-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, klHt6EXx1tpWcueTene4+zWhHPg2bx4ARE8hjUmsbO2wK3l1YbwxhYwg7PsjaCqC rwlvL0DWFr61jhCTilYc5Q== 0000950131-94-001988.txt : 19950105 0000950131-94-001988.hdr.sgml : 19950105 ACCESSION NUMBER: 0000950131-94-001988 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941230 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MAGNETICS CORP CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94567053 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 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, 1994 [ ] 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 incorporation or organization) Identification No.) 75 Robin Hill Road, Goleta, California 93117 - - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (805) 683-5353 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each exchange on Title of each Class which registered ---------------------------- ------------------------ Common Stock, $.10 par value 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 of 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 $3,617,517 as of December 15, 1994. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 15, 1994. Common Stock (Par Value $.10) 22,194,675 ---------------------------------------- * 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 registrant's Annual Report to Shareholders for the fiscal year ended September 30, 1994, are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the registrant's 1994 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A within 120 days following the registrant's fiscal year ended September 30, 1994, are incorporated by reference into Part III. PART I ------ ITEM 1. BUSINESS -------- GENERAL Applied Magnetics Corporation (the "Company" or "Applied Magnetics"), incorporated in California in 1957, was reincorporated in Delaware in 1987 pursuant to a merger into a wholly owned subsidiary, also named Applied Magnetics Corporation. The reincorporation merger was approved at the Annual Meeting of Stockholders in February 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 disk head products, including ferrite metal-in-gap ("MIG") and double-MIG disk heads and head stack assemblies. Prior to and during fiscal 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"), pursuant to a Stock Purchase Agreement (the "Seagate Agreement"). The consideration paid by Seagate was $21.5 million cash, of which $1.0 million is 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 in connection with the divestiture. Another $6.5 million is held in escrow pending completion by the Company of certain performance obligations to supply tape related products and services to Seagate under certain agreements. 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. In recent years, the Company has pursued a product strategy in which it has concentrated its resources on its disk head business with particular emphasis on thin-film and MR technologies and on developing capability for producing smaller form factor nanoslider thin-film disk heads. The Company's customers include, among others, Conner Peripherals, Maxtor, Quantum, Western Digital, IBM and NEC. -1- Performance improvements in microprocessors and the related, continuing proliferation of powerful operating systems and applications software, which require increased data storage capacity and faster data transfer rates, have resulted in increasing demand for greater data storage capacity and performance in smaller form factor disk drives. In addition, the rapid 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 was one of the first independent suppliers to ship test samples of MR disk heads. In fiscal 1994, the Company began shipping nanoslider MR disk heads in prototype volumes. The Company believes that, overall, the market for ferrite disk heads is declining. However, advances in ferrite disk head technology have occasionally permitted storage capacities per disk, for drives using these devices, to approach those achieved with thin-film disk heads. As a result, for certain disk drive applications, the Company's advanced ferrite disk heads, including its MIG and double MIG products, have offered required performance while providing cost advantages over thin-film disk heads. During fiscal 1993, the industry experienced significant overcapacity conditions in thin-film disk head supplies and intense price competition for these products. As a consequence, many customers that had previously selected ferrite disk head products for cost reasons revised their disk head requirements and, instead, selected competitively priced thin-film products. Market conditions for the disk drive industry served by the Company during fiscal year 1993 reflected rapid changes in, and more abbreviated, product life cycles, intense price erosion and excess supplies of disk drives and disk drive components, particularly thin-film disk heads. In connection with these developments and in response to significant order cancellations and reschedules and related product and technology transitions, in September, 1993, the Company recorded, for fiscal year 1994, a restructuring charge of approximately $50 million. This charge included approximately $40 million for write downs of equipment and tooling to estimated net realizable values and $10 million for costs attributable to the planned consolidation of certain of the Company's manufacturing facilities. -2- Due to lower sales volume and significant production and quality problems experienced by the Company during fiscal year 1994, the Company continued to experience 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 has taken a number of actions to reverse these difficulties, improve its cash and working capital position, reduce operating losses and return to profitability. In June, 1994, the Company announced that it had engaged Lehman Brothers, Inc., as financial advisors to assist the Company in exploring various strategic alliances and other opportunities to maximize shareholder value. In August, 1994, the Company engaged the consulting firm of Grisanti, Galef & Goldress ("GG&G") to provide crisis management and turnaround assistance and advice to the Company. It also appointed Mr. Craig D. Crisman, a partner in GG&G who has considerable experience in turnaround engagements, as the Company's Chief Executive Officer. Significant cost reductions have been implemented, including reductions in employment, curtailment of capital expenditures, consolidations of manufacturing activities, production and other resources and sales of excess properties and assets. The implementation of aggressive cash management practices and the Company's sale of its tape head business unit to Seagate in December, 1994, have, together with other cost reductions and control practices, improved the Company's cash and working capital resources. INDUSTRY OVERVIEW Rigid disk drives are the predominant data storage device used in computers. Disk drives include one or more rigid disks onto and from which data are recorded and retrieved by recording heads positioned by an actuator to fly within micro-inches of one or both sides of each disk. A recording head (or "slider") attached to a flexure or suspension arm comprises a head gimbal assembly ("HGA"). Multiple HGAs, assembled together with other components, comprise a head stack assembly ("HSA"). Although some drive manufacturers assemble HSAs from HGAs purchased from head manufacturers, the Company has experienced increased demand for disk head products in the HSA configuration. Disk drive manufacturers develop a variety of different drive programs to meet different design, performance and cost requirements. Magnetic recording head suppliers, such as the Company, work with drive manufacturers to determine the performance characteristics required for the heads to be used in a new drive design and develop customized heads and HSAs for each drive program. Head suppliers seek to have their heads "designed-in" for a particular drive program and to become qualified as a primary supplier for the new drive. Achieving such a "design-in" position is usually a significant competitive -3- advantage relative to suppliers who are not initially qualified on the new drive program. The development and commencement of production of disk head products for a new drive program involves major expenditures for product design, production engineering and capital equipment. Often, certain production processes must also be adjusted to accommodate the unique specifications of the new design. While the Company has been successful in achieving design- in status on some disk drive programs during fiscal 1994, it has experienced production yield, quality and manufacturing difficulties on some disk head products which have adversely affected its ability to obtain the desired production ramp levels on a timely basis. These difficulties also led to unfavorable financial conditions, including significant operating losses and limitations on cash and working capital resources. The Company has taken a number of steps to improve yields, reduce costs and strengthen its cash and working capital resources. However, the disk head industry is intensely competitive and if these production problems and the related financial conditions, including operating losses and limitations on capital resources, continue or reoccur, the Company's ability to successfully achieve design-in positions on future, new disk head products and its ability, once having achieved design-in status on such products, to execute on production programs could be adversely affected. Accordingly, there are no assurances that the Company will be able to continue these design-in successes. Further, its financial difficulties, limited resources and aggressive cash management/cost reduction activities may limit or delay the Company's ability to direct sufficient technical, research and other resources, on a timely basis, to new products or new generations of existing products in response to customer demands. TECHNOLOGY Magnetic recording heads are electromechanical devices that record ("write") data onto and retrieve ("read") data from the magnetic layers of digital data storage media, either disk or tape. 