-----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, WhoN3lmmEcoYUNkOKyWuIIQQZ5vIKoayG5BYvob/FNcGspocn2TuBhR+17u8lu+Y 83WC2hym9CvbUQovQ65eBw== 0000898430-95-002698.txt : 19951222 0000898430-95-002698.hdr.sgml : 19951222 ACCESSION NUMBER: 0000898430-95-002698 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951221 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MAGNETICS CORP CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06635 FILM NUMBER: 95603434 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-K 1 FORM 10-K FOR FISCAL YEAR END 09/30/95 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 30, 1995 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________ to ______________ Commission File No. 1-6635 APPLIED MAGNETICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1950506 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 75 ROBIN HILL ROAD, GOLETA, 93117 CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 683-5353 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH Common Stock, $.10 par value REGISTERED New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE (TITLE OF CLASS) 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 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OR REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR IN ANY AMENDMENT TO THIS FORM 10-K. [_] THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES* OF REGISTRANT WAS $320,730,894 AS OF DECEMBER 1, 1995. COMMON STOCK (PAR VALUE $.10) 22,295,878 * Without acknowledging that any person other than Harold R. Frank is an affiliate, all directors and executive officers of registrant have been included as affiliates solely for the purposes of this computation. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 1996 ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED PURSUANT TO REGULATION 14A WITHIN 120 DAYS FOLLOWING THE REGISTRANT'S FISCAL YEAR ENDED SEPTEMBER 30, 1995, ARE INCORPORATED BY REFERENCE INTO PART III ON THIS FORM 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Applied Magnetics Corporation (the "Company" or "Applied Magnetics") was incorporated in California in 1957 and was reincorporated in Delaware in 1987. The Company presently operates in one industry segment, namely, components for the computer peripheral industry with one major product group, recording heads for rigid disk drives. Applied Magnetics is a leading independent supplier of magnetic recording heads and of head stack assemblies for rigid disk drives. The Company supplies advanced inductive thin film ("thin film") disk head products, magnetoresistive ("MR") disk head products and ferrite ("ferrite" or "MIG") disk head products. Prior to December 10, 1994, the Company also manufactured and sold recording heads for tape drives which are used in the computer peripheral industry. On December 10, 1994, the Company sold its Tape Head business unit to Seagate Technology, Inc. ("Seagate") for $21.5 million, pursuant to a Stock Purchase Agreement (the "Seagate Agreement"). The Company received $14.0 million at the closing date of the transaction, and during fiscal 1995, received $5.9 million of $6.5 million held in escrow until the Company completed certain performance obligations to supply tape related products and services to Seagate. An additional $1.0 million was held in escrow as a standard hold-back, for one year, to indemnify the buyer for any claims relating to the representations and warranties made by the Company. It is anticipated that the majority of the remaining obligations will be completed by the end of the first quarter of fiscal 1996. Except for those arrangements to provide tape-related products and services to Seagate, the Company is no longer engaged in the design, development, manufacture and sale of recording heads for tape drives. Performance improvements in microprocessors, continuing proliferation of powerful operating systems and applications software, image intensive applications, increased home personal computer use, network connections, on- line services and the Internet have resulted in increasing demand for greater data storage capacity and performance in smaller form factor disk drives. In addition, the market growth of notebook and sub-notebook computers has increased demand for smaller form factor disk drives. Due to these trends, thin film disk heads, which generally permit greater storage capacities per disk and provide higher data transfer rates than ferrite disk heads, represent one of the fastest growing segments of the recording head industry. The Company has focused its long-range growth strategy on thin film and MR disk head technologies and believes that MR disk heads, which afford greater recording densities and other performance advantages as compared to thin film heads, represent the next important magnetic recording head technology. The Company believes that, overall, the market for ferrite disk heads peaked in 1995. However, advances in ferrite disk head technology may permit storage capacities per disk to approach those achieved with thin film disk heads. As a result, for certain disk drive applications, the Company's advanced ferrite disk heads have offered the required performance while providing cost advantages over thin film disk heads. During fiscal 1995, market conditions in the disk drive industry served by the Company were characterized by continued reduction of product life cycles and intense competition. The industry product life cycle is currently running approximately 12 to 18 months. Demand for hard disk drives exceeded prior forecasts for a substantial portion of the year. Most drive manufacturers experienced some shortages of key components including recording heads. The Company was well positioned and qualified on several key volume programs that enabled the Company to experience rapid growth in its thin film unit shipments. During fiscal 1994, due to lower sales volume and significant production and quality problems, the Company experienced major operating losses and financial difficulties, including negative cash flows and significant limitations on cash and working capital during the year ended September 30, 1994. The Company took a number of actions 1 to reverse these difficulties, improve its cash and working capital position, reduce operating losses and return to profitability. In August 1994, the Company engaged the consulting firm of Grisanti, Galef & Goldress, Inc. ("GG&G") to provide crisis management assistance to the Company. Mr. Craig D. Crisman, a partner in GG&G, was appointed as the Company's Chief Executive Officer. During fiscal 1995, the Company implemented a significant cost reduction program that included reduction in employment, improved management of capital expenditures, consolidation of manufacturing activities and sales of excess properties and assets. The implementation of aggressive cash management practices along with the Company's sale of its Tape Head business unit to Seagate in December 1994, have, together with other cost reductions, improved the Company's cash and working capital resources. The engagement between the Company and GG&G was successfully completed in July 1995. Mr. Crisman left his position with GG&G and signed a long term employment agreement with the Company as Chairman and Chief Executive Officer. INDUSTRY OVERVIEW Rigid disk drives (hard disk drives) are the predominant high capacity data storage device used in all classes of computers. Rigid disk drives typically include one to ten disks onto and from which data is recorded and retrieved by two to twenty recording heads. These heads are positioned by an actuator assembly to fly within three micro inches, or less, on one or both sides of each disk. The head (or "slider") attached to a suspension assembly comprises a head gimbal assembly ("HGA"). Multiple HGAs, assembled together with other components, comprise an actuator, or head stack assembly ("HSA"). The Company supplies both HGAs and HSAs to disk drive manufacturers. Disk drive manufacturers are constantly developing higher capacity products. Head suppliers, such as the Company, work with the drive manufacturers to develop customized HGAs and HSAs for each new drive program. Head suppliers seek to have their products "designed-in" for a particular drive program, thus becoming a primary supplier. Achieving a "primary supplier" status usually offers a competitive advantage, manifested as higher internal yields, compared to other head suppliers. The Company increased the number of "primary supplier" programs during fiscal 1995, compared to fiscal 1994. The disk head industry continues to be highly competitive. Achieving mature, mass production status on newer technology products as a primary supplier will be required in order for the Company to continue the revenue and shipment volume growth rate experienced in fiscal 1995. The disk drive industry is cyclical and has been characterized by periods of intense product demand requiring high production levels followed by periods of oversupply, order cancellations, pricing pressure and reduced production levels. During periods of high demand, the Company has expanded production facilities but at times has been unable to expand facilities and hire and train production personnel rapidly enough to meet the demand for its products. Conversely, in periods of lower demand, the Company has had excess production capacity and has experienced gross margin declines. TECHNOLOGY Magnetic disk heads are electromechanical devices that record ("write") data onto and retrieve ("read") data from the magnetic layers of digital data storage disks. The principal elements of an inductive magnetic recording head are a magnetic core, which is interrupted by a non-magnetic gap, and an electrically conducting coil wrapped or deposited in turns around the core. To write data, a current is passed through the coil, thereby inducing a magnetic field in the core. Since the core is interrupted by a non-magnetic gap, the magnetic field must "fringe" out from the gap, and in doing so, it magnetizes a segment of the disk. Reversing the direction of the current reverses the polarity of the next magnetized segment of the disk as it passes by the gap of the head, thus allowing data to be encoded as a pattern of reversing polarities. To read data, the previously encoded disk is again passed by the head and the reversing magnetic polarities induce reversing magnetic fields in the core. These reversing magnetic fields in the core generate correspondingly reversing currents in the coil which are sensed and decoded by the drive circuitry. 2 Disk drive storage capacity and performance are largely determined by the magnetic properties and interface of the recording head and disk. The number of coil turns and magnetic materials of the recording head are each optimized to achieve required performance. The number of coil turns and coil pitch characteristics (including the geometry of the coils and the distance between the coils) are selected to provide appropriate writing and maximum read-back signal levels. Higher data densities require that the head fly both closer to the disk and at more uniform flying heights across the disk or, alternatively, that the head maintain a light contact with the disk at a point near the head's gap, with the disk sliding over this portion of the head (known as contact recording). This is influenced by the size and mass of the head and by its hydrodynamic air bearing characteristics. Generally, rigid disk drives use either ferrite or thin film heads. Historically, ferrite disk heads have represented more cost-effective design alternatives for rigid disk drives than thin film disk heads. However, as demand for high performance, small form factor rigid disk drives has grown, there has been a corresponding increase in demand for disk heads that provide higher areal densities and data transfer rates. This technology and market shift has resulted in disk head specifications that increasingly require higher performance thin film heads. For certain disk drive applications, technology advances and improvements relating to MIG and double MIG ferrite disk head designs and production processes have occasionally allowed, and may in the future allow, ferrite disk heads to serve as a design alternative to thin film disk heads. However, due to the increasing supply of competitively priced thin film disk heads and the tendency of many major disk drive customers to select thin film products rather than ferrite disk heads, the Company expects that on an overall basis, demand for ferrite devices will continue to decline. Thin film head technology offers several performance advantages over ferrite technology, primarily higher areal densities, improved signal-to-noise ratios and higher data transfer rates. Thin film heads are produced with processes adapted from semiconductor manufacturing operations in which thin films of magnetic, conductive and insulating materials are deposited on a non-magnetic substrate to form the magnetic core and the electrical coils of the head. These processes permit a greater degree of precision and repeatability, greater miniaturization and lower mass than can easily be achieved with ferrite production methods in which the electrical coil is usually wound on a machined ferrite core. The Company believes that MR disk heads represent the next important magnetic recording head technology. In contrast to an inductive disk head, which is typically designed to "read" and "write" data using a single inductive element, an MR disk head uses an inductive element to "write" data onto the disk and a separate MR element to "read" data from the disk. The MR read element incorporates a magnetoresistor whose electrical resistance changes in the presence of a magnetic field. As the encoded disk is passed by the read element, the disk drive circuitry senses and decodes the changes in electrical resistance caused by the reversing magnetic polarities. The greater sensitivity of MR read elements provides higher signal output per unit of recording track width on the disk surface. As a result, MR disk heads have certain design and performance advantages over inductive heads, particularly in high performance small form factor disk drive applications. In addition, MR disk heads can read data from a rotating disk independent of the speed of rotation, thus allowing these devices to read data more reliably from small form factor disks in which linear velocities are inherently lower. MR disk heads also allow for optimization of read and write gaps independently. Typical inductive heads incorporate a single gap for both read and write functions. PRODUCTS Thin film and MR disk heads. During fiscal 1995, the Company became qualified and began to make volume production shipments on a number of new disk drive programs which require nanoslider thin film products. The Company's thin film products are produced in volume for 3.5-inch disk drives to achieve areal densities of up to approximately 425 megabits of data per square inch of disk surface. The thin film disk drive programs for which the Company has become and is seeking to become qualified are primarily for high capacity, low profile 3.5-inch disk drives for use in next generation personal computers and workstations, and represent drive applications with recording densities of up to 850 megabits per square inch. Development and commercialization of MR disk heads continued to be a major focus for the Company in fiscal 1995. During fiscal 1995, the Company continued to ship prototype and qualification samples of MR disk 3 head products to selected customers for drive applications with recording densities of up to 800 megabits per square inch and, during fiscal 1996, MR drive applications are expected to require areal densities of more than 1,000 megabits per square inch. The Company expects to ship production quantities of MR disk head products by the end of fiscal 1996. This will require the Company's engineering and production resources to meet their targeted design and process development plan, achieve "design-in" with the customer drives and execute the production ramp. The Company has also made important progress in the design and production of new, advanced thin film disk heads including higher efficiency products which increase the output signal for a given number of coil turns. Additional thin film advances have been made in developing processes, known as "track trimming", for defining thin film magnetic core elements that are both narrower and of more equal width which, in turn, enhance the capability of the head to write narrower and more densely packed tracks of data onto the disk surface. Advances have also been made in the Company's efforts to develop and offer thin film and MR disk heads with fully etched air bearing ("FEAB") or other negative air pressure bearing surfaces. The implementation of these designs and processes improve production yields and enhance the hydrodynamic characteristics of the disk heads, allowing the head to fly at lower, more uniform heights, or in light contact with the disk, thus contributing to higher areal densities, and thereby improving the reliability of the disk head. During fiscal 1996, the majority of the Company's customer programs will include these design improvements. As a result, the Company's continued shipment and revenue growth and achievement of satisfactory production yields to increase profitability depend on the Company's ability to achieve "design- in" status with its customers utilizing these advanced thin film heads. Ferrite disk heads. The Company offers ferrite MIG HGAs and HSAs in the nanoslider form factor. The use of ferrite heads in high performance disk drives presents technological challenges. However, advances in MIG technology have resulted in situations in which certain ferrite disk heads were more price competitive, for certain drive applications, than thin film products. While certain ferrite disk head designs may still be utilized in selective disk drive programs, thus providing a limited market for the Company's ferrite disk head products on a case-by-case basis, the Company believes that overall demand for ferrite disk heads will continue to decline. Further, because the Company's thin film disk head production is vertically integrated, the Company believes that obtaining sales of thin film products generally represents more attractive opportunities for revenue growth and profit improvement than ferrite disk head business. Tape heads. The Company sold its Tape Head business unit to Seagate on December 10, 1994. Pursuant to certain ongoing contractual arrangements, the Company continues to sell Seagate various tape-related goods and services. For discussion of net sales and percentage of sales by product, see "Annual Results of Operations" under Item 7. RESEARCH AND DEVELOPMENT The Company commits substantial resources to technology, product and process development in order to meet its customers' continuing demands for higher performance disk heads for successive disk drive product families. The Company has, on occasion, augmented its development programs with the financial and/or technical resources of certain strategic partners as, for example, under a License and Technology Agreement with Hitachi Metals, Ltd. ("HML") dated December 1992 (the "HML Agreement"). Primarily, however, the Company has engaged in its own proprietary technology development, utilizing its own resources. Technology development activities relate to creating technological advances required for new product development and the advancement of production processes required in new product manufacturing (e.g., development of smaller form factor products, advanced coil and core structures, constant flying height and contact recording technologies and the development of MR technology). In addition, development activities focus on conceptual formulation, design and testing of new product alternatives and construction of prototypes. Development activities relating to advanced disk head products are predominantly performed at the Company's 4 Goleta, California location. In addition, the Company also has engineering and technical staff located at various production operations and locations to provide manufacturing process and integration support. The Company's future success in achieving "design-in" positions and/or program qualifications depends heavily on the successful and timely completion of its product and process development efforts. While the Company is devoting substantial 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 could be an adverse effect on the Company's operating results. The Company's technology development is primarily devoted to commercialization of advanced inductive thin film disk head technology and of MR disk head technology. Research and development expenses were $33.7 million, $38.8 million and $32.6 million for fiscal years 1995, 1994 and 1993, respectively, before cost offsets of $14.1 million in fiscal 1994 and $15.1 million in fiscal 1993 related to funding pursuant to the HML Agreement and other development agreements with certain customers. No further payments were received during fiscal 1995. The Company does not currently have any ongoing technology development agreements which provide for it to receive any significant payments during fiscal 1996, for research and development efforts relating to new or advanced technology disk head products. While it may continue to consider and pursue opportunities relating to such arrangements, the Company believes that its existing cash resources and expected operating results will provide sufficient financial resources, on an independent basis to fund its ongoing research and development activities in a manner consistent with its current operating plan. Under the HML Agreement, the Company has granted to HML an exclusive, non- transferable license to use the Company's technology to manufacture in Japan thin film, MR and certain ferrite disk head products, HSAs, HGAs and components (the "Licensed Products") and a nonexclusive license to have Licensed Products made by HML subsidiaries and affiliates worldwide. Additionally, the Company has granted HML and its subsidiaries and affiliates certain exclusive rights to market and sell Licensed Products to disk drive and head manufacturers in Japan and has retained exclusive marketing rights to Licensed Products and improvements to Licensed Products in the rest of the world. MANUFACTURING Wafer/Slider Fabrication--Thin Film and MR Products MR and thin film transducers are manufactured utilizing a semiconductor-like wafer fabrication process. This process involves photolithography, vacuum deposition, vacuum etching, plasma etching, wet chemical etching and precision electroplating technologies. The Company's two wafer fabrication facilities are based on 150mm (approximately six inch) diameter round substrates. In the nanoslider form factor, approximately 8400 individual (unyielded) sliders can be produced from one six inch wafer. During fiscal 1995, the Company closed its three inch substrate disk head wafer fabrication operations in favor of the higher efficiency six inch production lines. The wafer fabrication facilities are located in two separate buildings in Goleta, California. Completed wafers are sliced into row bars containing up to 29 transducer sets and after testing are shipped to Penang, Malaysia for further processing. Rows are converted into individual sliders in the Company's slider fabrication facility in Penang, Malaysia. This process involves high precision grinding and lapping as well as photolithography and ion milling technologies utilized to define the critical air bearing geometries which allow the head ("slider") to fly within a few micro inches, or less, of the disk surface. All of the aforementioned processes can be characterized as high technology and their intrinsic yields directly define final production output and Company revenue. Typically, new (higher performance) head designs place increasing demands on process technology. The Company's ability to execute customer orders hinges on its ability to maintain statistical control and ramp these new products in light of constantly increasing technical demands from its customer base. 5 The Company believes that demand for thin film heads will continue to increase. To meet this demand, it is critical that wafer and slider output increase. This