject to delays in obtaining governmental permits and approvals, currency exchange fluctuations, currency and trade restrictions and transportation problems. Intellectual Property The Company regards elements of its manufacturing processes, product designs, and equipment as proprietary and seeks to protect its proprietary rights through a combination of employee and third party non-disclosure agreements, internal procedures and patent protection. The Company has been issued a number of United States Patents and has additional patent applications pending. There is no assurance that patents will be issued with respect to such applications or that any patents issued to the Company will protect the Company's competitive position. The Company believes that its success depends on the innovative skills and technological competence of its employees and upon proper protection of its intellectual properties. The Company has, from time to time, been notified of claims that it may be infringing patents owned by others. If it appears necessary or desirable, the Company may seek licenses under patents that it is allegedly infringing. Although patent holders commonly offer such licenses, no assurance can be given that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a key patent license from a third party could cause the Company to incur substantial liabilities and/or to suspend the manufacture of the products utilizing the patented invention. Page 20 of 27 Volatility of Stock Price The market price of the Company's Common Stock has been volatile, with daily closing market prices ranging from $4.00 to $33.25 per share during fiscal 1998 and ranging from $2.56 to $9.19 during the first nine months of fiscal 1999. The trading price of the Company's Common Stock has fluctuated in response to quarter-to-quarter operating results, industry conditions, awards of orders to the Company or its competitors, new product or product development announcements by the Company or its competitors, general market and economic conditions and other events or factors. In addition, the volatility of the stock markets in recent years has caused wide fluctuations in trading prices of stocks of technology companies independent of their individual operating results. The market price of the Company's Common Stock at any given time may be adversely affected by factors independent of the Company's operating results. The volatility of the stock price may reduce the ability of the Company to raise additional operating funds through equity offerings. Forward-Looking Information When used in Management's Discussion and Analysis, the words "believe", "anticipate", "expect" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements speak only as of the date hereof. All of the forward looking statements are based on estimates and assumptions made by management of the Company, which, although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such estimates. Such statements are subject to certain risks and uncertainties inherent in the Company's business that could cause actual results to differ materially from those projected. These factors include, but are not limited to: successful transition to volume production of MR and GMR disk head products with profitable yields; the limited number of customers and customer changes in short range and long range plans; competitive pricing pressures; changes in business conditions affecting the Company's financial position or results of operations which significantly increase the Company's working capital needs; the Company's inability to generate or obtain sufficient capital to fund its working capital needs; the Company's ability to control inventory levels; domestic and international competition in the Company's product areas; risks related to international transactions; Y2K issues; and general economic risks and uncertainties. Page 21 of 27 PART ll. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 11 Statement re computation of per share information. 27 Financial Data Schedules (b) Reports on Form 8-K. (i) On April 26, 1999, the Company filed a Current Report on Form 8-K dated April 9, 1999 reporting under item 5 that Magnetic Data Technologies, LLC, a Delaware limited liability company ("MDT"), completed a recapitalization in which, among other things, (i) MDT redeemed 220,458 Class A membership units of MDT from Applied Magnetics Corporation ("Applied") and 20,562,542 from DDCI, LLC, a Delaware limited liability company ("DDCI"), and (ii) MDT Holdings, LLC, a Delaware limited liability company (the "Buyer"), purchased 177,372 Class A membership units of MDT from Applied and 16,543,798 from DDCI. As a result of the recapitalization, the Buyer owns 89.3% of the outstanding Class A membership units of MDT and DDCI owns 10.17%. MDT is a leading provider of outsourced post-sales services to original equipment manufacturers of electronic components and systems. DDCI is a partially-owned subsidiary of Applied. Pursuant to the terms of DDCI's amended