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 media. Reversing the direction of the current reverses the polarity of the next magnetized segment of the media, thus allowing data to be encoded as a pattern of reversing polarities. To read data, the previously encoded media is 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 -4- currents in the coil which are sensed and decoded by the drive circuitry. 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 densities require that the head fly both closer to the disk and at more uniform flying heights across the disk. This is influenced by the size and mass of the head and its hydrodynamic 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 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, with competitive or enhanced price-performance characteristics. 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 continues to expect that on an overall basis, demand for these devices will continue to decline. Ferrite disk heads incorporate either conventional ferrite technology or ferrite-MIG technology. Conventional devices are constructed with a material which is limited to relatively low levels of magnetic field strength and attempts to produce stronger magnetic fields limit disk head performance at higher areal densities. MIG construction overcomes this limitation and allows the device to produce much stronger magnetic fields without saturation, thus permitting operation at much higher areal densities. 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 -5- 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. This process permits a greater degree of precision and repeatability, greater miniaturization and lower mass than can be achieved with ferrite production methods in which the electrical coil is usually hand-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 designed to "read" and "write" data using a simple inductive element, an MR disk head uses an inductive element to "write" data onto the media and a separate MR element to "read" data from the media. The MR read element incorporates a magnetoresistor whose electrical resistance changes in the presence of a magnetic field. As the encoded media 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 media 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 disk media in which linear velocities are inherently lower. MR disk heads also allow for optimization of read and write gaps independently. This cannot be accomplished with inductive heads which incorporate a single gap for both read and write functions. PRODUCTS THIN-FILM AND MR DISK HEADS. The Company currently produces thin-film HGAs and HSAs in nanoslider and microslider form factors. During fiscal 1994, the Company became qualified and began to make volume production shipments on a number of new disk drive programs, some of which require nanoslider thin-film products. The Company's thin-film microslider and nanoslider products are produced in volume for 3.5-inch disk drives to achieve areal densities of up to approximately 300 megabits of data per square inch. The nanoslider 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 workstations and next generation personal computers, and for 2.5-inch and smaller form factor drives for use in notebook products. -6- Development and commercialization of MR disk heads continued to be a major focus for the Company in fiscal 1994. During fiscal year 1994, the Company continued to ship prototype and qualification samples of MR disk head products to selected customers for drive applications with recording densities of up to 650 megabits per square inch. 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. 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 improves production yields and enhances the hydrodynamic characteristics of the disk heads, allowing the head to fly at lower, more uniform heights, thus contributing to higher areal densities. FERRITE DISK HEADS. The Company offers primarily ferrite-MIG HGAs and HSAs in microslider and minislider form factors. The use of ferrite heads in high performance disk drives presents technological challenges. However, advances in MIG technology resulted in situations in which certain ferrite disk heads are more 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 continues 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. During fiscal 1994, through its Tape Head business unit, the Company supplied various metal-core tape heads for both conventional one-half inch open reel and QIC tape drives and IBM-compatible 18-track MR heads for one-half inch cartridge tape drives and was involved in the development and production of MR tape heads for QIC tape drives. The Company's sales of tape heads for the year ended September 30, 1994, represented 6.8% of consolidated net sales. The Company sold this business unit to Seagate on December 10, 1994. However, pursuant to certain ongoing contractual arrangements, it will continue to sell to Seagate various tape- related goods and services. CUSTOMERS AND MARKETING The Company's customers include, among others, Conner, Maxtor, Quantum and IBM. The Company's top four customers -7- accounted for 86% of the Company's net sales in the year ended September 30, 1994. Conner, Maxtor, Quantum and IBM represented approximately 53%, 13%, 10% and 10%, respectively, of net sales during the year ended September 30, 1994. During fiscal 1993, Conner, Maxtor, Quantum and IBM represented approximately 21%, 28%, 18% and 17%, respectively, of net sales. 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 addition, the customer base may become more concentrated when, as and 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. See "Competition". 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. Maxtor has recently announced continuing operating losses and significant actions to reorganize and consolidate its operations. If these or other similar developments restrict or limit the development of major, new disk drive programs for which the Company anticipates supplying disk heads or prevent this customer from completing existing, major disk drive programs for which the Company supplies disk heads, such matters could have an adverse affect on the Company's business. 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 drives. Through its product planning and marketing efforts, the Company seeks to identify those high performance disk drive programs that it believes will achieve high volume and concentrates 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. Some of the Company's United States sales activities are conducted through independent sales representatives. Historically, the Company sold its products in Japan through its Japanese subsidiary. As of December 1992, in accordance with a License and Technology Development Agreement ("HML Agreement") -8- between it and Hitachi Metals, Ltd. ("HML"), the Company granted certain exclusive marketing rights in Japan to HML and retained rights to market products to only one Japanese manufacturer. The Company has been successful in achieving some design-in positions with certain customers on certain disk drive programs. However, in the past, the Company has experienced difficulties in consistently achieving design-in positions. Further, in some cases its products have not achieved the technical, performance or pricing objectives required by the customers. In fiscal 1994, having achieved design-in positions on certain programs, the Company experienced significant production yield and quality problems which led to significant operating losses and, in some cases, the Company was not able to deliver production volumes in accordance with the delivery schedules to which it had initially agreed. Accordingly, 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. RESEARCH AND DEVELOPMENT The Company commits substantial resources to research and development in order to meet its customers' continuing demands for higher performance disk heads for successive disk drive product families. The Company has augmented its research and development programs with the financial and technical resources of certain strategic partners. In addition to the HML Agreement, the Company has pursued joint product development agreements with certain major disk drive manufacturers for MR disk head development. Under the HML and other agreements, the Company recognized as income $14.1 million and $15.1 million in fiscal years 1994 and 1993. The development effort under two of the agreements with the disk drive companies was completed or substantially completed by the end of fiscal 1994, development efforts are continuing under one agreement and have been suspended under another agreement. Research and development expenses totaled $38.8 million in fiscal 1994, before giving effect to $14.1 million in development funding that was recognized as cost offsets. Research and -9- development