output increase is dependent on the Company's ability to generate the required capital funding. If the Company is unable to obtain the required funds in sufficient amounts and at the required times, its future revenues could be adversely affected. See "Liquidity and Capital Resources" under Item 7. The Company believes that the demand for heads which fly in light contact with the disk, and heads that are track trimmed (heads in which the elements that define the written track width on the disk are trimmed to equal width), will be required for most new inductive thin film products during fiscal 1996. Developing and implementing these new processes into volume production is critical to maintaining revenue growth. Assembly and Test--Ferrite, Thin Film and MR Products Ferrite sliders are purchased from outside suppliers and therefore require only final assembly. These heads represent older technology than thin film or MR heads and typically are used in lower performance drives in which cost is a major factor. The Company assembles all of its volume production of HGAs and HSAs outside of the United States. Principal manufacturing sites are in Penang, Malaysia, Chung-Ju, South Korea and Dublin, Ireland. The Company also maintains contractual relationships with unaffiliated parties that provide manufacturing space and contract labor in Malaysia and the People's Republic of China ("PRC"). The Company plans on continuing such relationships in the future. During fiscal 1995, due principally to growth and intense local competition for operators, the Company experienced a shortage of labor in both South Korea and Malaysia. To expand the available supply of operators, the Company has started a manufacturing operation in the PRC. This location was chosen due to the Company's previous experience with subcontractors in the PRC and the area's abundance of direct labor resources. The Company believes that with the addition of the PRC facility, the assembly labor shortage issue should no longer be a significant factor. The Company's foreign operations can be subject to risks associated with currency exchange fluctuations, government approvals, political instability, currency restrictions, trade restrictions, labor unrest, changes in tariff, and the like. Experience indicates that these factors have not produced significant liability, but there can be no assurances that these factors will not impact the Company's future operations. SOURCES OF SUPPLY The Company relies on Sumitomo, Ltd. as its principal supplier of substrates which are used to produce wafers for the Company's thin film and MR disk heads and on multiple independent suppliers for photoresist and other materials used in the manufacture of thin film disk heads and ferrite sliders. The Company purchases suspension assemblies from Hutchinson Technology Inc. ("Hutchinson"), Magnecomp and various other manufacturers. The Company also manufactures suspension assemblies internally. Although the Company has not experienced significant limitations on the availability of these materials, shortages could occur in the future. These developments could disrupt the Company's production volume and have an adverse effect on the Company's operations. CUSTOMERS AND MARKETING The Company's customers include, among others, Conner Peripherals Inc. ("Conner"), Maxtor Corporation ("Maxtor"), Quantum Corporation ("Quantum"), and Western Digital Corporation. Conner and Maxtor represented approximately 41% and 19%, respectively, of net sales during the year ended September 30, 1995. Due to the small number of disk drive manufacturers and computer system companies requiring independent sources of supply for magnetic recording heads, the Company's customer base is likely to remain concentrated. In 6 addition, the customer base may become more concentrated if disk drive manufacturers that do not have their own internal capabilities for designing and producing disk heads adopt and implement further vertical integration strategies. While the Company believes that industry conditions and economic factors will continue to create an environment in which drive manufacturers will require, as their primary source of supply, independent suppliers of magnetic recording heads and in which vertically integrated disk drive and systems companies will require alternative or "secondary" sources of supply, the further consolidation or integration of one or more of the Company's major customers with other disk drive or disk head firms could have an adverse effect on the Company's business. Such occurrences, however, could potentially be offset by the entry of new manufacturers in the disk drive market. See "Competition" for further discussion. Seagate, a major disk drive manufacturer, and Conner have recently announced an intent to merge their companies. Seagate has a large vertical capability in recording heads and its long term goal will likely be to supply all head requirements for Conner products. Conner was the Company's largest customer in fiscal 1995. The Company anticipates that revenues from Conner will decline materially during fiscal 1996. The Company believes that it is in a position to qualify on a sufficient number of new programs to allow an orderly transition in its customer base. However, if the Company experiences product "design-in" difficulties, this could have an adverse effect on the Company's future revenues and operations. During fiscal 1995, Maxtor experienced continuing operating losses and announced significant actions to reorganize and consolidate its operations. In November 1995, Maxtor announced it had approved an offer by Hyundai Electronics America ("HEA") to acquire all of its outstanding shares. The acquisition is subject to the approval of both the U.S. and Korean governments and satisfaction of other normal and customary closing conditions. Maxtor has stated that it believes the acquisition will be completed by early 1996. The Company believes the steps Maxtor is taking are positive, but there can be no assurances that Maxtor can close an agreement with HEA and such failure could impact Maxtor's head consumption plans in 1996. The Company believes that the most effective means of marketing and selling magnetic recording disk heads is by establishing close customer relationships at the engineering level, which permits technical collaboration and may result in the Company's heads being "designed-in" for particular disk drives. Through its product planning and marketing efforts, the Company seeks to identify those disk drive programs it believes will achieve high volume in order to concentrate its engineering resources on these programs. The Company's magnetic recording disk heads are sold in the United States and foreign countries by its direct sales personnel and through its subsidiaries in Singapore, Malaysia and Ireland. Historically, the Company sold its products in Japan through its Japanese subsidiary which closed during fiscal 1993. As of December 1992, in accordance with the HML Agreement between it and HML, the Company granted certain exclusive marketing rights in Japan to HML. The Company has been successful in achieving "design-in" positions with certain customers on certain disk drive programs. There can be no assurance that the Company will successfully obtain "design-in" positions on a sufficient number of the new disk drive programs that it is currently pursuing or that it expects to pursue, or that, after having achieved this position on any given customer program, it will not experience difficulties in obtaining desired levels of production volumes on a timely basis. The failure to secure and satisfactorily perform against orders for volume shipments of thin film disk heads could result in customer cancellations, reschedules and diversion of certain orders to the Company's competitors. To the extent any significant orders for the Company's thin film disk heads are canceled, rescheduled or diverted, such actions could have an adverse effect on the Company's operations. COMPETITION The Company competes with other independent recording head suppliers, as well as disk drive companies and systems companies that produce magnetic recording heads used in their own products. Some systems companies that manufacture disk drives internally, such as IBM, Fujitsu and NEC are vertically integrated and 7 produce thin film and/or MR heads for their own use. Seagate makes its thin film disk head products available on the market to competing drive manufacturers. All of these companies have significantly greater financial, technical and marketing resources than the Company. In fiscal 1994, Quantum, a major disk drive manufacturer and a significant customer of the Company, acquired Digital Equipment Corporation's ("DEC") inductive thin film head operations as well as controlling interest in Rocky Mountain Magnetics, a joint venture between Storage Technology and DEC. Rocky Mountain Magnetics is primarily engaged in the development and production of MR disk heads. While Quantum plans to ramp up its internal head manufacturing capacity, the Company believes that Quantum will continue to purchase a substantial portion of its head requirements from independent recording head suppliers. The Company believes that disk drive customers and systems companies that are not vertically integrated continue to represent significant opportunities for sales of the Company's disk head products for competitive and other reasons. Moreover, the Company believes that certain vertically integrated companies will continue to rely on independent suppliers of disk head products as alternative sources of supply or in some cases as primary sources of supply for discrete disk head solutions. Read-Rite Corporation has had substantially greater sales of thin film disk head products than the Company and is presently its largest competitor among independent thin film disk head manufacturers. Read-Rite has formed a joint venture with Sumitomo Metal Industries, Ltd. to manufacture and distribute thin film heads to Japanese customers. In addition, in fiscal 1994, Read-Rite acquired Sunward Technologies, Inc., a manufacturer of ferrite disk head products. In recent years, several large Japanese companies, each with considerably more resources than the Company, have entered the independent head market with considerable success. Alps Electric, Yamaha and TDK continue to aggressively develop and market ferrite, thin film and/or MR disk heads. The principal competitive factors in the markets the Company addresses are price, product performance, quality, product availability, responsiveness to customers and technological sophistication. The disk head industry is intensely competitive and largely dependent on sales to a limited number of disk drive manufacturers and systems companies. The Company's ability to obtain new orders depends on its ability to anticipate technological changes, develop products to meet individualized customer requirements and on timely delivery of products that meet customer specifications at competitive prices. The market for the Company's disk head products could be adversely affected if one or more disk drive manufacturers were to vertically integrate by acquiring disk head manufacturing capability. In addition, the disk drive industry is highly cyclical. Disk drive manufacturers may quickly lose market share as a result of the technological innovations of their competitors or various other factors. A reduction in market share by one of the Company's customers could result in the loss of business from such customer. This loss could have a material, adverse effect on the Company's future operations. BACKLOG The Company's backlog of open orders scheduled for delivery within six months at September 30, 1995 was approximately $107.5 million compared to approximately $64.8 million at September 30, 1994. Backlog increased year-to- year as a result of increased customer demand for thin film disk head products. Backlog includes only firm orders for which the customers have released a specific purchase order and specified a delivery schedule. The Company receives purchase orders from its customers which express the customer's intentions to purchase, at stated unit prices, certain quantities of products during a specified period, generally for one to two quarters. Orders are subject to rescheduling provisions which permit increases or decreases in volume of shipments during a specified period. In addition, at times of supply shortages, the Company believes it is a common practice for disk drive manufacturers to place orders in excess of actual requirements. Conversely, during periods of soft demand the Company has experienced cancellation and rescheduling of orders, reductions in quantities and repricing as customer requirements change. 8 The contractual arrangements between the Company and most of its customers permit the Company to assert claims for cancellation costs and expenses in these circumstances. However, the resolution of these claims is often a lengthy and extensively negotiated process, resulting in a compromise arrangement in which, among other things, the Company and the customer may agree that the claimed amount to be paid is reduced or that the Company will continue to deliver and the customer will accept all or part of the canceled order over an extended period of time at reduced unit prices. In previous years, particularly those in which the disk drive industry was experiencing overcapacity and intense price competition conditions, certain of the Company's customers have delayed shipment dates and requested extended payment terms and price concessions. It is possible that these circumstances could reoccur in future periods which could adversely offset the Company's revenues and profitability. Further, as a result of the foregoing factors, the Company's backlog may not be indicative of product shipments in any future period. EMPLOYEES As of September 30, 1995, the Company had approximately 5,500 employees of whom approximately 800 are located in California, approximately 4,500 are located in Asia and approximately 200 are located in Ireland. The Company's employees located in Korea are represented by a labor union, and the Company's Korean operations have, from time to time in past years, been affected by labor disruptions and slow downs. The Company's production facility in Malaysia is currently facing potential labor shortage issues, as many disk drive and component manufacturers expand their production facilities in Malaysia and compete for the supply of labor in that country. To protect against potential future labor shortages, the Company opened a manufacturing facility in Beijing, China in fiscal 1995. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS 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 multiple 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 its competitive position is more dependent on the technological know-how and creative skills of its personnel than on patent rights. The Company and IBM hold cross licenses with respect to certain patents held by each of them. Such cross licenses do not include any patents filed by IBM after January 1, 1991, nor any patents filed by the Company after July 1, 1991. While the Company has had discussions with IBM regarding extensions of the existing licenses, there can be no guarantee that such an extension will be successfully negotiated. Under an agreement (the "Hutchinson Agreement") with Hutchinson, the Company and Hutchinson hold cross licenses with respect to certain patents held by each of them concerning suspension assemblies to make, use and sell such products. The Company's purpose of entering into the Hutchinson Agreement was to avoid possible future infringements, thereby reducing the prospects for disputes and litigation. See "Sources of Supply". In connection with the sale of its Tape Head business unit to Seagate in December 1994, the Company and Seagate have entered into a broad cross license with respect to certain patents held by each of them. 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 which 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. 9 ENVIRONMENTAL REGULATIONS AND WATER SUPPLY RESTRICTIONS The Company uses certain hazardous chemicals in its manufacturing process and is subject to a variety of environmental and land use regulations related to the use, storage, discharge and disposal of such chemicals and the conduct of its manufacturing operations. The State of California recently enacted legislation generally referred to as "permit by rule". This legislation requires permits for any treatment or transportation of materials considered hazardous wastes. Although the Company believes it will receive the necessary permits prior to the time required by this legislation, there is no assurance that such permits will be issued in a timely manner or at all. A failure by the Company to comply with present or future regulations, could subject it to liability or result in production suspension or delay. In addition, environmental and land use regulations could restrict the Company's ability to expand its present production facilities or establish additional facilities in other locations, or could require the Company to acquire costly equipment, or to incur other significant expenses for compliance with environmental regulations or to clean up prior discharges. The Company, which is subject to water use restrictions, uses a significant amount of water in its manufacturing process. Although to date the Company has been able to obtain sufficient water supplies without significantly increased costs, stricter water use restrictions may be mandated and additional expenditures for water reclamation and conservation may be required. The Company has been identified as a potentially responsible party at a hazardous waste facility operated by the Omega Chemical Corporation in Whittier, California. Omega Chemical was employed by the Company for purposes of waste chemical disposal from 1987 to 1990 and was subsequently cited for stockpiling waste chemicals and for allowing leaking containers to contaminate their site. Omega has declared bankruptcy and a cleanup order was issued to the Company along with 56 other past customers of Omega. The Company's share of the cleanup cost during 1995 was $16,000 and it is expected that further cleanup activities involving a non-material cost to the Company will continue for an additional one to two years. On July 13, 1994 the California Regional Water Quality Control Board ("CRWQCB") issued a cleanup and abatement order to the Company concerning property previously used and owned by the Company on Ward Drive in Goleta, California. As a result of the order, the Company is required to carry out a further environmental study seeking to determine the amount of contamination related to chemicals used by the Company at this site. This study involves taking a number of soil samples and sinking several test wells to test the ground water and monitor the water's condition over a twelve month period. At this time, the soil sample work is complete and the cost to the Company for this study was $28,000. The study showed no metal or volatile organic compound ("VOC") contamination in the soil, but low levels of VOC contamination in the ground water. Contamination levels revealed were higher than tests completed in 1992. Since the Company left the premises in 1983, this implies the contamination is from a source other than the Company. At the completion of the study the CRWQCB will assess the need, if any, for either further investigation or cleanup and may issue another order at that time. SEASONALITY Management believes that the Company's revenues are cyclical rather than seasonal. See "Industry Overview" for further discussion. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information as to the name, age, and office(s) held by each executive officer of the Company as of December 15, 1995:
NAME AGE OFFICE HELD ---- --- ----------- Craig D. Crisman 54 Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, and Secretary John Ross 50 General Manager Peter T. Altavilla 42 Corporate Controller
10 Craig Crisman became an employee of the Company on August 1, 1995, and was elected Chairman of the Board and Secretary on November 3, 1995. Prior to that time he was a partner of the firm of GG&G. GG&G was engaged by the Company on August 1, 1994, to provide crisis management and turnaround services to the Company. Mr. Crisman was elected Chief Executive Officer on August 1, 1994, and, subsequently, was elected Director, President and Chief Financial Officer. The turnaround engagement was determined to have been successfully completed by July 27, 1995. During the five years preceding his appointment as Chairman, Chief Executive Officer and as a Director of the Company, Mr. Crisman was a partner of GG&G. In this capacity he has been engaged as a crisis management consultant in business turnaround assignments involving a number of different enterprises in various industries. John Ross became employed by the Company on June 1, 1993. Prior to this date he had served as Director, Wafer Fab Operations, at Read-Rite, Inc., a competitor, since March, 1991. Before joining Read-Rite, Mr. Ross served as Vice-President, Operations at Tegal Corporation, a company that makes and sells semiconductor manufacturing equipment. Peter T. Altavilla has been employed by the Company for approximately eight years. He served as Assistant Controller until August 1, 1994, when he was elected to his present position. ITEM 2. PROPERTIES Certain information concerning the Company's principal properties at September 30, 1995 is set forth below:
SQUARE LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP -------- ---- ------------- ------- --------- Goleta (Santa Barbara) Headquarters, Marketing, California office, plant manufacturing, and warehouse research and engineering 217,000 Owned San Jose, California Office Customer support 1,300 Leased Penang, Malaysia Office, plant and warehouse Manufacturing 208,000 Owned* Chunchon and Office, plant Chung Ju, Korea and warehouse Manufacturing 413,700 Owned Seoul, Korea Office, plant and warehouse Manufacturing 31,400 Leased Republic of Singapore Office Customer support 6,000 Leased Beijing, China Office, plant and warehouse Manufacturing 17,000 Leased Dublin, Ireland Office, plant and warehouse Manufacturing 40,000 Owned
- -------- *Property held as collateral for Malaysian revolving credit facility. See Note 5 to the Notes to Consolidated Financial Statements under Item 8. The Company owns a building in Dassel, Minnesota which is leased by the Company to the acquiror of a subsidiary which was previously sold by the Company. One facility in Chunchon, comprising 120,700 square feet and one facility in Chung Ju, comprising 93,000 square feet are being offered for sale. The Company believes that its existing manufacturing facilities are adequate to support customer requirements during fiscal 1996. 11 ITEM 3. LEGAL PROCEEDINGS On November 18, 1994, the Company announced that it had entered into an agreement to dismiss the 1993 securities class action suit brought against the Company and certain former Company Officers in U.S. District Court for the Central District of California. Settlement of the suit is subject to the terms of a definitive agreement which was submitted to the court for preliminary approval during December 1994. On May 31, 1995, the Court entered a judgement dismissing the litigation as to all claims against the Company and the other defendants, pursuant to an agreement by the parties to settle the litigation. Under the terms of this settlement, the Company will not be required to make any cash payments but will contribute shares of its common stock having an aggregate value of $1.25 million, which was provided for in fiscal 1994. The stock, along with $2.75 million from the Company's insurance carrier, will be distributed, after court approval, to a class consisting of all persons who purchased the Company's common stock during the period of October 22, 1992, through October 1, 1993. The Company is not a party, nor are its properties subject to, any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business and the matters described above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the New York Stock Exchange under the symbol "APM". The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock.