and restated operating agreement, Applied realized a gain of approximately $26 million on this transaction, consisting of $397,830 received from the redemption or purchase of membership units of MDT held directly by Applied and $25,543,620 received from DDCI. In addition to amounts already received by Applied, approximately $650,000 has been reserved for certain post-closing adjustments which may result in an increase or decrease in the gain realized by Applied. (ii) On June 2, 1999, the Company filed a Current Report on Form 8-K dated May 10, 1999 reporting under item 5 that on May 12, 1999, Applied Magnetics Corporation (the "Company") announced that it had entered into an Exchange Agreement, dated May 10, 1999, by and between the Company and Kennilworth Partners II, LP (the "Exchange Agreement"), pursuant to which through a private placement the Company will raise $25 million in cash through the issuance of a new convertible Page 22 of 27 preferred stock (the "Preferred Stock"). Under the terms of the Exchange Agreement, the Company will exchange 6,000,000 shares of newly-issued common stock for $24 million principal amount of the Company's 7% Convertible Subordinated Debentures (the "Debentures"). The Company will then retire the Debentures. The Preferred Stock will carry a 14% dividend rate, payable initially in shares, and will be convertible into common shares at a fixed price of $5.375 per share. The Company also announced that it embarked upon a significant cost reduction program in order to realign expenses in response to reduced projections in revenue and cash flow from operations for the balance of the 1999 calendar year. Page 23 of 27 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLIED MAGNETICS CORPORATION Dated: July 8, 1999 /s/ Craig D. Crisman ---------------------- Craig D. Crisman Chairman of the Board and Chief Executive Officer (Principal Financial Officer) Dated: July 8, 1999 /s/ Peter T. Altavilla ---------------------- Peter T. Altavilla Corporate Controller (Principal Accounting Officer) Page 24 of 27 EXHIBIT INDEX Exhibit No. Description Page - ------------------------------------------------------------------------------ 11 Statement re computation of per share information. 26 27 Financial Data Schedule 27 Page 25 of 27 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share data)
For the three months ended For the nine months ended July 3, July 4, July 3, July 4, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Loss Per Share: Loss from continuing operations $ (63,982) $ (35,842) $(197,066) $(107,522) Discontinued operations, net 25,941 -- 25,941 -- --------- --------- --------- --------- Net loss $ (38,041) $ (35,842) $(171,125) $(107,522) ========= ========= ========= ========= Common shares outstanding 41,427 23,968 33,378 23,917 ========= ========= ========= ========= Loss per common share: Loss from continuing operations per common share $ (1.55) $ (1.50) $ (5.91) $($4.50) Discontinued operations, net 0.63 -- 0.78 -- --------- --------- --------- --------- Loss per common share $ (0.92) $ (1.50) $ (5.13) $ (4.50) ========= ========= ========= ========= Loss Per Common Share-Assuming Dilution: Net loss before adjustment $ (38,041) $ (35,842) $(171,125) $(107,522) Add back subordinated debentures interest Add back subordinated debentures amortization Less tax impact --------- --------- --------- --------- Net loss as adjusted $ (38,041) $ (35,842) $(171,125) $(107,522) ========= ========= ========= ========= Shares Weighted average common shares outstanding 41,427 23,968 33,378 23,917 Dilutive effect of stock options Assuming conversion of convertible subordinated debentures --------- --------- --------- --------- Common shares-assuming dilution 41,427 23,968 33,378 23,917 ========= ========= ========= ========= Loss per common share assuming dilution: $ (0.92) $ (1.50) $ (5.13) $ (4.50) ========= ========= ========= =========
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Loss per common share -assuming dilution is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period and as if the Company's Convertible Subordinated Debentures ("Convertible Debentures") were converted into common stock at the beginning of the period after giving retroactive effect to the elimination of interest expense, net of income tax effect, applicable to the Convertible Debentures. Common shares equivalents were not considered as they would be anti-dilutive and had no impact on earnings per share for the periods presented. Page 26 of 27 EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of July 3, 1999 and the Consolidated Statement of Operations for the nine months ended July 3,1999 and is qualified in its entirety by reference to such financial statements. 9-MOS OCT-2-1999 JUL-3-1999 6,046 0 1,223 0 1,773 20,870 365,153 (209,310) 254,586 109,112 0 0 0 4,156 23,127 254,586 36,839 36,839 79,614 79,614 143,345 0 10,306 (170,601) 514 0 0 0 0 (171,125) (5.13) (5.13)
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