expenses in fiscal 1993 totaled $32.6 million, before giving effect to $15.1 million in development funding that was recognized as cost offsets. Research and development activities relate to creating technological advances required for new product development and the advancement of production processes required in new product production (e.g. development of smaller form factor products, advanced coil structures, constant flying height 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. Substantially all research and development activities relating to disk head products are performed at the Company's Goleta, California operations. A dedicated group of engineering and technical personnel has focused on product design and process development for the Company's MR disk head products. In addition, the Company also has engineering and technical staff dedicated to various production operations to provide manufacturing process and integration support for nanoslider products. While demand for nanoslider thin-film disk heads was strong during fiscal 1994, during this year the Company experienced production yield, quality and manufacturing difficulties. As a result, on some programs it was not able to ramp production volumes to desired levels in order to satisfy scheduled deliveries. These conditions, in turn, resulted in loss of revenues and operating losses during fiscal 1994. While the Company has taken, and is taking, a number of actions to improve the efficiency, quality and timeliness of the process by which its new and emerging products and product designs transition from the development stage into volume production, there are no assurances that this process may be adversely affected by similar problems or difficulties that might arise with respect to other new products or technologies that the Company may pursue in the future. The Company's technology development is primarily devoted to commercialization of MR disk head technology. The Company has been developing MR technology since 1979. The Company expended $33.6 million in MR disk head development in fiscal year 1994, and expects to expend approximately an additional $53.0 million through the end of fiscal 1995. The expenditures in 1993 and 1994 were partially offset by payments received under the HML Agreement and the joint product technology development agreements with four disk drive manufacturers described above. The Company does not currently have any ongoing technology development agreements which provide for it to receive any significant payments during fiscal 1995, for research and -10- development efforts relating to MR products or other new or advanced technology disk head products. While it may continue to consider and pursue opportunities relating to such arrangements, it believes that its existing cash resources and expected operating results will provide sufficient financial resources, on an independent basis, to fund its ongoing MR research and development activities in a manner consistent with its current operating plans. 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. HML has paid the Company $35 million, net of $1.0 million in Japanese withholding taxes, for joint development, and related licenses, for thin-film and MR disk head technology. In addition to this funding, HML is contributing engineering personnel, technology and know-how to the joint development program. MANUFACTURING The Company's thin-film and ferrite heads have different "front-end" or slider fabrication processes but similar "back-end" suspension assembly processes. FRONT END FABRICATION THIN-FILM. Thin-film heads are manufactured using a semiconductor- like fabrication process in which the coil and other critical structures of the magnetic sensor are created utilizing photolithography, vacuum deposition, wet chemical etching and precision electroplating technologies. The Company's fabrication process uses both three-inch and six-inch round non-magnetic ceramic wafers made of alumina titanium carbide. Six-inch wafers can produce 4.5 times more microsliders than three-inch wafers and six times more nanosliders than three-inch wafers. Volume production of six-inch wafers commenced in September 1992 and by September 1994 constituted over 80% of the Company's thin-film slider production. During the second quarter of fiscal 1994, the Company completed construction of a six-inch wafer fabrication facility for the volume production of MR heads. -11- In fiscal 1995, the Company will discontinue producing wafers for its thin-film and MR disk head products from its older, 3 inch lines and all wafers for thin-film and MR disk heads will be produced from 6 inch lines. This action is expected to improve production efficiencies and reduce costs. The Company fabricates all of its wafers at its Goleta, California facilities. The wafer moves through a sequence of processes employing photolithography, electroplating and sputtering techniques to deposit and form the magnetic elements of several thousand heads in thin-film layers on the surface of the wafer. The magnetic elements are made by depositing as many as twenty-one layers of various materials including gold, copper, and alloys of nickel and iron, using photo masking and selective etching techniques. Finished wafers are then tested, at the Goleta facilities, and sliced into "rows". These "rows" are then mounted on bars that serve as holding fixtures and then shipped to the Company's Malaysian facilities for further processing as a result of which approximately 1,000 or 1,800 sliders can be produced from three-inch wafers and 4,500 or 8,400 sliders from six-inch wafers, depending on whether microsliders or nanosliders are being manufactured. Each slider is ground and lapped to small tolerances in order to achieve the electromagnetic capabilities and hydrodynamic characteristics specified for the completed head. The production yield, quality and manufacturing difficulties experienced by the Company during fiscal 1994 included problems relating to its ability to produce wafers for thin-film disk heads with acceptable production yields from the Company's six-inch line. The Company has implemented additional manufacturing and process control procedures and other steps which resulted in improved yields in its wafer fabrication activities, including the six-inch line, during the last quarter of fiscal 1994, and continuing into the first quarter of 1995. While the Company will continue to monitor these control procedures and implement new or supplemental manufacturing and control procedures to sustain wafer yields at acceptable levels, there can be no assurances that its efforts to maintain production yields at acceptable levels will not be adversely affected by similar or other difficulties that may arise with respect to new products, new product designs or changes in manufacturing processes which would result in lower than acceptable production yields. To the extent, if any, the Company's ability to execute customer orders is adversely affected by lower than acceptable production yields or other difficulties, the Company's ability to generate sufficient cash flows from operations to meet its operating and capital expenditure requirements consistent with management's intentions to return the Company to profitability by the end of fiscal 1995 could be adversely affected. -12- The Company expects that demand for thin-film disk head products will continue to increase. The Company's ability to achieve desired increases in production output levels from its six inch wafer fabrication line in order to respond to increased market demands in its thin-film products is, to a large extent, dependent on its ability to fund capital expenditures needed to improve and refine certain processes and process equipment. If, because of restrictions on cash and other capital resources, the Company is unable to obtain the required funds in sufficient amounts and at required times, its future revenues could be adversely affected. The Company believes that demand for disk heads with FEAB or other negative air pressure bearing surfaces, which enhance the hydrodynamic characteristics of the disk heads, will increase and that it has made important progress in its efforts to develop processes relating to these designs and in implementing these designs in a number of its thin-film disk head programs. The Company is also converting some of its conventional processes and equipment so as to increase its capabilities in this area. However, circumstances may arise in which the demand for disk head products with these features may exceed, on a temporary basis, the Company's manufacturing capacity. FERRITE. Ferrite disk heads consist of a polycrystalline or single crystal ferrite core bonded to a slider body. The slider body is manufactured from ferrite (monolithic) or non-magnetic ceramic (composite) materials and is processed through several high precision grinding and lapping operations. The Company purchases its requirements of both monolithic and composite ferrite sliders from outside vendors. These sliders are delivered to facilities in Korea, Malaysia or China where the coils are wound with fine copper wire using either manual or automatic processes. Procurement of sliders from established vendors allows the Company to avoid making capital expenditures for ferrite slider production capacity. BACK-END ASSEMBLY Sliders are attached to a stainless steel suspension, forming an HGA. The Company performs assembly and testing of thin-film and ferrite HGAs at its facilities in Ireland, Korea and