HIGH LOW ------ ------ Fiscal year ending September 30, 1994 First Quarter............................................ $6 1/2 $5 1/8 Second Quarter........................................... 7 3/8 5 1/8 Third Quarter............................................ 6 5/8 4 1/4 Fourth Quarter........................................... 5 3/8 4 Fiscal year ending September 30, 1995 First Quarter............................................ $4 3/8 $2 1/4 Second Quarter........................................... 3 7/8 2 1/2 Third Quarter............................................ 7 2 5/8 Fourth Quarter........................................... 18 3/8 7 1/8
At December 15, 1995, there were approximately 1,682 record holders of the Company's Common Stock. There were no cash dividends paid by the Company during the fiscal years 1995 or 1994. The Company currently intends to retain any earnings for use in its business and does not anticipate paying cash dividends in the foreseeable future. 12 APPLIED MAGNETICS CORPORATION ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS)
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- OPERATIONS Net sales................... $292,600 $275,927 $335,898 $297,864 $385,053 Income (Loss) from continuing operations...... 1,748 (52,670) (43,728) 315 (15,805) Loss from discontinued operations................. -- -- -- (25,422) (2,479) Net income (loss)........... 1,748 (52,670) (43,728) (25,107) (18,284) Net income (loss) per share: Net income (loss) from continuing operations.... $ 0.08 $ (2.39) $ (2.17) $ 0.02 $ (0.97) Loss from discontinued operations............... -- -- -- (1.53) (0.15) Net income (loss)......... $ 0.08 $ (2.39) $ (2.17) $ (1.51) $ (1.12) Weighted average common and dilutive equivalent shares outstanding: 22,472 22,082 20,156 16,604 16,294 Order backlog............... $107,466 $ 64,781 $ 77,126 $ 96,104 $113,794 Year-end employment......... 5,478 5,531 7,259 7,407 9,183 BALANCE SHEET Working capital (1)......... $ (5,963) $(36,443) $ 33,920 $ 17,823 $ 17,677 Total assets................ 246,817 220,556 278,516 263,319 299,811 Total debt.................. 69,629 67,151 57,183 71,224 74,850 Shareholders' investment.... 103,592 98,433 151,095 124,399 150,078
Note: Balance Sheet data for 1991 has not been restated for discontinued operations. - -------- (1) This balance includes borrowings outstanding under loan facilities with a Malaysian bank which have been in place since June 1990, are callable on demand, have no termination date and are guaranteed by the Company. The balances at September 30, 1995, 1994, 1993, 1992 and 1991 were $46.9 million, $46.1 million, $35.2 million, $38.1 million and $29.4 million, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The Company posted a net profit in fiscal 1995, as compared to net losses during the previous two years of the three year period ended September 30, 1995. The Company's successful turnaround is attributed to numerous factors, including increased customer demand for its thin film products, substantial cost reductions implemented during the last quarter of fiscal 1994, timely production ramps on a number of qualified thin film programs and significant technological process improvements which increased production volumes. This growth was supported by generation of cash as a result of completion of the sale of the Company's Tape Head business unit to Seagate and aggressive cash management practices which included accelerated payment terms with some of the Company's customers, completion of a secured asset-based revolving line of credit and extension of payment on a revolving credit facility with a commercial bank. See "Liquidity" for further discussion. During fiscal 1995, in response to market demands occurring over the three year period, the Company continued its shift from production of ferrite disk heads to thin film disk heads, which offer superior performance characteristics over ferrite disk heads and became competitively priced. The Company furthered its technological development from the thin film microslider to the nanoslider form factor and by the first quarter of fiscal 1995, substantially all thin film shipments were nanoslider products. The Company also made substantial progress in thin 13 film production process improvements including conversion from 3 inch substrate ("wafer") to 6 inch wafer fabrication (which produces more thin film disk heads per wafer), and conversion to fully etched air bearing ("FEAB") and negative pressure air bearing disk head designs, that allowed certain of its products to demonstrate improved performance. MR disk head product development continues to be critical for the Company's future growth. The Company is committed to substantial engineering, production process and capital investments in MR. It continued to ship prototype and qualification samples to selected customers. The Company expects to ship production quantities of MR disk heads by the end of fiscal 1996. See "Products" under Item 1. During fiscal 1994 and fiscal 1993, market demand shifted to the thin film nanoslider form factor from the microslider form factor and from ferrite disk heads. This unexpected rapid market transition contributed to the substantial losses in fiscal 1994 as the Company struggled with its thin film manufacturing process which impacted the Company's ability to quickly ramp production to achieve desired levels of volume shipments in response to strong market demand. The market transition impacted fiscal 1993 as the Company sustained significant losses and recorded a $49.6 million restructuring charge in the fourth quarter to consolidate manufacturing resources and write-down production assets (primarily related to ferrite and thin film microslider production) to their estimated net realizable values. Fiscal 1993 also included completion of management's strategic plan to focus solely on the design, manufacture and sale of magnetic recording head products. The execution of the plan included sale of non-core businesses, a secondary public offering, and establishing a strategic corporate relationship with HML . ANNUAL RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ---------------------------- 1995 1994 1993 (IN THOUSANDS) -------- -------- -------- Thin Film Disk Head Products Net Sales................................. $250,873 $133,909 $139,553 Percentage of Total....................... 85.7% 48.5% 41.6% Ferrite Disk Head Products Net Sales................................. 30,443 123,254 177,094 Percentage of Total....................... 10.4% 44.7% 52.7% Tape Head Products Net Sales................................. 11,284 18,764 19,251 Percentage of Total....................... 3.9% 6.8% 5.7% -------- -------- -------- Total Net Sales............................. $292,600 $275,927 $335,898 100.0% 100.0% 100.0% ======== ======== ========
NET SALES: Net sales increased 6% from fiscal 1994 to fiscal 1995. Net sales of thin film disk head products increased as a percentage of total net sales from 48.5% of net sales in 1994 to 85.7% of net sales in 1995. In absolute terms, thin film net sales increased 87.3% from 1994 to 1995. The significant growth in thin film disk heads was attributable to achievement of production volumes for nanoslider products and continued strong demand by certain customers on more mature products. Thin film disk head net sales increased quarter-to-quarter for fiscal 1995 and were $41.9 million, $57.9 million, $71.9 million and $79.2 million, respectively. This increase during the first two quarters was due to significant growth in thin film disk head shipments, while the last two quarters were primarily due to the change in mix of shipments from head gimbal assemblies ("HGAs") to head stack assemblies ("HSAs") and to a lesser extent due to growth in thin film disk head shipments. Net sales of ferrite disk head products decreased 75.3% in fiscal 1995 from fiscal 1994. The Company attributes the decline to the market shift to thin film disk heads that offer competitive prices and superior performance and to the Company's decision in fiscal 1994 to focus on thin film disk head product development. The Company believes that computer drive 14 industry demand will continue to shift to thin film and MR disk heads over the long term. As a result, over the past three fiscal years, the Company has committed its engineering and production resources to further advancement of thin film inductive technology. Net sales for tape head products decreased 39.9% in fiscal 1995 from fiscal 1994. Tape head products were produced by the Company's Tape Head business unit which was sold to Seagate in December 1994. Pursuant to the sales agreement, the Company continues to provide certain tape-related goods and services on an ongoing basis. Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of thin film disk head products increased as a percent of total net sales from 41.6% in 1993 to 48.5% of net sales in 1994, but in absolute terms, net sales decreased slightly, by 4.0%, from 1993 to 1994. The decline was caused by difficulties experienced by the Company in achieving production volumes of nanoslider products. Net sales of thin film disk head products for three quarters of fiscal 1994 remained between $30.9 million and $32.5 million. In the fourth quarter of fiscal 1994, thin film disk head shipments increased to $38.0 million as a result of improved production yields. Net sales of ferrite disk head products decreased 30.4% from fiscal 1993 to 1994 as a result of maturing of ferrite-based drive programs for which the Company is a supplier. Net sales of tape head products remained flat in fiscal 1994 as compared to 1993. GROSS PROFIT: The gross margin increased in fiscal 1995 to 13.6% as compared to (2.2%) in fiscal 1994. The increase resulted from significantly higher revenues due to improved production volumes generated from technological improvements in the thin film nanoslider production processes, conversion from the 3 inch to 6 inch wafer fabrication, and due to continued cost reductions implemented during the last quarter of fiscal 1994. The gross margin decreased in fiscal 1994 to (2.2%) as compared to 14.9% in fiscal 1993. This decrease was primarily due to lower sales volumes, lower average unit sales prices and manufacturing difficulties as the Company was confronted with the sudden and unexpected change in market demands from the thin film microslider to the nanoslider form factor. RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were $33.7 million, $38.8 million and $32.6 million for fiscal years 1995, 1994, and 1993, respectively, before cost offsets of $14.1 million in fiscal 1994 and $15.1 million in fiscal 1993. These expenses represented 11.5%, 14.1% and 9.7% of net sales, respectively, for such periods. The cost offsets were related to developmental funding the Company received under a License and Technology Development Agreement with Hitachi Metals, Ltd. for the advancement of the Company's inductive thin film technology and the development and commercialization of MR disk head technology, and from joint product development agreements with certain major disk drive manufacturers for MR disk head development. Funding for these agreements was concluded by the end of fiscal 1994. R&D expenses decreased by $5.1 million from fiscal 1994 to 1995 as the Company implemented cost controls during the fourth quarter of fiscal 1994 in response to significantly lower revenues and deteriorating gross margins. R&D expenses increased $6.2 million from fiscal 1993 to 1994 as the Company increased its investment in the development and commercialization of MR disk head development and continued the advancement of inductive thin film technology. The Company continues to invest in advanced technology products and processes and expects that expenditures generally will increase on an absolute dollar basis, given that the revenue base can support these expenditures. The Company did not receive any development funding from customers and strategic partners in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative ("SG&A") expenses in absolute dollars were $7.4 million, $17.3 million, and $20.1 million in fiscal 1995, 1994 and 1993, respectively. These expenses represented 2.5%, 6.3% and 6.0% of net sales, respectively, for such periods. The continued decrease in SG&A expenses was primarily due to a cost reduction program implemented during the fourth quarter of fiscal 1994 in response to lower sales volume. The Company expects that SG&A expenses as a percent of sales will vary from period to period depending on the level of net sales. SPECIAL CHARGES: There were no special charges in fiscal 1995 and 1994. Results from fiscal 1993 include a restructuring charge of $49.6 million to consolidate manufacturing resources and write-down manufacturing equipment to estimated net realizable values primarily as a result of the unexpectedly rapid market transition from ferrite and from the thin film microslider to the nanoslider form factor. 15 INTEREST INCOME AND EXPENSE: Interest income was $2.0 million in fiscal 1995, and $0.8 million in both fiscal 1994 and 1993. Interest income increased $1.2 million in fiscal 1995 from 1994 due to higher average cash balances and improved investment management. Interest income remained unchanged in fiscal 1994 from 1993, primarily due to similar average cash balances in both years. Interest expense was $4.9 million, $4.2 million and $5.6 million in fiscal 1995, 1994 and 1993, respectively. Interest expense increased $0.7 million in fiscal 1995 from 1994 primarily as a result of higher average interest rates on the Malaysian bank loans and letter of credit and loan fees related to the secured asset-based revolving line of credit established in January 1995. Interest expense decreased $1.4 million in fiscal 1994 from 1993 which included the write-off of certain loan origination expenses related to repayment of debt from proceeds of the Company's equity offering in February 1993. OTHER INCOME (EXPENSE): Other income of $6.3 million in fiscal 1995 included $4.9 million income recognized as the Company completed certain performance milestones pursuant to the sale of its Tape Head business unit to Seagate. See Note 6 of Notes to Consolidated Financial Statements for further discussion of the agreement. Other income in fiscal 1995 also included $1.3 million related to sale of tooling and excess assets. Other income (expense) for fiscal 1994 and 1993 primarily consisted of foreign exchange translation and transaction gains and losses. PROVISION FOR INCOME TAXES: For fiscal years 1995, 1994 and 1993, the most significant component of the provision for income taxes was foreign taxes for which there were no foreign tax credit offsets available. See Note 3 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES In fiscal 1995, in order to improve liquidity and as part of a cash management and operating plan implemented by the Company, cost and cash expenditure controls were established, accelerated payment terms were negotiated with some of the Company's customers, the Tape Head business unit was sold to Seagate and the Company completed other financings, including new loan credit facilities, extensions or renewals of existing facilities and lease financing. The Company expects to continue to use lease financing for capital expenditures and anticipates that it will continue to maintain cost and expenditure controls to provide acceptable liquidity. As of September 30, 1995, the Company's cash and cash equivalents balance increased to $48.2 million from $20.8 million at September 30, 1994. During fiscal 1995, the Company generated $18.9 million from operating activities, including $1.7 million from net income, $27.6 million from depreciation and amortization, $23.1 million from increased accounts payable and $3.8 million from decreased inventory, primarily offset by $17.8 million in increased accounts receivable to support higher net sales levels. During fiscal 1995, net cash of $4.6 million was also generated from financing activities, primarily due to additional capital leases for equipment and proceeds from stock options exercised. During this period, the Company used cash to make $23.4 million in capital expenditures, primarily related to increasing thin film disk production capacity and the development of MR disk head technology. Additionally, the Company entered into $9.8 million of operating leases for machinery and equipment, with terms of up to three (3) years. The Company also generated $25.3 million in cash from the sale of businesses and assets which were made up of the following: (1) the sale of a building in Singapore for $4.9 million; (2) the sale of its Tape Head business unit to Seagate for $21.5 million, of which the Company received $14.0 million at the closing date of the transaction and $5.7 million, net of related costs, upon completion of certain performance milestones and (3) $0.7 million for the sale of excess machinery and equipment. See Note 6 of Notes to Consolidated Financial Statements for discussion of the Seagate agreement. At September 30, 1995, total debt, including notes payable, was $69.6 million, an increase of $2.4 million from the balance outstanding at September 30, 1994, primarily due to capital lease financing in Malaysia, where the Company has substantial manufacturing operations. The Company also had fully drawn down its unsecured Malaysian credit facilities to $46.9 million from a bank in Malaysia. In May 1995, the Company's Malaysian subsidiary agreed with the Malaysian bank to continue these credit facilities which have been in place since 1990. 