Malaysia. Assembly and testing operations were also conducted, previously, at the Company's Singapore facility until those operations were consolidated with the Malaysian facility in the latter half of fiscal 1994. The Company has undertaken substantial capital expenditures for the mechanization of its HGA production processes, which has resulted in increased productivity, reduced critical device tolerances and improved quality. In addition to increasing manufacturing output, these improvements have resulted in more uniform performance by the Company's HGAs, which the Company believes provides it with a -13- competitive advantage. The Company manufactures a substantial portion of its stainless steel suspension requirements at a manufacturing facility in Korea. The Company has been assembling complex ferrite HSAs since the mid- 1970s. FOREIGN OPERATIONS With the exception of its wafer fabrication operations, and certain slider fabrication operations, which are located in Goleta, California, the Company conducts substantially all of its production, assembly and test operations at its facilities in Korea and Malaysia. Since July, 1994, following the consolidation, into its Malaysian facility, of certain assembly and test operations formerly done at the Singapore business unit, the Company's Singapore subsidiary has been engaged in customer service and support operations relating to several disk drive customers who conduct operations in that country. The Company has contractual relationships with unaffiliated parties who provide manufacturing and assembly operations on a contract-labor basis for the Company in Korea and in the People's Republic of China ("PRC"). The PRC operations are monitored by an office maintained by the Company in Hong Kong. During fiscal 1995, the Company expects to terminate these contractual arrangements and close the Hong Kong office as it consolidates these operations at other facilities. The Company supports its European markets primarily from its facility in Dublin, Ireland. The Company's operations in Korea have, from time to time in recent years, been affected by labor disruptions and slow-downs. In addition to risks of labor disruptions, civil unrest and political instability, the Company's foreign operations subject it to risks associated with obtaining governmental permits and approvals, currency exchange fluctuations, currency restrictions, trade restrictions and changes in tariff and freight rates. Further, language barriers and distances between the Company's domestic and foreign operations occasionally contribute to logistic and communication difficulties in manufacturing and production activities. The Company has consolidated much of its manufacturing and assembly operations at its facility in Penang, Malaysia which, at September 30, 1994, employed approximately 3,200 persons. Because the number of employees in this region is increasing and because employers currently located in this region are expanding their operations, there may, from time to time, be situations in which there are shortages of labor resources having the desired skills and experience for the Company's operations at its Malaysian facility. These developments could adversely affect shipment levels or result in higher labor costs. -14- 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, wire and other materials used in the manufacture of thin-film disk heads and ferrite sliders. 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. BACKLOG The Company receives purchase orders from its customers, or in some cases master purchase agreements, which express the customer's intentions to purchase, at stated unit prices, certain quantities of products during a specified period. Although the customers are not obligated under these agreements to purchase the total quantities, the purchase of a smaller quantity may result in an increased unit price for the number purchased. Further, some 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. The Company has experienced cancellation and rescheduling of orders, reductions in quantities and repricing as customer requirements change. 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 claim 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. The significant order cancellations and reschedules which occurred in September, 1993, resulted, generally, in compromise arrangements of this nature. In previous years, particularly those in which the disk drive industry was undergoing 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 as a result of which the Company's revenues and profitability could be adversely affected. Further, -15- as a result of the foregoing factors, the Company's backlog may not be indicative of product shipments in any future period. The Company's backlog of unfilled orders for thin-film or ferrite disk heads and tape heads as of September 30, 1994 and September 30, 1993 is set forth below. Orders in backlog with specified delivery dates are, generally, for delivery within six months. The Company's backlog is subject to substantial fluctuations depending on the timing of orders, shipments and release dates with respect to the Company's principal customers. Further, in December, 1994, the Company completed the sale of its Tape Head operations to Seagate and following the divestiture, its production and sale of tape related goods and services will be limited to that required in order for it to comply with certain continuing contractual obligations between it and the buyer. See Item 1, "Business - General".
Orders With Orders With Specified Delivery Delivery Dates September 30, 1994 Date To Be Determined Total - - ------------------ ------------------ ---------------- -------------- (in thousands) (in thousands) (in thousands) Thin-film disk head products $34,703 $11,461 $46,164 Ferrite disk head products 9,923 18 9,941 Tape head products 8,611 65 8,676 ------- ------- ------- $53,237 $11,544 $64,781 ======= ======= ======= September 30, 1993 - - ------------------ Thin-film disk head products $25,764 $ 6,608 $32,372 Ferrite disk head products 37,059 1,934 38,993 Tape head products 4,225 1,536 5,761 ------- ------- ------- $67,048 $10,078 $77,126 ======= ======= =======
-16- COMPETITION The Company competes with other independent recording head suppliers, two major disk drive companies and some systems companies that produce magnetic recording heads used in their own products. In the case of thin- film heads, some systems companies who manufacture disk drives internally, such as IBM, Fujitsu and NEC (each with significantly greater financial, technical and marketing resources than the Company), are vertically integrated and produce thin-film heads for their own use. Quantum and Seagate, both of which are major independent disk drive manufacturers, and IBM occasionally make their thin-film disk head products available on the market to competing drive manufacturers. In fiscal 1994, Quantum Corporation, a major disk drive manufacturer, acquired from Digital Equipment that firm's controlling interest in Rocky Mountain Magnetics, a joint venture with Storage Technology and Digital's thin-film disk head operations. Rocky Mountain Magnetics is primarily engaged in the development, production and sale of MR disk heads. Relative to Applied Magnetics, these companies have greater financial and operational resources and may have closer and faster access to disk drive technology development, thus allowing them a competitive advantage over the Company. However, 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, for competitive and other reasons, as alternative sources of supply or in some cases as primary sources of supply for discrete disk head solutions. The Company believes that Read-Rite Corporation has had substantially greater sales of thin-film disk head products than the Company and is presently its primary 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. While this acquisition will allow Read-Rite to compete with the Company in both product offerings, the same price-performance considerations related to offering ferrite, as compared to thin-film disk head products, for different disk drive applications, that have applied to the Company are likely to affect this competitor and may contribute to greater stability in product pricing decisions. See "Item 1. Business, Technology". -17- Komag, a large independent supplier of disk media, Asahi Glass, a large diversified Japanese industrial concern, and Hewlett Packard Company have recently announced the formation of Headway Technologies, Inc., a joint venture to develop, produce and market MR disk heads. The principal competitive factors in the markets the Company addresses are price, product performance and quality, product availability, responsiveness to customers and technological sophistication. The Company believes that it competes favorably with respect to these factors, but there is no assurance that it will continue to be able to do so. The financial difficulties experienced by the Company during fiscal 1994 and the limitations on its scientific, technical, cash and working capital resources have required the Company to impose greater focus and management controls on research and development projects and, in certain cases, to delay, postpone or curtail certain advanced technology research and development efforts. However, the Company believes that it has continued to make satisfactory progress and achievements in program-specific development efforts involving both thin-film and MR disk head products. Additional or more severe financial conditions, operating losses and restrictions on capital resources could have an adverse effect on the Company's research and development activities in these areas. The Company currently experiences limited competition from domestic U.S. independent head manufacturers in ferrite disk heads but believes that its primary competitors, TDK and its SAE subsidiary, each have revenues from ferrite disk heads comparable to those of the Company. In previous years, the Company believes that its ability to offer both thin-film and ferrite disk head technologies has allowed its customers to select the desired price-performance characteristics for specific drive programs and, therefore, provided the Company a competitive advantage over those competitors with narrower product lines. However, as the turmoil and uncertainty in the industry increased in the latter part of 1993, combined with significant price erosion in thin-film disk heads, these products currently represent attractive price-performance alternatives to ferrite disk heads. As a consequence, the Company anticipates that, while there may continue to be situations in which ferrite disk heads provide a more attractive solution for particular disk drive applications, given relevant price-performance considerations, the competitive benefits of being able to offer both ferrite and thin-film disk products will be outweighed by price, performance, quality, time-to-market and other considerations involving thin-film disk heads. 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 -18- obtain new orders depends on its ability to anticipate technological changes, develop products to meet individualized customer requirements and timely deliver 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 orders from, or loss of a customer, which could occur as a result of these or a wide variety of other reasons, could have a material adverse effect on the Company's operations and financial condition, including collection of accounts receivable and realization of inventories relating to that customer. RECENT DEVELOPMENTS As a result of its deteriorating financial condition, operating losses and declining revenues during fiscal 1994 and continuing into 1995, the Company took a number of actions intended to assure the Company's survivability, to maximize shareholder value and to set the Company on a course leading to a return to profitability. In June, 1994, the Company announced that it had retained Lehman Brothers, Inc. as financial advisors to assist in exploring strategic alliances and other opportunities to maximize shareholder value. In August, 1994, the Company announced that it had retained Grisanti, Galef & Goldress, Inc. ("GG&G") a consulting firm with considerable crisis management and turnaround experience, to assist the Company in its efforts to conserve and generate cash and working capital, reduce costs, stem operating losses and return to profitability. Further, Mr. Craig D. Crisman, a partner in GG&G, was appointed as President and Chief Executive Officer and as a member of the Board of Directors. Substantial changes in the Company's executive management team have been implemented and significant reductions in the Company's employment force have taken place. In November, 1994, the Company announced and on December 10, 1994, it completed, the sale of its Tape Head business unit to Seagate for $21.5 million cash, of which the Company has received $14.0 million. Of the remaining funds, $1.0 million is held in escrow as a standard hold-back, for one year, to indemnify the buyer for any claims relating to the representations and warranties provided by the Company in connection with the divestiture. Another $6.5 million is held in escrow pending the completion by the Company of certain performance milestones, most of which are scheduled for completion within twelve (12) months following the sale of this business unit, under the Company's agreements to provide certain tape-related goods and services to the buyer following the sale. -19- The Company believes that all or substantially all the funds being held in escrow will eventually be distributed to it. However, if for any reason claims are made by, and resolved in favor of, the buyer to the extent that all or a significant portion of the escrowed funds are not distributed to the Company, this could have an adverse impact on the Company's liquidity. In November, 1994, the Company also announced that it had entered into a commitment letter with The CIT Group/Business Credit, Inc. ("CIT") for an asset-based credit facility of up to $35.0 million. The closing of the transaction, which is subject to preparation and execution of definitive loan documentation and certain other closing conditions, is expected to occur in early January, 1995. In November, 1994, the Company also announced that it entered into an agreement to dismiss a securities class action suit brought against it and several present and former officers in U.S. District Court for the Central District of California. No findings or admissions of liability on the part of the Company or the named defendants have been made and the Company will not have to make any cash payments to resolve the suit. Moreover, while the Company believes the allegations in the suit are totally without merit, it will not have to undergo protracted and expensive litigation to defend the case and will, instead, be able to focus its resources, skills and energies towards operational goals and objectives. The agreement is subject to the terms of a definitive written agreement which is to be submitted to the court for preliminary approval. See Item 3, "Legal Proceedings". The Company has also implemented consolidations of manufacturing operations at several domestic and foreign facilities which have resulted in cost reductions and the sale or expected sale of excess properties and assets. Moreover, the Company has implemented aggressive cash management practices and operating plans for fiscal 1995, that are being closely managed. On the basis of these actions and other, continuing management actions that are being taken to reduce costs, limit and control capital expenditures, achieve operational objectives, resolve yield problems and production difficulties and manage cash and working capital resources, the Company's objective is to return to profitability by the end of fiscal 1995, provided there are no significant external adverse developments including, but not limited to, market conditions similar to those experienced in fiscal 1993, major consolidation of customers or competitors, significant and unanticipated technological developments or other considerations. -20- INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company regards elements of its manufacturing process, product design, 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 issue 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. In addition, 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. The Company is currently in negotiation with IBM regarding extensions of existing licenses. Further, under an agreement with Hutchinson Technology, Inc., 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 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. Despite the Company's protective measures, however, competitors or customers could obtain information that the Company regards as proprietary. 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 to suspend the manufacture of the products utilizing the patented invention. -21- EMPLOYEES As of September 30, 1994, the Company had approximately 5,500 employees of whom approximately 800 are located in California, approximately 4,600 are located in Asia and approximately 100 are located in Ireland. The Company believes that its future success will depend in large part upon its ability to continue to attract, retain, train and motivate highly skilled and dedicated employees. 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 recent years, been affected by labor disruptions and slow downs. 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, or to obtain all permits as required under such 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. Based on Company records of shipments to this site and preliminary estimates of cleanup costs, it appears that any exposure to the Company will not be material. -22- SEASONALITY Generally, the Company's revenues for the first quarter (October 1- December 31) of its fiscal year tend to be lower than the last quarter of the preceding fiscal year and may be lower than those of one or more succeeding quarters. To some extent this is due to inventory and production planning and scheduling requirements imposed by some customers during the last quarter of the calendar year. This is also due to the holidays which occur during the period and related temporary plant close- downs at some of the Company's manufacturing locations during these holidays. There are occasional exceptions to this general condition. For example, during the course of a calendar year, market conditions may rapidly shift from oversupply to cutback conditions during the first half of the year to an increase in demand for products during the latter half. 