16 The facilities are callable on demand, have no termination date, are guaranteed by the Company, are secured by the Malaysian subsidiary's real property holdings in Malaysia and are subject to certain covenants which preclude the subsidiary from granting liens and security interests in other assets. 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. During fiscal 1995, the Company's Malaysian subsidiary entered into $5.1 million in capital lease agreements for machinery and equipment. In January 1995, the Company retired the $10.0 million debt obligation owed to Conner. The Company obtained a secured, asset-based revolving line of credit of $35.0 million from CIT Group/Business Credit, Inc. ("CIT"). This line of credit provides for borrowings up to $35.0 million based on eligible trade receivables at various interest rates over a three year term and is secured by trade receivables, inventories and certain other assets. As of September 30, 1995, $7.5 million of borrowings was outstanding. The $7.5 million was fully repaid during October 1995. The balance available for additional borrowings under this line of credit was approximately $1.3 million at September 30, 1995 and the Company was in compliance with all financial covenants. In May 1995, the Company obtained an extension to March 1996, of the maturity date on a $10.0 million revolving credit facility from a commercial bank. This facility is secured by a letter of credit issued for the account of HML, subject to reimbursement by the Company. The Company's reimbursement obligation to HML is secured by a security interest and lien on certain machinery and equipment. The Company continues to have informal understandings with some of its customers to make payments on accelerated terms. However, the liquidity risk associated with the cancellation of one or more of these arrangements is partially ameliorated by the credit available under the CIT Agreement under which available loan proceeds could generally increase as the Company's trade accounts receivable increase. In 1996, the Company plans approximately $100.0 million in capital expenditures related primarily to improving thin film production processes, increasing thin film production volumes and development and production of MR technologies and products. During the next twelve months, the Company believes it will have sufficient cash flows from operations and equipment lease financing alternatives to meet its operating and capital expenditure requirements. The Company's accounts receivable and inventory balances are heavily concentrated with a small number of customers. Sales to Conner and Maxtor accounted for 41% and 19%, respectively, for the Company's sales in 1995. If any large customer of the Company became unable to pay its debts to the Company, liquidity would be adversely affected. In fiscal 1995, Conner agreed to be acquired by Seagate. The Company anticipates that such acquisition will result in a significant decrease in the sales volumes to Conner in fiscal 1996 and in future years. See "Customers and Marketing" under Item 1. The Company operates in a number of foreign countries. Purchases of certain raw materials and certain labor costs are paid for in foreign currencies, as well as repayments of a portion of the Company's Malaysian debt denominated in ringgitts. The Company is not currently hedging against potential foreign exchange risk. Fluctuations of foreign currency to the dollar could have a significant effect on reported cash balances. The effect of foreign currency exchange rate changes were increases of $0.1 million and $1.2 million in cash, for fiscal 1995 and 1994, respectively. Market and customer demand continues to be strong for the Company's thin film disk heads. In the event that demand for the Company's products declines, management believes that it will be able to reduce its funding requirements for planned, but not committed, capital expenditures. However, if the Company were unable to continue to increase sales or maintain production yields at acceptable levels in order to permit it to execute customer orders for new drive programs in a timely manner, there would be a significant adverse impact on liquidity. This would 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 could adversely affect the Company's future years' operations and competitive position. 17 RECENT ACCOUNTING PRONOUNCEMENTS In March of 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"). This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement will become effective for financial statements of the Company in the first quarter of fiscal 1997. Management has not yet determined the impact which SFAS 121 will have on the Company's financial position and results of operations when it is adopted. 18 APPLIED MAGNETICS CORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE FINANCIAL STATEMENTS: ---- Report of Independent Public Accountants (Arthur Andersen LLP)...... F-2 Consolidated Statements of Operations for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993...... F-3 Consolidated Balance Sheets as of September 30, 1995 and September 30, 1994........................................................... F-4 Consolidated Statements of Cash Flows for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993...... F-5 Consolidated Statements of Shareholder's Investment for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993............................................................... F-6 Notes to Consolidated Financial Statements.......................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Applied Magnetics Corporation: We have audited the accompanying consolidated balance sheets of Applied Magnetics Corporation (a Delaware corporation) and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Magnetics Corporation and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California December 12, 1995 F-2 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net sales................................. $ 292,600 $ 275,927 $ 335,898 Cost of sales............................. 252,684 281,997 286,017 ---------- ---------- ---------- Gross profit (loss)..................... 39,916 (6,070) 49,881 ---------- ---------- ---------- Research and development expenses......... (33,655) (24,682) (17,504) Selling, general and administrative expenses................................. (7,434) (17,267) (20,115) Restructuring charge ..................... -- -- (49,600) Interest income........................... 1,996 825 803 Interest expense.......................... (4,826) (4,216) (5,632) Other income (expense), net............... 6,335 (160) 1,244 ---------- ---------- ---------- Income (Loss) before income taxes....... 2,332 (51,570) (40,923) Provision for income taxes................ 584 1,100 2,805 ---------- ---------- ---------- Net Income (loss)....................... $ 1,748 $ (52,670) $ (43,728) ========== ========== ========== Net income (loss) per share............. $ 0.08 $ (2.39) $ (2.17) ========== ========== ========== Weighted average common and dilutive equivalent shares outstanding............ 22,472,208 22,081,751 20,155,868 ========== ========== ==========
The accompanying Notes to Consolidated Financial Statementsare an integral part of these consolidated statements. F-3 APPLIED MAGNETICS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
AS OF SEPTEMBER 30, ------------------ 1995 1994 -------- -------- ASSETS Current assets: Cash and equivalents..................................... $ 48,236 $ 20,761 Accounts receivable, less allowances of $652 in 1995 and $3,629 in 1994.......................................... 36,571 18,720 Inventories.............................................. 32,727 31,520 Prepaid expenses and other............................... 10,411 6,879 -------- -------- 127,945 77,880 -------- -------- Property, plant and equipment, at cost: Land..................................................... 2,556 3,992 Buildings................................................ 67,314 77,745 Manufacturing equipment.................................. 146,706 163,068 Other equipment and leasehold improvements............... 29,410 30,743 Construction in progress................................. 6,967 13,814 -------- -------- 252,953 289,362 Less--accumulated depreciation and amortization............ (148,636) (165,046) -------- -------- 104,317 124,316 -------- -------- Other assets............................................... 14,555 18,360 -------- -------- $246,817 $220,556 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Current portion of long-term debt........................ $ 12,004 $ 20,412 Bank notes payable....................................... 54,371 46,062 Accounts payable......................................... 44,535 22,332 Accrued payroll and benefits............................. 9,361 9,406 Other current liabilities................................ 13,637 16,111 -------- -------- 133,908 114,323 -------- -------- Long-term debt, net........................................ 3,254 677 -------- -------- Other liabilities.......................................... 6,063 7,123 -------- -------- Shareholders' Investment: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding..................... -- -- Common stock, $.10 par value, authorized 40,000,000 shares, issued 22,619,205 shares and 22,161,460 shares at September 30, 1995 and 1994, respectively............ 2,262 2,216 Paid-in capital.......................................... 181,191 178,481 Retained deficit......................................... (79,031) (80,779) -------- -------- 104,422 99,918 Treasury stock, at cost (96,603 shares and 92,509 shares at September 30, 1995 and 1994, respectively)................ (830) (812) Unearned restricted stock compensation..................... -- (673) -------- -------- 103,592 98,433 -------- -------- $246,817 $220,556 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. F-4 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30, -------------------------------- 1995 1994 1993 --------- --------- ---------- Cash Flows from Operating Activities: Net profit (loss)............................. $ 1,748 $ (52,670) $ (43,728) Adjustments to derive cash flows: Depreciation and amortization............... 27,600 23,643 29,866 Gain on sale of business and assets......... (6,109) -- -- Provision for receivable allowances......... -- 100 550 Restructuring charge........................ -- -- 49,600 Deferred tax provision...................... -- -- 1,384 Amortization of unearned restricted stock compensation, net.......................... 721 (145) 1,225 Other assets................................ -- (4,167) (1,103) Other liabilities........................... (1,060) (300) (3,278) Other, net.................................. -- 1,123 303 Working capital changes affecting cash flows from operations: Accounts receivable........................ (17,712) 19,053 (11,562) Other receivables.......................... -- 5,170 10,900 Inventories................................ (3,772) 10,906 (5,827) Prepaid expenses and other................. (3,074) (305) (921) Accounts payable........................... 23,168 (5,955) (3,007) Accrued payroll and benefits............... 181 (2,739) 2,558 Other current liabilities.................. (2,795) (6,654) 2,424 --------- --------- --------- Net cash flows provided by (used in) operating activities....................... 18,896 (12,940) 29,384 --------- --------- --------- Cash Flows from Investing Activities: Additions to property, plant and equipment.... (23,401) (31,452) (56,652) Proceeds from sale of businesses and assets, net.......................................... 25,264 3,516 15,409 Notes receivable.............................. 2,048 2,038 1,433 --------- --------- --------- Net cash flows provided by (used) in invest- ing activities.............................. 3,911 (25,898) (39,810) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from issuance of debt................ 160,868 142,767 107,724 Proceeds from issuance of capital lease obligations.................................. 5,142 464 728 Repayment of debt............................. (163,705) (134,402) (127,127) Proceeds from sale of common stock............ -- -- 66,488 Proceeds from stock options exercised......... 2,270 153 1,475 --------- --------- --------- Net cash flows provided by financing activities................................. 4,575 8,982 49,288 --------- --------- --------- Effect of exchange rate changes on cash and equivalents.................................. 93 1,246 (964) --------- --------- --------- Net increase (decrease) in cash and equivalents.................................. 27,475 (28,610) 37,898 Cash and equivalents at beginning of period... 20,761 49,371 11,473 --------- --------- --------- Cash and equivalents at end of period......... $ 48,236 $ 20,761 $ 49,371 ========= ========= ========= Supplemental Cash Flow Data: Interest paid, net of amounts capitalized..... $ 4,827 $ 4,215 $ 4,158 ========= ========= ========= Income taxes paid............................. $ 494 $ 1,025 $ 1,209 ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. F-5 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ ---------------- UNEARNED RESTRICTED SHARE- NUMBER OF PAID-IN RETAINED NUMBER OF STOCK HOLDERS' SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT COMPENSATION INVESTMENT ---------- ------ -------- -------- --------- ------ ------------ ---------- Balance, September 30, 1992..... 16,444,323 $1,644 $109,563 $ 15,619 67,626 $(631) $(1,796) $124,399 Stock options exercised............ 359,772 36 2,780 -- -- -- -- 2,816 Issuance of common stock................ 5,291,070 529 65,959 -- -- -- -- 66,488 Purchase of treasury stock, net........... -- -- -- -- 11,702 (105) -- (105) Restricted stock issuance, net........ 58,577 6 231 -- -- -- (237) -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- 1,225 1,225 Net loss.............. -- -- -- (43,728) -- -- -- (43,728) ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1993..... 22,153,742 2,215 178,533 (28,109) 79,328 (736) (808) 151,095 Stock options exercised............ 26,087 3 226 -- -- -- -- 229 Purchase of treasury stock, net........... -- -- -- -- 13,181 (76) -- (76) Restricted stock issuance, net........ (18,369) (2) (278) -- -- -- 280 -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- (145) (145) Net loss.............. -- -- -- (52,670) -- -- -- (52,670) ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1994..... 22,161,460 2,216 178,481 (80,779) 92,509 (812) (673) 98,433 Stock options exercised............ 399,773 40 2,668 -- -- -- -- 2,708 Purchase of treasury stock, net........... -- -- -- -- 4,094 (18) -- (18) Restricted stock issuance, net........ 57,972 6 42 -- -- -- (48) -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- 721 721 Net income............ -- -- -- 1,748 -- -- -- 1,748 ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1995..... 22,619,205 $2,262 $181,191 $(79,031) 96,603 $(830) $ -- $103,592 ========== ====== ======== ======== ====== ===== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. F-6 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Applied Magnetics Corporation and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Certain 1993 and 1994 accounts have been reclassified to conform with the 1995 presentation. TRANSLATION OF FOREIGN CURRENCIES: Financial statements and transactions of subsidiaries operating in foreign countries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. The functional currency for all subsidiaries is the U.S. dollar. The effect of translating assets and liabilities stated in foreign currency is included as a component of "Other Income (Expense), net" in the Consolidated Statements of Operations. Translation and transaction losses of $0.2 million in 1995 and 1994, and gains of $0.8 million in 1993 were included in operations. The Company operates in a number of foreign countries. The relative impact of foreign currency fluctuations on revenue is not significant as product pricing is generally based on the U.S. dollar. Purchases of certain raw materials and certain labor costs are paid for in foreign currencies. Malaysian debt maturities are not currently hedged. As a result, effects of currency rate fluctuations can affect results of operations. Fluctuations may also have a significant effect on reported cash balances. DEPRECIATION AND AMORTIZATION POLICIES: Plant and equipment are depreciated or amortized over their estimated useful lives primarily using the straight- line method. Estimated useful lives are as follows: Buildings................................ 15-50 Years Manufacturing equipment.................. 2-5 Years Other equipment.......................... 1-5 Years Leasehold improvements................... Term of Lease