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 margin declines. WORKING CAPITAL The manufacture of recording heads, particularly thin-film and MR disk heads, is capital intensive. In fiscal 1994, revenues fell below 1993 volumes, and the Company experienced manufacturing difficulties and production yield problems. These factors combined to reduce the Company's cash balance from $49.4 million at September 30, 1993, to $20.8 million at September 30, 1994. In addition, as a result of significant operating losses and capital expenditures during fiscal 1994, at September 30, 1994, the Company had a negative working capital of $36.4 million as compared to a positive working capital of $33.9 million at September 30, 1993. As a result, the Company's ability to make major capital investments in equipment, tooling and facilities to support improvements and investments in its thin-film disk head products and technology has been constrained. The Company has, however, successfully managed its working capital to make selected capital expenditures during this period. In response to these developments, in the fourth quarter of fiscal 1994, the Company implemented cost and cash expenditure controls that included staff reductions and aggressive cash management practices. -23- The Company has also negotiated accelerated payment terms with some of its key customers and is exploring other financing alternatives, including new loan and credit facilities, extensions or renewals of existing facilities, lease financing opportunities and other cash and working capital sources. During fiscal 1994, the Company experienced a net use of cash in the amount of $12.9 million for operating activities which included the receipt of $15.9 million of joint development funding received under the HML Agreement and the Development Agreements, and decreases in accounts receivable and inventory of $19.1 million and $10.9 million, respectively. During fiscal 1994, net cash from financing activities was $9.0 million, primarily from utilization of the Company's unsecured credit facility with a Malaysian bank. During this period, the Company made capital expenditures of $31.5 million, primarily related to increasing thin-film disk head production capacity and development of MR disk head technology. Additionally, the Company entered into $12.0 million of operating leases with terms of three (3) years. At September 30, 1994, total debt, including notes payable, was $67.2 million, an increase of $10.0 million from the balance outstanding at September 30, 1993. The Company had fully drawn down its unsecured Malaysian credit facility to $46.1 million, which has no stated maturity but is callable on demand from a bank in Malaysia where the Company has substantial manufacturing operations. The Company also had outstanding $10.0 million under a revolving credit facility with a commercial bank. The credit facility provides for up to $10.0 million in aggregate commitments, is supported by a letter of credit issued for the account of HML, subject to reimbursement by the Company and the interest rate under this credit facility was 5.4% for the year ended September 30, 1994. This credit facility was amended to extend the maturity to March 15, 1995. All other terms of the facility remain unchanged. The Company also had outstanding a $10.0 million note with Conner, pursuant to a Note Purchase Agreement, which is secured by accounts receivable arising from sales to Conner and by certain capital equipment. The underlying loan, which matures December 31, 1994, is convertible, at Conner's election at any time, into shares of the Company's Common Stock at a conversion price of $10.25 per share. On December 21, 1994, in connection with the contemplated credit agreement between the Company and CIT, described above in "Recent Developments", the Company and Conner entered into an agreement to extend the maturity date of the Note Purchase Agreement to the earlier of January 10, 1995, or the closing date of the CIT credit agreement. -24- In 1995, the Company plans approximately $49.0 million in capital expenditures relating primarily to its thin-film and MR disk head production capacity and development of related technologies. During the next twelve months, the Company believes that additional sources of capital will be required in order to fund the planned production ramp-up of thin- film and MR disk heads and to maintain planned levels of research and development and capital expenditure levels required for these disk head technologies. The Company has implemented an operating and cash management plan, the objective of which is to provide sufficient cash flows from operations to meet its operating and capital expenditure requirements consistent with management's intentions to return the Company to profitability by the end of fiscal 1995. Management believes that it will be able to reduce its funding requirements for planned but not committed capital expenditures required to develop and achieve volume production of certain disk head products if market demand for those products does not materialize or declines. However, if the Company is unable to increase sales and maintain production yields at acceptable levels in order to permit it to execute customer orders for the new drive programs in a manner consistent with management's intentions to return to profitability by the end of fiscal 1995, there could be a significant adverse impact on liquidity, which would require the Company to obtain additional capital from external sources. There are no assurances that such sources of capital will be available or that the terms associated with external funding sources will be satisfactory to the Company. If the Company is unable to obtain sufficient capital it would need to curtail its capital, research and development and working capital expenditures which would adversely affect the Company's future years' operations and competitive position. The Company's accounts receivable and inventory balances are heavily concentrated with a small number of customers. Sales to Conner, Maxtor, Quantum and IBM accounted for 53%, 13%, 10% and 10%, respectively, of the Company's sales in 1994. If any large customer of the Company became unable to pay its debts to the Company, liquidity would be adversely affected. Further, while management has not been informed of any facts or circumstances suggesting that the Malaysian bank intends, during fiscal 1995 to cease making the Malaysian Credit Facility available, should the bank decide, for any reason, to make all or any significant portion unavailable in fiscal 1995, the Company would need to pursue alternative financing sources. Moreover, the Company has reached informal agreements and understandings with some of its customers to make payments on accelerated terms. Generally, these arrangements may be canceled at any time and the customers could revert to payments in accordance with usual and customary terms. Should one or more of these customers determine that all or a significant portion of the Company's trade accounts which are currently being paid on accelerated terms should revert to standard terms, there could be a significant impact on liquidity -25- unless the Company has been able to obtain additional or supplementary sources of capital. However, this liquidity risk may be partially ameliorated by the credit available under the contemplated CIT Credit Facility under which available loan proceeds could, generally, increase as the Company's trade accounts receivable increase. See "Recent Developments". 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. Raw material purchases in yen are selectively hedged. The Malaysian debt maturities are also hedged. The Company effects these hedges primarily with forward contracts in order to reduce the effects of currency rate fluctuations on its results of operations. However, such fluctuations can have a significant effect on reported cash balances. The effect of foreign currency exchange rate changes was a $1.2 million increase in fiscal 1994, and a $1.0 million decrease in fiscal 1993 in cash and equivalents held in foreign currency. ITEM 2. PROPERTIES The Company's continuing manufacturing operations are located in California, Malaysia, Korea and Ireland. These manufacturing facilities comprise over 900,000 square feet, substantially all of which are owned by the Company. The Company is offering for sale certain of its facilities in Korea comprising approximately 93,000 square feet. In addition, one separate facility is owned by the Company in connection with a subsidiary which had been previously divested. This facility is currently leased to the acquirors of the subsidiary. The Company does not believe it will be required to acquire or lease significant additional facilities at least through fiscal 1995. Moreover, the Company anticipates that it will, during fiscal 1995, undergo some further consolidation of certain of its manufacturing facilities. The following table sets forth information concerning the principal manufacturing and sales facilities of the Company and other properties owned by the Company. Except as noted below with respect to certain facilities that are no longer required and are being offered for sale, the Company considers the utilization and productive capacity of these facilities adequate and suitable for its business as it is presently being conducted. During fiscal 1994, the Company sold its facilities in Golden Valley, Minnesota and Monument, Colorado, comprising approximately 81,000 and 17,000 square feet, respectively. In the first quarter of fiscal 1995, the sale of an approximate 6,000 square feet facility owned by the Company's Singapore -26- subsidiary was completed and, in connection with the sale of its Tape Head business unit to Seagate, the Company transferred ownership of its 30,000 square feet facility in Santa Maria, California.
Approximate Expiration of Floor Area Original or (Sq. Ft.) Option Term of Lease --------------- -------------------- Goleta (Santa Barbara) California 217,000 Owned San Jose, California 1,265 Month-to-Month Dassel, (Minneapolis) Minnesota 20,000 Owned /(1)/ Penang, Malaysia 208,000 Owned Republic of Singapore 6,000 July, 1997 Chuncheon and Chung Ju, Korea 451,761 Owned /(2)/ Seoul, Korea 31,385 December, 1996 Dublin, Ireland 40,000 Owned
[FN] /(1)/ This facility is leased by the Company to the acquiror of a subsidiary which was previously sold by the Company. /(2)/ One of the facilities at Chung Ju, comprising approximately 93,000 square feet is being offered for sale or lease. 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 present and 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 is expected to be submitted to the court for preliminary approval during December, 1994. The settlement is ultimately subject to final court approval after notice to the class members of the terms. 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. 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. -27- 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. PART II ------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- NONE ITEMS 5. through 8. The information called for by Part II of Form 10-K (Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters; Item 6 - Selected Financial Data; Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations; and Item 8 - Financial Statements and Supplementary Data) is set forth on page 10, and pages 5 through 14, in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1994, and such information is incorporated herein by this reference. There were no cash dividends paid by the Company during the fiscal years 1994 or 1993. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- None PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The following table sets forth information as to the name, age, and office(s) held by each director and executive officer of the Company as of December 29, 1994:
Name Age Office Held - - ---------------------- --- ------------------------- Harold R. Frank 70 Chairman of the Board Dr. R.C. Mercure, Jr. 63 Director Herbert M. Dwight, Jr. 64 Director Craig D. Crisman 53 Director, President and Chief Executive Officer, Chief Financial Officer
-28- Raymond P. Le Blanc 49 Vice President, Secretary and General Counsel Peter T. Altavilla 41 Corporate Controller John Ross 49 General Manager, Wafer Fabrication Business Unit
Harold R. Frank has been Chairman of the Board of the Company for more than five years. Mr. Frank also serves as a member of the boards of directors of Circon Corporation, La Cumbre Savings Bank and Key Technology, Inc. Dr. R.C. Mercure, Jr. became director of the Company in October 1982. He serves as Professor and Director, Engineering Management Program, University of Colorado at Boulder. Dr. Mercure previously served as Vice President, Colorado Venture Management, Inc., a management consulting firm, and is a director of Imex Medical Systems. Herbert M. Dwight, Jr. became a director of the Company in August 1989. He has been President of Optical Coating Laboratory, Inc., a manufacturer of precision optical thin-film products and components, since August 1991. Previously, Mr. Dwight was a founder, President, Chairman and Chief Executive Officer of Spectra-Physics, Inc., a manufacturer of laser products and scientific instruments. Mr. Dwight is also a director of Applied Materials, Inc., Laserscope, Inc. and Trans Ocean, Ltd., a sea container leasing corporation. Mr. Crisman is a partner in the firm of Grisanti, Galef & Goldress, Inc. ("GG&G") which firm was engaged by the Company on August 1, 1994, to provide crisis management and turnaround services to the Company. He was appointed Chief Executive Officer on August 1, 1994, and, subsequently, assumed the additional duties of President and Chief Financial Officer. During the five years preceding his appointment as Chief Executive Officer and as a Director of the Company, Mr. Crisman, acting as a partner in GG&G, has been engaged, as a crisis management consultant, in business turnaround assignments involving a number of different enterprises in various industry segments. Raymond P. Le Blanc has served as Vice President since September 1985 and as Secretary and General Counsel since 1982. He joined the Company in February 1974. -29- Peter T. Altavilla has been employed by the Company for approximately seven (7) years. He served as Assistant Controller until August 11, 1994, when he was elected to his present position. 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. Certain information with respect to the Company's directors required by Part III of Form 10-K, Item 10, will be set forth in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the Company's fiscal year ended September 30, 1994, and such information is incorporated herein by this reference. ITEMS 11. - 13. The information called for by Part III of Form 10-K (Item 11 Executive Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and Management, and Item 13 - Certain Relation-ships and Related Transactions) will be set forth in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the Company's fiscal year ended September 30, 1994, and such information is incorporated herein by this reference. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS --------------------------------------------------- ON FORM 8-K ----------- I. FINANCIAL STATEMENTS (1) The financial statements listed below are set forth in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1994, and are incorporated herein by this reference. -30- Annual Report Page No. ------------- Consolidated Statements of Operations for 11 the Years Ended September 30, 1994, 1993 and 1992 Consolidated Balance Sheets, 12 September 30, 1994 and 1993 Consolidated Statements of Cash Flows 13 for the years ended September 30, 1994, 1993, and 1992 Consolidated Statements of Shareholders' 14 Investment for the Years Ended September 30, 1994, 1993 and 1992 Notes to Consolidated Financial Statements 15-25 Report of Independent Public Accountants 26 (2) Supplemental financial statement schedules required to be filed as a part of this report: Form 10-K Page No. ---------- Supplemental Note to Consolidated 38 Financial Statements, September 30, 1994 Schedules for the years ended 39-43 September 30, 1994, 1993 and 1992 II. AMOUNTS RECEIVABLE FROM RELATED PARTIES 39 AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES V. PROPERTY, PLANT AND EQUIPMENT 40 VI. ACCUMULATED DEPRECIATION AND 41 AMORTIZATION VIII. VALUATION AND QUALIFYING ACCOUNTS 42 IX. SHORT-TERM BORROWINGS 43 Notes to Supplemental Financial Statement 44-45 Schedules Report of Independent Public Accountants on 46 Schedules and Supplemental Note to Consolidated Financial Statements -31- Schedules other than those listed above are omitted since they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto incorporated by reference in this report. Individual financial statements of the Company are omitted because the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements filed are totally held and long-term debt (excluding debt guaranteed by the Company) of certain consolidated subsidiaries is, in the aggregate, not significant. (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) 9 Voting trust agreement. None 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) Letter Agreement dated October 30, 1992 between Applied Magnetics Corporation and Dr.Richard D. Balanson (9) (i) Applied Magnetics Corporation 1992 Stock Option Plan (9) (j) Note Purchase Agreement dated as of December 2, 1992 between Applied Magnetics Corporation and Conner Peripherals, Inc. (9) (k) Letter Agreement dated as of December 22, 1992 between Applied Magnetics Corporation and The Prudential Insurance Company of America (9) -32- (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 Magnetics Corp., a Nebraska Corporation (10) (m) Retention Agreement dated November 3, 1993, between the Company and Kathryn E. Gehrke (11) (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 Directors' Stock (12) Option Plan (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. (u) Stock Purchase Agreement by and among the Company, Seagate Technology, Inc. and Applied Tape Technology, Inc. (v) Letter Agreement dated September 12, 1994, between the Company and William R. Anderson (w) Letter Agreement dated June 21, 1994, between the Company and Dr. Richard D. Balanson (x) Letter Agreement dated September 12, 1994, between the Company and Kathryn E. Gehrke (y) Letter Agreement dated August 1, 1994, between the Company and Grisanti, Galef & Goldress, Inc. 11 Statement re computation of per share earnings. 12 Statement re computation of ratios. None. 13 Annual Report to Shareholders. 