Depreciation and amortization expense from continuing operations amounted to $27.6 million, $23.6 million and $29.9 million in 1995, 1994 and 1993, respectively. The Company follows the policy of capitalizing expenditures that materially increase asset lives. Maintenance and minor replacements are charged to operations when incurred. Maintenance and repair expenses charged to operations were $6.4 million, $8.7 million and $7.1 million in 1995, 1994 and 1993, respectively. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in operations. The cost of buildings and equipment includes interest expense incurred prior to the time such assets are placed in service. Interest expense of $1.0 million was capitalized in 1993. No interest was capitalized in 1995 and 1994. CASH EQUIVALENTS: Cash equivalents consist primarily of money market instruments maturing within 90 days that are carried at cost, which approximates market. Cash equivalents were $43.6 million and $15.5 million at September 30, 1995 and September 30, 1994, respectively. INVENTORIES: Inventories are stated at the lower of cost (first-in, first- out method) or market. Market for purchased parts and manufacturing supplies is based on replacement costs and for other inventory classifications on net realizable value. Inventories consist of purchased materials and services, direct production labor and manufacturing overhead. F-7 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INVENTORIES: The components of inventory were as follows (in thousands):
SEPTEMBER 30 --------------- 1995 1994 ------- ------- Purchased parts and manufacturing supplies............... $13,036 $ 9,970 Work in process.......................................... 17,589 17,436 Finished goods........................................... 2,102 4,114 ------- ------- $32,727 $31,520 ======= =======
REVENUE RECOGNITION AND WARRANTY POLICIES: Revenue is recognized at the time the product is shipped to the customer. Under the Company's warranty terms, customers are allowed to return products within the applicable warranty periods. The Company accrues for the estimated rework and scrap costs associated with anticipated returns. In addition, the Company reverses the net sales and associated costs upon receipt of returned products. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Net income (loss) per common and common equivalent share is calculated using the treasury stock method, except in those periods where the effect of including common equivalent shares is anti-dilutive. RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged in basic technology and applied research and development programs which are designed to develop new products and product applications and related manufacturing processes. The costs of these programs are classified as research and development expenses and are charged to operations as incurred. Sustaining engineering is charged to cost of sales. OTHER LIABILITIES: Other liabilities are primarily composed of the non- current portion of accrued expenses related to various employee compensation plans. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note 3. STOCK OPTIONS: Proceeds from the sale of common stock issued upon the exercise of stock options are credited to common stock and paid-in capital accounts at the time the option is exercised. Income tax benefits attributable to stock options exercised are credited to paid-in capital when realized. See Note 4. CONSOLIDATED STATEMENTS OF CASH FLOWS: In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," the Company has selected the "indirect method" of presentation for reporting cash flows. 2. SEGMENTS OF BUSINESS The Company operates in one market worldwide--components for the computer peripheral industry. The Company's trade receivables are unsecured. Sales to major customers are as follows:
FISCAL YEAR ENDED SEPTEMBER 30, (AS A PERCENTAGE OF SALES) ---------------- 1995 1994 1993 ---- ---- ---- Conner Peripherals...................................... 41% 53% 21% Maxtor.................................................. 19% 13% 28% All Others.............................................. 40% 34% 51% --- --- --- Total................................................... 100% 100% 100% === === ===
F-8 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Export sales are made by the United States operations to the following geographic locations (in thousands):
1995 1994 1993 -------- ------- ------- Europe........................................... $ 159 $ 1,523 $11,533 Asia............................................. 231,781 35,082 6,564 North America.................................... -- 67 -- -------- ------- ------- $231,940 $36,672 $18,097 ======== ======= =======
Information regarding the Company's domestic and foreign operations is as follows (in thousands):
UNITED STATES FOREIGN TOTAL ------------- -------- -------- 1995 Net sales.............................. $271,947 $ 20,653 $292,600 ======== ======== ======== Intercompany sales..................... $138,230 $213,260 $ -- ======== ======== ======== Operating profit (loss)................ $ (3,608) $ 8,770 $ 5,162 Interest expense, net.................. (2,830) -------- Income before income taxes........... $ 2,332 ======== Identifiable assets.................... $165,064 $ 81,753 $246,817 ======== ======== ======== 1994 Net sales.............................. $ 98,680 $177,247 $275,927 ======== ======== ======== Intercompany sales..................... $229,022 $220,507 $ -- ======== ======== ======== Operating loss......................... $(27,162) $(21,017) $(48,179) Interest expense, net.................. (3,391) -------- Loss before income taxes............. $(51,570) ======== Identifiable assets.................... $141,029 $ 79,527 $220,556 ======== ======== ======== 1993 Net sales.............................. $159,854 $176,044 $335,898 ======== ======== ======== Intercompany sales..................... $202,335 $236,317 $ -- ======== ======== ======== Operating loss......................... $(32,749) $ (3,345) $(36,094) Interest expense, net.................. (4,829) -------- Loss before income taxes............. $(40,923) ======== Identifiable assets.................... $164,267 $114,249 $278,516 ======== ======== ========
F-9 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Foreign operations primarily consist of operations in the Asia-Pacific region. The increase in U.S. export sales to Asia and the decrease in sales of foreign operations in fiscal 1995 was due to the closure of the Company's production facility in Singapore in July 1994 and the transfer of sales invoicing responsibility to the U.S. operations. See Note 7 regarding the charges recorded in 1993 associated with restructuring of operations. The segment of business information presented above reflects an allocation of such restructuring charges to the location in which restructuring costs were incurred. The amount of these charges allocated between foreign and domestic operations were $30.0 million and $19.6 million, respectively, in 1993. Results of operations for United States-based operations include all research and development expenditures, thereby causing an unfavorable comparison with the operating results of foreign-based operations. United States income for 1993 and 1994 include research and development cost offsets relating to the license and technology development agreement with Hitachi Metals, Ltd. ("HML"). See Note 9. 3. INCOME TAXES The provision for income taxes for the years ended September 30, consists of (in thousands):
1995 1994 1993 ---- ------ ------ Federal Income Taxes Current.............................................. $-- $ -- $ -- Deferred............................................. -- -- 1,384 State income taxes Current.............................................. 92 211 226 Deferred............................................. -- -- -- Foreign income taxes................................... 492 889 1,195 ---- ------ ------ $584 $1,100 $2,805 ==== ====== ======
Reconciliations of the actual provisions for income taxes to the income tax calculated at the United States Federal rates for continuing operations were as follows (in thousands):
1995 1994 1993 ------- -------- -------- Income tax at the United States federal income tax rate............................ $ 816 $(18,050) $(13,913) State income taxes, net of federal income tax benefit................................ 59 137 149 Foreign income taxed at lower rate.......... (2,217) (550) (1,536) Temporary differences/net operating losses not benefitted............................. 1,926 19,563 18,116 Other, net.................................. -- -- (11) ------- -------- -------- $ 584 $ 1,100 $ 2,805 ======= ======== ========
F-10 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision (benefit) for deferred income taxes results from temporary differences which result from different tax bases for assets and liabilities than their reported amounts in the financial statements. Such differences result in recognition of income or expense in different years for tax and financial statement purposes. The sources of these differences and the tax effect of each at September 30, 1995 and 1994 were as follows (in thousands):
1995 1994 -------- -------- Inventory reserves.................................... $ 1,348 $ 5,181 Restructuring & other reserves........................ 9,594 10,169 Net operating loss carryforwards...................... 32,536 24,204 Foreign tax & general business credit carryforwards... 5,442 4,763 Depreciation.......................................... (4,970) (3,396) Other, net............................................ 2,783 1,884 -------- -------- Subtotal............................................ $ 46,733 $ 42,805 Valuation allowance................................... (46,733) (42,805) -------- -------- Total net deferred tax asset (liability).............. $ -- $ -- ======== ========
SFAS 109 requires that all deferred tax balances be determined using the tax rates and limitations expected to be in effect when the taxes will actually be paid or recovered. Consequently, the income tax provision will increase or decrease in the period in which a change in tax rate or limitation is enacted. As of September 30, 1995, the Company had total deferred tax liabilities of $5.0 million and total deferred tax assets of $51.7 million. The Company recorded a valuation allowance in the amount of $46.7 million against the amount by which deferred tax assets exceed deferred tax liabilities. The valuation reserve increased from $42.8 million at September 30, 1994 primarily due to the current year net operating loss which cannot be recognized. Consolidated retained deficit at September 30, 1995 included approximately $63.9 million of accumulated earnings of foreign operations for which a deferred tax liability has not been recognized. The additional taxes which may become due if those earnings were to be repatriated to the United States, after utilizing available foreign tax credits, would be approximately $20.5 million. However, the Company intends to reinvest these earnings indefinitely in maintaining its foreign operations. The Company had net operating loss carryforwards available for tax purposes of approximately $79.4 million. To the extent not used, the net operating loss carryforward expires in varying amounts beginning in 2006. 4. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS The Company adopted stock option plans in 1988, 1992 and 1994. Incentive or nonstatutory stock options may be granted under the 1992 and 1994 plans while the 1988 plan is limited to nonstatutory options only. The options are issued at exercise prices equal to the fair market value of the Common Stock at the date of grant, and, accordingly, the Company makes no charges against income with respect to these options. Stock option activity under the option plans was as follows:
OPTIONS OUTSTANDING --------------------------------- OPTION PRICE PER NUMBER OF AVAILABLE SHARE SHARES FOR GRANT ----------- --------- ---------- Balance at September 30, 1994.......... $5.00-13.63 1,553,502 744,288 Grants............................... $2.38- 8.88 1,090,455 (1,090,455) Exercised............................ $3.88- 9.38 (338,236) -- Cancelled............................ $2.38-13.63 (861,520) 861,520 --------- ---------- Balance at September 30, 1995.......... $2.38-13.63 1,444,201 515,353 ========= ==========
F-11 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At September 30, 1995, 1994 and 1993, there were exercisable options outstanding under the option plans to purchase an aggregate of 161,889, 812,002 and 591,786 shares, respectively. The Company adopted long-term incentive plans in 1982, 1986 and 1989. Under the 1982 and 1986 plans, options were issued at exercise prices lower than the market value at the date of grant. The Company accrued as compensation expense, over the life of the plans, the amount by which the market price exceeded the exercise price at the date of grant for options outstanding and for cash performance awards granted under the plans. At September 30, 1995, no options to purchase Common Stock were available for future issuance under these two plans, and nonstatutory options of 36,036 shares were outstanding at prices from $1.90 to $2.04 per share, of which 31,248 shares were exercisable. During 1995, options for 61,537 shares were exercised at prices from $1.30 to $10.95 per share, and options for 16,208 shares were canceled. Under the 1989 plan, the Company grants shares of Common Stock at no cost to the participants. These shares are subject to restrictions which prohibit selling, transferring, assigning or otherwise disposing of the Common Stock. The restrictions automatically expire ten years following the date of grant, or earlier if certain performance objectives are achieved. The market value of Common Stock issued is recorded as unearned restricted stock compensation and shown as a separate component of shareholders' investment. This compensation is amortized against income over the periods in which the participants perform services. At September 30, 1995, 22,335 shares were available for future issuance under the 1989 plan and 95,721 shares remain subject to restrictions. During 1995, 68,000 shares were issued, 10,028 shares were canceled and restrictions were removed from 39,049 shares under the 1989 plan. Compensation expense recorded under the 1989 plan during 1995, 1994 and 1993 was approximately $0.7 million, $0.2 million and $1.2 million, respectively. In 1994, the Company adopted a non-qualified stock option plan for non- employee directors (the "1994 Directors' Plan"). A total of 150,000 shares of the Company's Common Stock are reserved for issuance under the 1994 Directors' Plan. Under this plan, directors who are not employed by the Company are granted options to purchase 5,000 shares of the Company's Common Stock upon being elected to the board and, thereafter, such directors receive automatic annual grants of options to acquire 5,000 shares of Common Stock on March 1 of each year provided the person continues to serve as a director. The exercise price of the options is set at the closing price of the common stock on the New York Stock Exchange on the date of grant. The options granted under the 1994 Directors' Plan become exercisable in one third increments beginning on the first anniversary following the date of grant. At September 30, 1995, options for 25,000 shares had been granted under this plan and 5,000 shares have been canceled. In December 1994, the Company granted 250,000 shares of the Company's Common Stock, at $4.125, to Grisanti, Galef and Goldress, Inc. ("GG&G"), a consulting firm hired in August 1994 to provide the Company with crisis management and turnaround assistance. The options would be exercisable if the turnaround engagement was successfully completed, which the Company determined to be so, in July 1995. The options became exercisable in whole or part and will expire in five years. The exercise price of the options is set at the closing price of the common stock on the New York Stock Exchange on the date of grant. The Company has authorized a class of Preferred Stock consisting of 5,000,000 shares, $.10 par value. The Board of Directors has authority to divide the Preferred Stock into series, to fix the number of shares comprising any series and to fix or alter the rights, privileges and preferences of the Preferred Stock. No shares of the Preferred Stock were outstanding at September 30, 1995 or September 30, 1994. During 1988, the Board of Directors declared a dividend of one Right for each outstanding share of Common Stock to stockholders of record on November 4, 1988. Each Right entitles the holder to buy the economic equivalent of one share of Common Stock in the form of one one-hundredth of a share of the Preferred Stock at an exercise price of $75.00. Under certain conditions, each Right will entitle its holder to purchase, at the Rights exercise price, shares of the Company's Common Stock or common stock equivalents having a market value of twice the Right's exercise price. F-12 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following at September 30 (in thousands):
1995 1994 ------- ------- Secured revolving credit agreement, interest rate of 10.50% as of September 30, 1995...................... $ 7,500 $ -- 7% secured note purchase agreement, due January 10, 1995................................................. -- 9,827 Secured revolving credit agreement due March 1996, interest rate of 8.75% as of September 30, 1995...... 10,000 10,000 Secured Malaysian bank credit facility, interest rates from 6.00% to 7.41% as of September 30, 1995......... 46,871 46,062 Mortgage payable, interest rate of 8.50% as of September 30, 1995................................... 126 146 Capital leases........................................ 5,132 1,116 ------- ------- 69,629 67,151 Less--current portion, including bank notes payable... (66,375) (66,474) ------- ------- $ 3,254 $ 677 ======= =======
The aggregate principal payments of bank notes payable and long-term debt for the years subsequent to September 30, 1995 are: 1996--$66.4 million, 1997--$1.9 million, 1998--$1.3 million. In January 1995, the Company retired the $10.0 million debt obligation owed to Conner Peripherals Inc. The Company obtained a secured, revolving line of credit from CIT Group/Business Credit, Inc. ("CIT"). This line of credit provides for borrowings up to $35.0 million based on eligible trade receivables at various interest rates over a three-year term and is secured by trade receivables, inventories and certain other assets. As of September 30, 1995, $7.5 million of borrowings was outstanding. The interest rate for the amounts outstanding under the credit facility at September 30, 1995 was 10.5%. The balance available for additional borrowings under this line of credit was approximately $1.3 million at September 30, 1995 and the Company was in compliance with all financial covenants. At September 30, 1995, $4.0 million of standby letters of credit have been issued on behalf of the Company under this facility. The $7.5 million of borrowings was fully repaid during October 1995. The Company has a $10.0 million revolving credit facility from a commercial bank which is supported by a letter of credit issued for the account of HML, subject to reimbursement by the Company and the liens in favor of HML on certain of the Company's manufacturing equipment. At September 30, 1995, the interest rate on the facility was 8.75%. The credit facility expires in March, 1996. The Company's Malaysian subsidiary has loan facilities with a Malaysian bank which have been in place since June 1990, are callable on demand, have no termination date and are guaranteed by the Company. In May 1995, the Company and the Malaysian bank amended these credit facilities to include a security interest in the Company's real property holdings in Malaysia and to include certain covenants which preclude the Company from granting liens and security interests in other assets in Malaysia. The Company was in compliance with all financial covenants under this facility at September 30, 1995. The interest rates outstanding on these loan facilities ranged from 5.2% to 7.6% at September 30, 1995 and had a weighted average interest rate of 6.7%. The Company intends to continue its practice of repaying maturities with new borrowings under the facilities. F-13 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. SALE OF ASSETS During the first quarter of fiscal 1995, the Company completed the sale of a facility in Singapore and received proceeds of $4.9 million in cash, which approximated book value. In December 1994, the Company sold its Tape Head business unit and agreed to perform certain services and to produce certain tape heads for Seagate Technology Inc., for $21.5 million in cash, of which the Company received $19.9 million during fiscal 1995. The Company recorded a gain of $5.7 million, net of related expenses, during the year ended September 30, 1995. It is estimated that certain of the remaining performance milestones will be completed by the end of the first quarter of fiscal 1996 and the remaining cash will be collected. 7. RESTRUCTURING CHARGE The Company recorded a restructuring charge of $49.6 million in 1993 to consolidate manufacturing resources and write-down equipment to estimated net realizable values primarily as a result of the unexpectedly rapid market transition from ferrite to thin film and from the thin film microslider to the nanoslider form factor. The Company charged costs against these reserves of $38.4 million, $5.1 million and $1.0 million in 1993, 1994, and 1995, respectively. The balance of the 1993 restructuring charge of $5.1 million is included as a component of Other Current Liabilities in the accompanying Consolidated Balance Sheet at September 30, 1995. This reserve has been assigned to adjust the carrying value of facilities in Asia and other assets identified for disposal at the time of restructuring to estimated realizable value. 8. COMMITMENTS AND CONTINGENCIES A portion of the Company's facilities and equipment are leased under non- cancelable operating leases and certain equipment is leased under capitalized leases. The terms of the leases for facilities and equipment expire over the next three years with renewal options in certain instances. Future minimum lease payments under capital and operating leases as of September 30, 1995 are as follows (in thousands):
LEASES ------------------ CAPITAL OPERATING ------- --------- 1996................................................... $ 2,553 $10,939 1997................................................... 2,055 7,874 1998................................................... 1,206 3,311 1999................................................... 22 21 2000................................................... -- -- ------- ------- Total minimum payments................................. $ 5,836 $22,145 ------- ------- Less imputed interest.................................. (705) ------- Present value of payments under capital leases......... 5,131 Less current portion................................... (1,984) ------- Long-term lease obligations............................ $ 3,147 =======
Manufacturing and other equipment at September 30, 1995 include assets under capitalized leases of $6.0 million, with related accumulated depreciation of $1.4 million. Total rental expense, net of sublease rental income, for the years ended September 30, 1995, 1994, and 1993, including items on a month-to-month basis, was approximately $10.2 million, $3.6 million and $4.0 million, respectively. The Company does not have a post-retirement benefits program. As a result, no corresponding accrual has been reflected on the accompanying Consolidated Balance Sheets. F-14 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On November 18, 1994, the Company announced that it had entered into an agreement to dismiss the 1993 securities class action suit brought against the Company and certain former Company Officers in U.S. District Court for the Central District of California. On May 31, 1995, the Court entered into a judgement dismissing the litigation as to all claims against the Company and the other defendants, pursuant to an agreement by the parties to settle the litigation. The terms of this settlement have not yet been completely ratified by the plaintiffs. The Company will not be required to make any cash payments but will issue to plaintiffs shares of its common stock having an aggregate value of $1.25 million, which was provided for in fiscal 1994. The stock, along with $2.75 million from the Company's insurance carrier, will be distributed, after court approval, to a class consisting of all persons who purchased the Company's common stock during the period of October 22, 1992 through October 1, 1993. In addition, the Company or its subsidiaries are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. 9. LICENSE AND TECHNOLOGY DEVELOPMENT AGREEMENTS In September, 1992, the Company entered into a license and technology development agreement with HML (the "HML Agreement") to further the development and marketing of advanced magnetic recording disk head technologies and products. During fiscal 1993 and 1994, HML paid the Company $35.0 million, net of $1.0 million in foreign withholding taxes, and supplied additional technical resources in exchange for certain licenses covering existing technology and future technology developed by the companies under the joint development activities contemplated by the Agreement. The combined technical and financial resources of the Company and HML focused on the improvement of the Company's inductive thin film disk head business and the development and commercialization of MR thin film disk head products. HML has the rights to manufacture products based on this technology and has certain marketing and distribution rights for certain disk head products and markets. HML also provided a guarantee for the extension of the Company's existing $10.0 million revolving credit facility to March 1996. During fiscal 1993, the Company entered into additional technology development agreements (the "Development Agreements") with four major domestic disk drive companies relating to the development of MR thin film disk head products and technology. During fiscal 1994, the joint development efforts under one of these Development Agreements were suspended and, under the remaining Development Agreements, funding of up to an aggregate of $3.1 million was paid to the Company from inception of these programs through the first quarter of fiscal 1994. During each of fiscal years 1994 and 1993 the Company recognized as income, funding under the HML Agreement and the Development Agreements in the amounts of $14.1 million and $15.1 million, respectively. Funding was completed by the end of fiscal 1994. F-15 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED -------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ 1995 Net sales........................ $ 55,373 $64,919 $ 79,860 $ 92,448 Gross profit (loss) (1).......... (794) 5,123 16,406 19,181 Net income (loss)................ (11,714) (2,691) 6,721 9,432 Net income (loss) per share $ (0.53) $ (0.12) $ 0.30 $ 0.40 Weighted average common and dilutive equivalent shares outstanding 22,074 22,100 22,666 23,577 1994 Net sales........................ $ 71,244 $69,834 $ 70,289 $ 64,560 Gross profit (loss) (1).......... 2,686 2,011 (2,723) (8,044) Net loss......................... (6,245) (9,375) (16,505) (20,545) Net loss per share $ (0.28) $ (0.42) $ (0.75) $ (0.93) Weighted average common and dilutive equivalent shares outstanding 22,079 22,087 22,081 22,080
- -------- (1) Prior year quarterly G&A expense amounts have been reclassified to cost of sales to conform with fiscal 1995 presentation. F-16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE--None PART III Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the 1996 Annual Meeting of Stockholders ("the Proxy Statement"). ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information concerning Directors of the Company appears in the Company's Proxy Statement, under Item 1 "Election of Directors". This portion of the Proxy Statement is incorporated herein by reference. (b) For information with respect to Executive Officers, see Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation appears in the Company's Proxy Statement, under the caption "Executive Compensation", and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the security ownership of certain beneficial owners and management appears in the Company's Proxy Statement, under Item 1 "Election of Directors", and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions appears in the Company's Proxy Statement, under Item 1 "Election of Directors", and is incorporated herein by reference. I-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following documents are filed as part of this Report: Financial Statements--See Index to Consolidated Financial Statements at Item 8 on F-1 of this Report. (2) Supplemental Schedule: Report of Arthur Andersen LLP Schedule II Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3 Certificate of Incorporation and Bylaws (1) Amended and Restated Bylaws (2) Amendment to Bylaws dated June 14, 1989(3) Certificate of Incorporation (as amended) (4) 4 Instruments defining the rights of securities holders including indentures Rights Agreement, dated as of October 19, 1988, between Applied Magnetics Corporation and First Interstate Bank of California, as Rights Agent (2) 10 (a) Applied Magnetics Corporation 1982 Long-Term Incentive Plan (5) (b) Applied Magnetics Corporation Nonstatutory Stock Option Plan (6) (c) Applied Magnetics Corporation 1986 Long-Term Incentive Plan (6) (d) Applied Magnetics Corporation 1988 Stock Option Plan (7) (e) Applied Magnetics Corporation 1989 Long-Term Incentive Plan (8) (f) Loan Agreement dated February 13, 1992 between Applied Magnetics Corporation and Union Bank, N.A., as amended (9) (g) License and Technology Development Agreement dated as of September 25, 1992, between Applied Magnetics Corporation and Hitachi Metals, Ltd. (9) (h) Deeds of Trust naming as beneficiary Hitachi Metals, Ltd. to secure the Company's obligations under a letter agreement dated March 24, 1995 (15) (i) Applied Magnetics Corporation 1992 Stock Option Plan (9) (j) Financing Agreement dated January 11, 1995 between the Company and CIT Group/Business Credit, Inc. (14) (k) Letter Agreement between Registrant and Hitachi Metals, Ltd. Dated May 30, 1995 extending maturity date of Letter of Credit to April 12, 1996 (16) (l) Purchase Agreement between the Company and Delta Bravo, Inc. For the purchase of capital stock of Magnetic Data, Inc., a Delaware Corporation and Brumko Magnetic Corp., a Nebraska Corporation (10)
I-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- (m) Security Agreement between Registrant and Hitachi Metals, Ltd. dated May 30, 1995 (16) (n) Cross License and Joint Research and Development Agreement effective as of November 5, 1993, between the Company and Hutchinson Technology Incorporated (11) (o) Applied Magnetics Corporation 1994 Employee Stock Option Plan (12) (p) Applied Magnetics Corporation 1994 Nonemployee Director's Stock Option Plan (12) (q) Letter Agreement dated February 8, 1994 between the Company and O.M. Fundingsland, formerly Executive Vice President of the Company (12) (r) Letter Agreement dated January 12, 1994 between the Company and Louis W. Rayer, formerly Vice President of the Company (12) (s) Retention Agreement dated January 2, 1994, between the Company and Raymond P. Le Blanc, Vice President, Secretary and General Counsel of the Company (12) (t) Letter Agreement dated as of November 14, 1994, between the Company and the CIT Group/Business Credit, Inc. (13) (u) Stock Purchase Agreement by and among the Company, Seagate Technology, Inc. and Applied Tape Technology, Inc. (13) (v) Letter Agreement dated September 12, 1994, between the Company and William R. Anderson (13) (w) Letter Agreement dated June 21, 1994 , between the Company and Dr. Richard D. Balanson (13) (x) Letter Agreement dated September 12, 1994, between the Company and Kathryn E. Gehrke (13) (y) Letter Agreement dated August 1, 1994, between the Company and Grisanti, Galef & Goldress, Inc. (13) (z) Offer letter dated April 19, 1995 between Maybank Banking Berhad and Applied Magnetics (M) Sdn Bhd. for extension of Credit Facility (16) (aa) Corporate Guarantee of the Registrant dated June 8, 1995 in favor of Maybank Banking Berhad (16) (bb) Employment Agreement between Craig D. Crisman and the Company dated August 1, 1995 (cc) Letter Agreement dated July 19, 1995, between the Company and Raymond P. Le Blanc (dd) 1995 Key Management Incentive Bonus Plan dated March 16, 1995 11 Statement re computation of per share earnings. 13 Annual Report to Shareholders. Integrated with Form 10-K 21 Subsidiaries of the registrant. Incorporated by reference on Form 10-K dated December 29, 1994 22 Published report regarding matters submitted to vote of security holders. None 23 Consent of experts and counsel. Consent of Arthur Andersen LLP dated December 20, 1995. 24 Power of Attorney. None 27 Financial Data Schedule 28 Information from reports furnished to state insurance regulatory authorities. None (1) Filed an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 33-13653) filed on April 21, 1987, and incorporated herein by reference (2) Filed as an exhibit to the Company's Current Report on Form 8-K dated October 19, 1988, and incorporated herein by reference (3) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q dated May 4, 1989 and incorporated herein by reference
I-3
EXHIBIT NUMBER DESCRIPTION ------- ----------- (4) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q dated May 4, 1989 and incorporated herein by reference (5) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on January 27, 1983, and incorporated herein by reference (6) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on December 23, 1985, and incorporated herein by reference (7) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on January 7, 1988, and incorporated herein by reference (8) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on December 30, 1988 and incorporated herein by reference (9) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 22, 1992, as amended by Form 8, filed February 12, 1993 and incorporated herein by reference (10) Filed as an exhibit to the Company's Report on Form 10-Q dated May 14, 1993 and incorporated herein by reference (11) Filed as an exhibit to the Company's Current Report on Form 8-K dated December 2, 1993 and incorporated herein by reference (12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q dated March 31, 1994, and incorporated herein by reference (13) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 29, 1994 (14) Filed as an exhibit to the Company's Current Report on Form 8-K dated January 20, 1995 and incorporated by reference (15) Filed as an exhibit to the Company's Report on Form 10-Q dated May 15, 1995 and incorporated herein by reference. (16) Filed as an exhibit to the Company's Report on Form 10-Q dated August 15, 1995 and incorporated herein by reference. (b) Report on Form-8K. None (c) Exhibits. The exhibits listed (a) (2) above are submitted as a separate section of this report (d) The individual financial statements of the registrant have been omitted since the registrant is primarily an operating company and all subsidiaries are included in the consolidated financial statements.
I-4 SIGNATURES Pursuant to the requirements of Section 13 (d) or 15 (d) 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 By: /s/ Craig D. Crisman Date: December 21, 1995 --------------------------------- Craig D. Crisman Chairman of the Board, Chief Executive Officer and Chief Financial Officer (Principal Financial Officer) By: /s/ Peter T. Altavilla Date: December 21, 1995 --------------------------------- Peter T. Altavilla Corporate Controller (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated. /s/ Craig D. Crisman December 21, 1995 - ------------------------------------- Craig D. Crisman, Chairman of the Board, Chief Executive Officer, and Chief Financial Officer /s/ Harold R. Frank December 21, 1995 - ------------------------------------- Harold R. Frank, Director and Chairman Emeritus /s/ R.C. Mercure, Jr. December 21, 1995 - ------------------------------------- R.C. Mercure, Jr., Director /s/ Herbert M. Dwight, Jr. December 21, 1995 - ------------------------------------- Herbert M. Dwight, Jr., Director /s/ Jerry E. Goldress December 21, 1995 - ------------------------------------- Jerry E. Goldress, Director I-5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Applied Magnetics Corporation included in this Form 10-K and have issued our report thereon dated December 12, 1995. Our audits were made for the purposes of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Los Angeles, California December 12, 1995 I-6 SCHEDULE II APPLIED MAGNETICS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS)
BALANCE BALANCE AT AT END BEGINNING OF CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS OTHER (A) PERIOD -------------- ---------- --------- ---------- --------- ------- Year Ended September 30, 1993 Allowance for doubtful col- lection: Accounts Receivable........ $ 1,958 $ 550 $ (5) $ 739 $ 3,242 Notes Receivable........... 2,559 12,009 (3,261) -- 11,307 Year Ended September 30, 1994 Allowance for doubtful collection: Accounts Receivable........ $ 3,242 $ 100 $ (28) $ 315 $ 3,629 Notes Receivable........... 11,307 1,878 -- -- 13,185 Year Ended September 30, 1995 Allowance for doubtful collection: Accounts Receivable........ $ 3,629 $ -- $ 268 $(3,245) $ 652 Notes Receivable........... 13,185 1,229 -- 3,245 17,659
- -------- (A) In 1993 and 1994 this amount represents recoveries of accounts previously written off. In 1995 the Company determined that its allowance for doubtful trade receivables was in excess of the amount needed and it transferred this excess to its allowance for notes receivable where it was required. I-7 EX-10.(BB) 2 EMPLOYMENT AGREEMENT OF CRISMAN EXHIBIT 10(bb) EMPLOYMENT AGREEMENT -------------------- This AGREEMENT, made effective as of August 1, 1995, between Applied Magnetics Corporation, a Delaware corporation (the "Company"), a corporation having its principal office at 75 Robin Hill Road, Goleta, California 93117, and Craig D. Crisman ("Executive"). RECITALS -------- The Company desires to engage the services and employment of Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement, and Executive is willing to accept employment by the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth. The execution of this Agreement has been duly authorized by the Board of Directors of the Company ("Board"), and the terms of compensation contained herein have been approved by the Stock Option and Compensation Committee of the Board (the Committee"). NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Employment. The Company agrees to employ Executive and Executive ---------- agrees to accept employment by the Company, for the period stated in paragraph 3 hereof and upon the other terms and conditions herein provided. 2. Position and Responsibilities. During the period of his ----------------------------- employment hereunder, Executive agrees to serve the Company and the Company shall employ Executive as President and Chief Executive Officer of the Company. Executive shall be elected to the office of Chairman of the Board prior to the 1996 Annual Meeting of Stockholders. 3. Terms and Duties. ---------------- (a) Term of Employment. The period of Executive's employment ------------------ under this Agreement shall commence on the date of this Agreement and shall continue through July 31, 2000 (the "Term"). (b) Duties. During the Term and except for illness, reasonable ------ vacation periods, and reasonable leaves of absence, Executive shall devote his best efforts and all his business time, attention, skill and efforts to the business and affairs of the Company and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board; provided, however, that, with the approval of the Board, Executive may serve, or continue to serve, on the boards of directors of and hold any other offices or positions in, companies or organizations which, in such Board's judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially affect the performance of Executive's duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which he is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of California, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board, but are to be rendered primarily at the headquarters of the Company in the State of California. 4. Compensation and Reimbursement of Expenses; Other Benefits. ---------------------------------------------------------- (a) Compensation. The Company shall compensate Executive during ------------ the term of this Agreement as follows: (i) Base Salary. Executive shall be paid a base salary, ----------- adjusted as provided in Section 4(a)(iv), ("Base Salary") of not less than Three Hundred Seventy-Five Thousand Dollars ($375,000) per year in installments consistent with the Company's usual practices; (ii) Individual Bonuses and Stock Benefit. ------------------------------------ 1 Executive shall participate in an incentive compensation plan to be devised by the Board commencing with fiscal 1996. He shall also be granted nonqualified options to purchase 300,000 shares of the Company's common stock under the Company's existing stock option plans that have been registered with the Securities and Exchange Commission. Such options shall be granted on the effective date of this agreement and shall bear an exercise price equal to the fair market price of the Company's common stock on the New York Stock Exchange as of the close of trading on such date. Such options shall be subject to appropriate adjustments for stock dividends, stock splits, recapitalizations, mergers, combinations and the like. Such options shall become exercisable over a period of three years, with options to purchase 100,000 shares becoming exercisable on the first anniversary date of this agreement, an additional 100,000 on the second anniversary date of this agreement, and the final 100,000 on the third anniversary date of this agreement. (iii) Other Benefits. During the period of employment under this -------------- Agreement, Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company's management and those benefits for which key executives are or shall become eligible; (iv) Base Salary Review. The Company agrees to review ------------------ Executive's Base Salary within twelve (12) months after his date of employment and annually thereafter, or within the time period prescribed in salary administration practices applied to all officers of the Company. (b) Reimbursement of Expenses. The Company shall pay or ------------------------- reimburse Executive for all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement. The Company further agrees to furnish Executive with such assistance and office accommodations as shall be suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. 5. Benefits Payable Upon Disability or Death. ----------------------------------------- (a) Disability. If during the Term Executive should fail to ---------- perform his duties hereunder on account of illness or other incapacity which the Board shall in good faith determine renders Executive incapable of performing his duties hereunder, and such illness or other incapacity shall continue for a period of more than 6 months, the Company shall have the right, upon written notice to Executive to terminate this Agreement. Executive shall be entitled to disability payments and coverage upon the basis available to Company employees under, and subject to the terms and provisions of, disability benefit plans of Company which may from time to time be in effect and applicable to employees. (b) Death. If Executive shall die during the Employment Term, ----- the employment of Executive shall thereupon terminate and all options exercisable by Executive at the time of his death shall remain exercisable for a period of 180 days thereafter. (c) Other Benefits. The provisions of this Section 5 shall not -------------- affect the entitlements of Executive's heirs, executors, administrators, legatees, beneficiaries or assigns under any employee benefit plan, fund or program of the Company. 6. Obligations of Executive During and After Employment. ------------------------------------------------------ (a) Executive agrees that during the term of his employment under this Agreement, he will engage in no other business activities, directly or indirectly, which are or may be competitive with or which might place him in a competing position to that of the Company, or any affiliated company, without the written consent of the Board. (b) Executive realizes that during the course of his employment he will have produced and/or have access to confidential information, records, notebooks, data, formulae, 2 specifications, trade secrets, customer lists, inventions and processes of Company and its affiliated companies. Therefore, during or subsequent to his employment by Company, or by an affiliated company, Executive agrees to hold in confidence and not directly or indirectly to disclose or use or copy or make lists of any such information, except to the extent authorized by the Company in writing. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of Company, or of an affiliated company, and shall not be removed from the Company's or the affiliated Company's premises without its written consent, and shall be promptly returned to the Company upon termination of the Executive's employment with the Company and its affiliated companies. 7. Termination By Company. ---------------------- (a ) Termination For Cause. Except as otherwise provided --------------------- herein, the Company may terminate the employment of Executive "for Cause" at any time upon written notice to Executive specifying the cause of termination. If terminated pursuant to this Section 7(a), the then current Base Salary shall be paid on a prorated basis to the date of termination. For purposes of this Agreement, "for Cause" shall mean the discharge resulting from a determination by the Company that Executive (i) has been convicted of a crime involving moral turpitude, including fraud, theft or embezzlement, (ii) has failed or refused (in a material respect) to follow reasonable policies or directives established by the Board which failure or refusal continues for ten (10) days following written notice thereof to Executive, (iii) has willfully and persistently failed to attend to material duties or obligations imposed on him under this Agreement which failure continues for ten (10) days following written notice thereof to Executive, or (iv) has continued to engage, after ten (10) days written notice, in any act that constitutes a breach of his fiduciary duties to, or involves a conflict of interest with, the Company or involves a usurpation of a material opportunity of the Company. A termination by the Company under this Section 7(a) shall not prejudice any remedy to which the Company may be entitled either at law, in equity, or under this Agreement. (b) Termination Without Cause. The Company may terminate the ------------------------- employment of Executive without cause at any time upon written notice to Executive; provided, however, that the Company shall be obligated to pay Executive, as severance, an amount equal to the greatest Base Salary payable during the Term for a period of one year following the date of termination, and the Committee shall accelerate the exercise dates of all stock options then held by the Executive to the date of termination. Such options shall remain exercisable for 180 days following the termination date. 8. Termination by Executive. ------------------------ (a) Termination For Good Reason. If Executive terminates his --------------------------- employment hereunder for Good Reason (as hereinafter defined), he shall be entitled to the benefits set forth herein applicable to termination without Cause as set forth in Section 7(b) hereof. For the purposes of this Agreement, Good Reason" shall mean: (i) assignment to the Executive of duties inconsistent with his responsibilities as they existed on the date of this Agreement, a substantial alteration in the title of Executive (so long as the existing corporate structure of the Company is maintained) or substantial alteration in the status of Executive in the Company organization; (ii) reduction by the Company in the Executive's Base Salary; (iii) failure by the Company to continue in effect, without substantial change, any benefit plan or arrangement in which Executive was participating or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce his benefits under any benefit plan, unless all other key executives are similarly affected; or 3 (iv) any material breach by the Company of any provision of this Agreement without the Executive having committed any material breach of his obligations hereunder, which breach is not cured within ten (10) days following written notice thereof to the Company of such breach. (b) Termination Without Good Reason. If Executive terminates his ------------------------------- employment hereunder without Good Reason his then current Base Salary shall be paid on a prorated basis to the date of the termination, but no incentive compensation shall be payable for the year in which such termination takes place. 9. Termination After Corporate Changes. An acquisition of ----------------------------------- the Company during the Term by merger, sale of all or substantially all of the Company's assets, or purchase of 51% or more of the voting stock of the Company, or other reorganization resulting in a change of a majority or more of the ownership of the Company's voting stock shall be deemed to be, and shall be referred to as, a "Change of Control" whether or not such Change of Control was caused or could have been prevented by acts of the Company, and whether or not in each case Executive shall have voted for such Change of Control as a director or shareholder or consented thereto expressly or in writing. If, following a Change of Control Executive shall (i) resign after giving the Company not less than 60 days written notice or (ii) have been terminated, Executive shall be entitled to the greater of (aa) the benefits set forth herein applicable to termination without cause as set forth in Section 7(b) hereof, or (bb) the greatest Base Salary paid to Executive during the Term for the balance of the Term. Notwithstanding the foregoing, in the event that any payment to Executive under this Agreement would be nondeductible by the Company in whole or in part on account of Section 280G of the Internal Revenue Code of 1986, as amended, the amount of such payment shall be reduced (but not below zero) until no portion of such amount would be nondeductible under Section 28OG. 10. Company's Insurance on Executive. The Company may secure in -------------------------------- its own name, or otherwise, and at its own expense, life, health, accident and other insurance covering Executive, or Executive and others. Executive agrees to assist the Company in procuring such insurance by submitting to the usual and customary medical and other examinations and by signing, as the insured, such applications and other instruments in writing as may be reasonably required by the insurance companies to which application is made for such insurance. Executive agrees that he shall have no rights, title or interest in or to any insurance policies or the proceeds thereof which the Company may so elect to take out or to continue on his life. ll. No Obligation to Mitigate Damages. --------------------------------- (a) Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by payment to him of retirement benefits after the date of termination of his employment. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, employment agreement or other contract, plan or arrangement, except that the provisions of Section 9 of this Agreement and any payment provided for thereunder, shall be in lieu of payments otherwise due to Executive under any provision of Sections 7 and 8 hereof. 12. Arbitration. Any dispute, controversy or claim arising ----------- under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon 4 the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 12 shall take place in Santa Barbara County, California. 13. Notice. For purposes of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Applied Magnetics Corporation 75 Robin Hill Road Goleta, California 93117 Attention: Harold R. Frank If to the Executive: Craig D. Crisman 291 32nd Avenue San Francisco, California 94121 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. Non-Waiver. Complete Agreement. Governing Law. No provisions ---------------------------------------------- of this Agreement may be modified, waived or discharged except in writing signed by both parties. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior to subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 15. Legal Fees and Expenses. The Company shall pay all reasonable ----------------------- legal fees and expenses which Executive may incur as a result of the Company's contesting the validity, enforceability or Executive's good faith interpretation of, or good faith determination under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Executive in contesting the termination of Executive's employment for Cause or asserting that his termination was for Good Reason if, as a result of such contest, it is determined that the Executive was in fact terminated for Cause, or that he did not terminate his employment for Good Reason. 16. Severability. The invalidity or unenforceability of any ------------ provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 17. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, the Executive and the Company (pursuant to a resolution of its Board adopted at a duly constituted meeting) have executed this Agreement, effective as of the date first above written. APPLIED MAGNETICS CORPORATION, a Delaware corporation By __________________________________ Harold R. Frank Chairman, Emeritus _____________________________________ Craig D. Crisman, Chairman and Chief Executive Officer 6 EX-10.(CC) 3 TERMINATION AGREEMENT OF LEBLANC EXHIBIT 10(cc) TERMINATION AGREEMENT AND RELEASE --------------------------------- This Termination Agreement and Release, executed as of this l9th day of July 1995, is by and between Raymond P. Le Blanc (hereinafter referred to as "Employee") and Applied Magnetics Corporation, a Delaware corporation (hereinafter referred to as "Employer"). Recitals -------- A. Employee is currently serving as Vice President, Secretary and General Counsel of Employer and has management responsibilities for Employer's Legal Department. B. Employer has decided to discontinue its Legal Department, eliminate the position of General Counsel and to procure legal services from other sources. C. Employee and Employer desire to resolve all claims by Employee and to reach a mutual understanding and acceptance of the terms and conditions related to the termination of Employee's employment with Employer. Agreement --------- NOW, THEREFORE in consideration of the mutual promises and covenants herein contained it is hereby agreed as follows: 1. Employee will be terminated from employment by Employer effective March 1, 1996 ("Termination Date"). Employee will cease to be an officer of Employer and its subsidiary and affiliated corporations and entities as of the date hereof and except as otherwise expressly provided herein is relieved of his duties and responsibilities as an officer and employee of Employer. Employee shall also no longer be considered by Employer to be a "reporting person" for purposes of Rule 16b promulgated under the Securities and Exchange Act of 1934, as amended. Employee agrees that from the date of this Agreement to the Termination Date he will be available to respond to inquiries from Employer regarding information he obtained while an employee of Employer, provided that the time spent by Employee on such matters during that period shall not exceed four (4) hours per month, unless the parties agree otherwise in writing. In the event the Employer utilizes the services of Employee in excess of four (4) hours per month prior to the Termination Date and at any time after the Termination Date, Employee shall charge Employer for such time and Employer shall pay for such time, at his normal hourly rate of $250 and for reasonable costs and expenses. Employer will promptly cause a person other than Employee to be designated as Employer's agent for service of process in each jurisdiction where Employer is qualified to conduct business and Employee is hereby relieved of any and all duties as agent for service process. 2. Employee will not report to work at any of Employer's facilities. He will, however, remain on employee status to and including the Termination Date subject to the provisions of paragraph 1 above. At no time from and after the date of this Agreement shall Employee be authorized to represent or bind Employer or any of its subsidiary or affiliated corporations or entities in any way, or incur any reimbursable business expenses, unless expressly authorized in advance in writing by the Chief Executive Officer of Employer. During the period from the date hereof to the Termination Date, Employer shall provide to Employee during normal business hours reasonable secretarial support (but not office space) to assist Employee in his efforts to seek other employment. Employee shall be kept in Employer's voice mail system until March 1, 1996. 3. During the period from the date of this Agreement to and including the Termination Date, Employer will pay to Employee $3,269.20 per week in accordance with Employer's standard payroll practices. Employee, or his heirs or personal representative in the case of death or disability shall be paid said salary, and shall receive the benefits referred to in paragraph 4 below, except as otherwise expressly provided therein, even in the event Employee dies or becomes disabled (as defined in section 1.6 of the Retention Agreement), is employed by another entity, he establishes his own law practice or otherwise becomes self-employed, provided, 1 however, upon occurrence of any of these events he shall cease to be an employee of Employer. Employer may deduct from said salary all customary and usual payroll deductions, including contributions to Employer's 401(k) Plan in an amount consistent with Plan limitations. Notwithstanding the foregoing, in the event Employee is not employed by a third party or has not established his own law practice or otherwise become self-employed by October 1, 1996, commencing on that date, Employer agrees to pay Employee $3,269.20 per week, provided that such obligation shall cease on the earliest to occur of (i) Employee becoming employed by another entity, (ii) Employee establishing his own law practice or otherwise becoming self-employed, or (iii) April 1, 1997. 4. Employer will continue Employee's current group insurance, or the equivalent thereof (including group medical, dental, long-term disability, vision, basic life insurance, supplemental life insurance coverage, health care spending account, and 401(k) plan), including dependent coverage as applicable, through the Termination Date. From and after the date of this Agreement, Employee will not be entitled to participate in any other employee benefit plans of Employer except those specifically listed above, and Employee will not accrue any vacation or paid time off or personal time, provided, however, that if it should at any time be determined that Employee has accrued vacation/personal time during the period from the date of this Agreement to the Termination Date, the payments referred to in paragraph 3 above shall be deemed to include payment in full for any accrued vacation/personal time. Commencing on March 1, 1996, Employer agrees to reimburse Employee for COBRA premiums on the Employer's regular group medical, dental and vision policies for a period of 18 months, provided that in the event Employee becomes covered under plans offered by another employer, generally comparable to the group plans provided by Employer, prior to the expiration of the obligation of Employer to make such reimbursements, the obligation of Employer to make such reimbursements shall immediately cease. Reimbursement will be made within ten (10) days of receipt by Employer of an invoice from Employee reflecting COBRA premium payments made. 5. Stock options providing for the purchase of 39,818 shares of the Common Stock of Employer heretofore granted to Employee and as reflected on Exhibit "A" attached hereto, and not vested are hereby deemed to be fully vested as of the date hereof and shall be exercisable up to the Termination Date. Employer represents that the acceleration of the exercisability of such stock options does not require any amendments to any of the stock option plans pursuant to which such options were granted and will hold Employee harmless and indemnify him for any loss, damage, cost or expense suffered or incurred by Employee in connection with any breach of this representation. So long as employer is not in breach of the foregoing indemnification obligation, Employee agrees (i) not to claim or assert that such acceleration requires any such amendment to any such stock option plan, and (ii) to waive all rights with respect to any such claim or assertion, or any cause of action relating thereto (other than rights to the indemnification described in the immediately preceding sentence). 6. For and in consideration of all claims that Employee has or may have against Employer for emotional distress, personal injury or other tort damages Employee claims to have suffered as a consequence of his termination, Employer agrees to pay to Employee a sum equal to the current outstanding principal balance under the Company Loan, as hereinafter defined (together with any and all interest due thereunder), plus an amount equal to the closing price of the Employers' Common Stock as reported on the New York Stock Exchange on the date of this Agreement multiplied by 7,500, which shall be payable as follows: (a) Employer's agreement, effective as of the date of this Agreement to forgive, release, cancel and discharge all remaining indebtedness due by Employee under the Company Loan; and (b) Employer's agreement to release all restrictions against the transfer, sale or hypothecation imposed by Employer on all shares of the Common Stock of Employer issued to Employee under Employer's 1989 Amended and Restated Long Term Incentive Plan ("Restricted Shares"). Upon execution of the Agreement, the Employer will deliver to Employee the original Executive Note as hereinafter defined, marked "Canceled" and a full and complete reconveyance of the Deed of Trust in recordable form and shall also furnish to the Employer's Transfer Agent, First Interstate Bank of California, written, irrevocable instructions to the effect that all restrictions 2 shall be immediately removed from the Restricted Shares and that such shares may be transferred free and clear of such restriction and to the extent the Restricted Shares are free of restrictions on sale provided under Rule 144 promulgated under the Securities Act of 1933, as amended, free of any restrictive legends or stop codes. The consideration payable to Employee shall not be reflected in his W-2 income, shall not be subject to withholding taxes or other payroll deduction and shall not be reported on Form 1099. As used herein, the term "Company Loan" shall mean that certain loan, with a current outstanding principal balance of $60,000, made by Employer to Employee and represented by (a) that certain Promissory Note dated January 10, 1994 (the "Executive Note") and (b) a deed of trust dated January 10, 1994, on that certain improved real property located at 2225 St. James Drive, Santa Barbara, California ("Deed of Trust"). 7. Employer, shall at its cost, provide to Employee the outplacement services of Drake, Beam, Morin, Inc. Pursuant to that firm's Executive Six Month Program, such services to be provided at a Los Angeles area office of that firm. 8. Employee shall be entitled to take title to the furniture in his current office which consists of a desk, chair, filing cabinets, personal computer, meeting table and chairs and book shelf, as well as the legal reference materials located in Employer's "Law Library", including the book shelves holding such materials, which are hereby conveyed to the Employee on an "AS IS, WHERE IS" basis without any warranties either express or implied. Such furniture must be removed from Employer's premises at Employee's cost on or before July 28, 1995. Employee will be granted access to the premises to remove above mentioned items. 9. Employee agrees that he has heretofore received payment in full for any and all (i) paid time off (PTO) accrued to the date of this Agreement, (ii) salary and other compensation through the date of this Agreement, and (iii) outstanding business expenses incurred prior to the date of this Agreement. 10. In consideration of the above, Employee for and on behalf of himself, his spouse, descendants, ancestors, dependents, heirs, executors, administrators, assigns and successors, and each of them, hereby covenants not to sue and fully, forever and irrevocably releases, discharges and acquits Employer its subsidiaries and affiliates, and each of them, and their respective officers, directors, shareholders, employees, agents, affiliates and attorneys and their respective heirs, representatives, successors and assigns, and each of them (hereinafter collectively referred to as the "Employer Releases") from any and all actions, causes of action, debts, agreements, promises, liabilities, claims, damages or demands of any kind or nature whatsoever, that Employee has had, may have had, or now has, or hereafter can, shall or may have against the Employer Releases, and each of them, for or by reason of any matter, cause or thing whatsoever, through and including the date hereof, including specifically, but not exclusively and without limiting the generality of the foregoing, employment of Employee by Employer and the termination thereof, and any and all forms of compensation or reimbursement, including any incentive awards or bonuses, relating to such employment, any claim for worker's compensation or any claim under or pursuant to that certain Retention Agreement, dated as of January 2, 1994, by and between Employer and Employee (the "Retention Agreement"). Notwithstanding the foregoing, nothing contained herein shall be construed as a waiver, release or discharge of any rights which Employee may have (i) to indemnification under and subject to the provision of Article VII of the By-Laws of Employer, (ii) under either Delaware General Corporation Law 145, or California Labor Code 2802, or (iii) under the Company's directors' and officers' liability insurance policies. 11. In consideration of the above, Employer, for and behalf of itself, its subsidiaries and affiliates, and each of them and their respective officers, directors, shareholders, partners, employees, agents, affiliates and attorneys, and their respective heirs, representatives, successors and assigns, and each of them hereby fully, forever, and irrevocably releases, discharges and acquits Employee, his spouse, descendants, ancestors, dependents, heirs, executors, administrators, assigns and successors, and each of them ("Employee Releasees"), from any and all actions, causes of action, debts, agreements, promises, liabilities, claims, damages or demands of any kind or nature whatsoever, that Employer has had, may have had, or now has, or hereafter can, shall or may have against Employee Releasees, and each of them, for or by reason of any matter, cause or thing whatsoever, through and including the date hereof, including specifically, but not exclusively and without limiting the generality of the foregoing, any liability arising out or in connection with the employment of Employee by Employer. Notwithstanding the foregoing, nothing contained herein shall be construed as a waiver, releasee or discharge of any 3 rights which Employer may have in connection with any act or omission by Employee at any time which constituted misappropriation, selfdealing, fraud or intentional or willful misconduct of any nature. 12. It is understood and agreed that the releases set forth in paragraphs 10 and 11 above, respectively, are intended as and shall be deemed to be full and complete releases of any and all claims that Employee may or might have against the Employer Releasees, or any of them, or, except as noted in paragraph 11 above, that Employer may have against Employee Releasees, or any of them, arising out of any act, omission or occurrence to date and said releases are intended to cover and do cover any and all future damages and Claims not now known to Employee or Employer or which may later develop or be discovered, including all causes of action therefor and arising out of or in connection with any occurrence to date. 13. The parties hereto each hereby represent and warrant that they are aware of the provisions of Section 1542 of the Civil Code of the State of California, which section reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." The provisions of Section 1542 are hereby expressly waived by each party hereto. Each party hereto similarly expressly waives any and all rights and benefits conferred by any law of any state or territory of the United States or of any foreign country, or principle of common law, which is similar, comparable or equivalent to Section 1542 of the California Civil Code. Nothing herein, however, shall be deemed to release any claim by either party hereto which arises out of the nonperformance or breach of any of the terms and conditions contained herein. Notwithstanding the foregoing, nothing herein contained shall limit the right of either party hereto to enforce the provisions of this Agreement. 14. Employee expressly acknowledges and agrees that, by entering into this Agreement, he is waiving any and all rights or claims that he may have arising under the Age Discrimination in Employment Act of 1967, as amended, which have arisen on or before the date of execution of this Agreement. Employee further expressly acknowledges and agrees that: (a) In return for this Agreement, he will receive compensation beyond that which he was already entitled to receive before entering into this Agreement; (b) He is hereby advised in writing by this Agreement to consult with an attorney before signing this Agreement; (c) He was given a copy of this Agreement on July 19, 1995, and is informed by this Agreement that he has 21 days within which to consider the Agreement; and (d) He is hereby advised that he has seven (7) days following the date of execution of this Agreement in which to revoke this Agreement. Any revocation of this Agreement must be in writing and hand delivered during the revocation period. This Agreement will become effective and enforceable seven days following execution by Employee unless it is revoked during the seven-day period. Notwithstanding subparagraph (c) above, Employee, with full knowledge of his rights, waives the period of twenty-one (21) days within which to consider this Agreement. 15. Employer and Employee each promise to maintain this Agreement in strict confidence and to make no disclosure of the terms of this settlement to any third party, except attorneys for the parties, Employer's accountants, Employee's family members, Employee's tax accountant, banks or other lenders to whom Employee may be indebted or from whom Employee may seek to obtain credit, and subject to the consent of Employer, which will not be unreasonably withheld, the non-financial portions of this Agreement may be made available to potential employers of Employee. If requested either party may make this Agreement available to 4 governmental tax authorities and as may be required by law, provided, however, that nothing herein contained shall prohibit Employee from disclosing the terms of this Agreement as may be required by law in order to assert a claim for unemployment insurance benefits, provided, however, that the foregoing shall in no way limit the effect of the releases set forth above. 16. It is hereby agreed that both parties to this Agreement shall refrain from making any disparaging remarks about the other party to this Agreement (including disparaging remarks by the directors and executive officers of Employer, but excluding any such remarks by the other employees of Employer) and shall further refrain from interfering or causing others to interfere in the business or affairs of the other party. 17. Employee agrees to return all Employer property in his possession to Employer on or before the date hereof, including but not limited to company-issued credit cards and office keys. Employee acknowledges that he has heretofore entered into a Confidentiality and Assignment Agreement ("Confidentiality Agreement") with the Employer. The Confidentiality Agreement and Section 12 of the Retention Agreement are each by this reference incorporated herein in their entirety and are made a part of this Agreement. Employee agrees and acknowledges that, as an employee of Employer, he is obliged to comply with Employer's policies and procedures with respect to confidential, proprietary and non-public information. Employee agrees that he will not, without the Employer's prior written consent, at any time after the date of this letter, divulge, furnish or make accessible to anyone or use in any way, any information which is subject to the Confidentiality Agreement or Section 12 of the Retention Agreement. Employee understands and agrees that any material disclosure in contravention of the foregoing may release Employer from any obligations it may have to Employee under this Agreement. 18. This Agreement supersedes any prior written, oral or implied agreement between the parties hereto regarding the subject matter hereof, particularly including, but not limited to, the Retention Agreement, which shall in all respects, except Section 12 thereof which shall remain binding on Employee and which is hereby incorporated herein by reference, be deemed null and void effective as of the date hereof. This Agreement may only be amended by a written agreement signed by the parties hereto. 19. Employee agrees and understands that the execution of this Agreement shall not constitute or be construed as an admission by Employer of any liability to or of the validity of any claim whatsoever by Employee. 20. Employer agrees and understands that the execution of this Agreement shall not constitute or be construed as an admission by Employee of any liability to or of the validity of any claim whatsoever by Employer. 21. Employer and Employee acknowledge that they have been advised to obtain and have obtained the advice of legal counsel of their choice (in the case of Employer, someone other than Employee) regarding their execution of this Agreement. 22. Employee hereby represents and agrees that in entering into this Agreement he has relied solely upon his own judgment, belief and knowledge and that, except as set forth herein, no statement made by or on behalf of Employer has in any way influenced him in such regard. 23. Employer hereby represents and agrees that in entering into this Agreement it has relied solely upon its own judgment, belief and knowledge and that, except as set forth herein, no statement made by or on behalf of Employee has in any way influenced it in such regard. 24. Each party hereto represents and warrants to the other party hereto that he or it has not assigned any claim he or it may or might have against the other party to any third party. 25. This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective successors and assigns. This Agreement is in the nature of a personal services contract and may not be assigned by Employee without the prior written consent of Employer. Any assignment by Employee without Employer's consent shall be null and void. 5 This Agreement constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and may be amended only by a written instrument executed by both parties hereto. 26. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 27. If either party files any action or brings any proceeding against the other arising out of this Agreement, the prevailing party in any such action or proceeding shall be entitled to recover as an element of his or its costs of suit, and not as damages, reasonable attorneys' fees to be fixed by the court. 28. The parties hereto acknowledge that the payments, benefits and other accommodations provided for in this Agreement are not intended to and do not establish any severance or termination allowance policy, plan or procedure of Employer. 29. Employer represents that the material terms and conditions contained herein have been approved by the Board of Directors of Employer. 30. It is agreed by each of the parties hereto that they have read the above and fully understand the terms of this Agreement which they voluntarily executed in good faith and deemed to be a full and equitable settlement of this matter. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. __________________________________ Raymond P. Le Blanc APPLIED MAGNETICS CORPORATION By_________________________________ Craig D. Crisman, Chairman and Chief Executive Officer 6 Exhibit A LeBlanc Stock Option Analysis
Accelerated Cash Value Total Option Shares Option of Option Cash Number Grant date Vested Price Per Share Value - --------------------------------------------------------------------------- I-0641 Oct-94 5000 $3.875 $3.38 $16,875 LB0001 Sep-94 1113 $4.250 $3.00 $ 3,339 S-0012 Feb-94 20000 $5.125 $2.13 $42,500 I-0629 Oct-93 7800 $5.875 $1.38 $10,725 A-0379 Oct-93 2200 $5.875 $1.38 $ 3,025 LT-0008 June-82 3705 $1.296 $5.95 $22,061 TOTALS 39818 $98,525
Shares With Accelerated Vesting as of July 17, 1995 Assumes a Stock Price of $7.25 7 EX-10.(DD) 4 MANAGEMENT INCENTIVE CASH BONUS PLAN EXHIBIT 10(dd) CONFIDENTIAL MEMORANDUM To: (First Name) (Last Name) From: Craig Crisman Date: March 16, 1995 Subject: Key Management Incentive Cash Bonus Plan ______________________________________________________________________________ It is the company's total compensation philosophy to provide key employees such as yourself with competitive compensation comprised of three components. These components are base cash compensation, incentive cash bonus compensation, and incentive stock options and/or restricted grants. This memo is intended to provide you with information about the Company's Key Management Incentive Cash Bonus Plan. The Board of Directors has approved you as a participant in this Plan for Fiscal Year 1995. The details of this Plan are as follows: The pool of available money to distribute to participants will be determined according to the following schedule: FY 1995 PRE-TAX EARNINGS CASH BONUS POOL ($ 8,000,000) $ 0 ($ 2,500,000) $ 270,000 $ 3,000,000 $ 540,000 $ 8,500,000 $ 810,000 $14,000,000 $1,080,000 - --------------------------------------------- The following assumptions will be in effect for The Fiscal Year 1995 Key Management Incentive Cash Bonus Plan: 1. FY 1995 Pre-Tax Earnings will be subject to the following rules: . Gains and/or losses on the sale of assets will not be included, . Increases and/or decreases in reserves will not be included, and . Tape Division milestones which are met will not be included, milestones which are not met will be included. 2. Payout will be made at the conclusion of the Annual Fiscal Year Audit and upon approval of the Compensation Committee of the Board of Directors. 3. Individual bonus distributions will be determined by Craig Crisman based on input from participants. 4. To receive a payout, participants must be employees of the Company for the entire Fiscal Year and active employees with the Company on the payout distribution date. There is no guarantee of payment under this plan. EX-11 5 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS ---------------------------------------------- (in thousands except per share data)
For the Fiscal Year Ended September 30, 1995 ------------------------------------------------------- Primary earnings Fully diluted per share earnings per share Net income $ 1,748 $ 1,748 ======== ======= Weighted average common shares outstanding 22,311 22,311 Dilutive common stock equivalents 161 308 -------- ------- Total weighted average common shares outstanding 22,472 22,619 ======== ======= Net income per share $ .08 $ .08 ======== =======
Since fully diluted earnings per share does not reduce the Company's earnings per share by more than 3% of primary earnings per share, the Company has reflected primary earnings per share on the Consolidated Statement of Operations for the fiscal year ended September 30, 1995. EX-23 6 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (File Nos. 2-63785, 2-86527, 33-6873, 33-17944, 33-22040, 33-24509, 33-28600, 33-58200, 33-59391 and 33-59393). ARTHUR ANDERSEN LLP Los Angeles, California December 20, 1995 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains a summary financial information extracted from the Consolidated Balance Sheet as of September 30, 1995 and the Consolidated Statement of Operations for the year ended as of September 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR SEP-30-1995 SEP-30-1995 48,236 0 36,571 0 32,727 127,945 252,953 (148,636) 246,817 133,908 0 2,262 0 0 101,330 246,817 292,600 292,600 252,684 252,684 41,089 0 4,826 2,332 584 0 0 0 0 1,748 0.08 0
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