18 Letter re change in accounting principles. None. -33- 20 (a) Press release (dated September 30, 1993) announcing expected operating loss for the Company's fourth quarter of fiscal 1993 and a restructuring charge of approximately $50 million. (17) (b) Press release (dated October 22, 1993) announcing Company's intent to vigorously defend several lawsuits filed in the U.S. District Court, Central District of California, accusing the Company and certain executive officers of violating federal securities laws. (14) (c) Press release (dated January 19, 1994) announcing the Company's unaudited first quarter results for fiscal 1994. (d) Press release (dated January 27, 1994) announcing the Company's strategic alliance with Storage Technology, Inc. for the manufacturing and development of technology for thin-film tape heads. (e) Press release (dated February 3, 1994) announcing the addition of Mr. Nic Pignati (General Manager of final assembly) and George Shaw (General Manager of Malaysian operations) to the senior management team. (f) Press release (dated April 4, 1994) announcing the consolidation of the Company's southeast Asian operations transferring the manufacturing operations of Applied Magnetics Singapore to Applied Magnetics Malaysia and second quarter operating losses. (g) Press release (dated April 20, 1994) announcing the Company's unaudited second quarter results. (h) Press release (dated May 17, 1994) announcing the Company's receipt of ISO 9002 certification of all foreign plants (i) Press release (dated June 7, 1994) announcing lower than expected results for third quarter of fiscal 1994 (j) Press release (dated June 17, 1994) announcing the Company's retention of Lehman Brothers, Inc. for assistance in securing strategic alliances, a reduction in the work force and the resignation of Dr. Richard D. Balanson. (k) Press release (dated July 20, 1994) announcing the unaudited third quarter results of fiscal 1994. (l) Press release (dated August 2, 1994) announcing the retention of Grisanti, Galef & Goldress ("GG&G") as a consulting firm to assist the Company in affecting a turnaround strategy and the appointment of Craig D. Crisman as President, Chief Executive Officer and a Director. (m) Press release (dated August 17, 1994) announcing another reduction in employment. (n) Press release (dated September 12, 1994) announcing the resignation of William R. Anderson as President and Chief Operating Officer. -34- (o) Press release (dated November 1, 1994) announcing the Company's unaudited fiscal year 1994 results. (p) Press release (dated November 8, 1994) announcing the Company's intentions to sell the Tape Division operation in Santa Maria to Seagate Technology, Inc. (q) Press release (dated November 15, 1994) announcing the Commitment Letter between the Company and The CIT Group/Business Credit, Inc. ("CIT") for an asset-based credit facility of up to $35 million. (r) Press release (dated November 18, 1994) announcing the settlement and agreement of dismissal of a 1993 securities class action suit brought against the Company and several present and former officers in the U.S. District Court for the Central District of California. (s) Press release (dated December 12, 1994) announcing the completion of the sale of the Tape Division to Seagate Technology, Inc. 21 Subsidiaries of the registrant. 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 27, 1994. 24 Power of Attorney. None 27 Financial Data Schedules. 28 Information from reports furnished to state insurance regulatory authorities. None 29 Additional Exhibits. None (1) Filed as exhibits 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 reference (3) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 21, 1989, and incorporated herein by reference (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. -35- (6) Filed as an exhibit to the Company's definitive Pro%y 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. (b) Reports on Form 8-K. The Company filed a report on Form 8-K during the quarter ended September 30, 1994, reporting, under Item 5 of such Form, the retention of Grisanti, Galef & Goldress, Inc. as consultants to provide crisis management and turnaround services. The Company also filed current reports on Form 8-K during the quarter ended December 31, 1994, reporting, under Item 5 of such Form, (a) the Company's settlement of a 1993 securities class action suit filed in the U.S. District Court for the Central District of California against the Company and certain executive officers under the federal securities laws, (b) the Company's intentions to sell its Tape Head operations to Seagate Technology, Inc. and (c) a commitment letter between the Company and The CIT Group/Business Credit, Inc. for an asset-based credit facility of up to $35 million. (13) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 28, 1991 and incorporated herein by reference. (14) Filed as an exhibit to the Company's Current Report on Form 8-K dated September 28, 1992 and incorporated herein by reference. (15) Filed as an Exhibit to the Company's Current Report on Form 8-K dated September 30, 1992 and incorporated herein by reference. -36- 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: ____________________________ Date: December 29, 1994 Craig D. Crisman President, Chief Executive Officer and Chief Financial Officer (Principal Financial Officer) By: ____________________________ Date: December 29, 1994 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/ _______________________________________ December 29, 1994 Harold R. Frank, Chairman of the Board /s/ _______________________________________ December 29, 1994 R.C. Mercure, Jr., Director /s/ _______________________________________ December 29, 1994 Herbert M. Dwight, Jr., Director /s/ _______________________________________ December 29, 1994 Craig D. Crisman, Director, President and Chief Executive Officer -37- Supplemental Note to Consolidated Financial Statements APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994 11. INVENTORIES The components of inventory were as follows (in thousands):
September 30 ---------------- 1994 1993 ------- ------- Purchased parts and manufactured supplies $ 9,970 $13,810 Work in process 17,436 23,541 Finished goods 4,114 5,075 ------- ------- $31,520 $42,426 ======= =======
-38- SCHEDULE II APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES For the Years Ended September 30, 1994, 1993 and 1992 (in thousands)
Balance Balance at at End Beginning of Name of Debtor of Period Additions Deductions Period (E) - - ------------------------------------ --------- --------- ---------- ---------- Year Ended September 30, 1992 Richard D. Balanson, President and Chief Operations Officer $ -- $ 250 $ -- $ 250 ===== ===== ===== ===== Year Ended September 30, 1993 Richard D. Balanson, President and Chief Operations Officer $ 250 $ 250 $ 125 $ 375 ===== ===== ===== ===== Year Ended September 30, 1994 Richard D. Balanson, President and Chief Operations Officer $ 375 $ -- $ 375 $ -- Kathryn E. Gehrke, Vice President, Chief Financial Officer and Treasurer -- 150 150 -- ----- ----- ----- ----- $ 375 $ 150 $ 525 $ -- ===== ===== ===== =====
The accompanying Notes to Supplemental Financial Statement Schedules are an integral part of this schedule. 39 SCHEDULE V APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT For the Years Ended September 30, 1994, 1993 and 1992 (in thousands)
Balance Balance at Translation at End Beginning Additions Retirement Transfers Adjustment Other of Classification (A) of Period at cost or Sales (G) (B) (F) (H) Period - - ------------------ ---------- --------- ---------- --------- ----------- -------- -------- Year Ended September 30, 1992 Land $ 6,183 $ -- $ -- $ -- $ 4 $ (894) $ 5,293 Buildings 73,952 565 (533) (3,416) 161 (3,140) 67,589 Manufacturing equipment 151,608 7,815 (21,398) 9,697 457 (22,036) 126,143 Other equipment and leasehold improvements 33,913 881 (6,771) 1,279 35 (5,363) 23,974 Construction in process 13,329 20,550 (21) (12,230) (61) (2,359) 19,208 -------- ------ -------- -------- ----- -------- -------- Total $278,985 $29,811 $(28,723) $ (4,670) $ 596 $(33,792) $242,207 ======== ======= ======== ======== ===== ======== ======== Year Ended September 30, 1993 Land $ 5,293 $ -- $(1,192) $ 1 $ -- $ -- $ 4,102 Buildings 67,589 1,520 (2,694) 3,382 -- 10 69,807 Manufacturing equipment 126,143 17,177 (7,446) 20,731 -- (9,088) 147,517 Other equipment and leasehold improvements 23,974 3,302 (980) 3,045 -- (651) 28,690 Construction in process 19,208 34,653 (258) (27,159) -- (5,128) 21,316 -------- ------- -------- -------- ----- -------- -------- Total $242,207 $56,652 $(12,570) $ -- $ -- $(14,857) $271,432 ======== ======= ======== ======== ===== ======== ======== Year Ended September 30, 1994 Land $ 4,102 $ -- $ (110) $ -- $ -- $ -- $ 3,992 Buildings 69,807 616 (38) 7,360 -- -- 77,745 Manufacturing equipment 147,517 7,145 (4,702) 15,468 -- (2,360) 163,068 Other equipment and leasehold improvements 28,690 1,607 (2,228) 3,032 -- (358) 30,743 Construction in process 21,316 22,084 (51) (29,489) -- (46) 13,814 -------- ------- -------- -------- ----- -------- -------- Total $271,432 $31,452 $ (7,129) $ (3,629) $ -- $ (2,764) $289,362 ======== ======= ======== ======== ===== ======== ========
The accompanying Notes to Supplemental Financial Statement Schedules are an integral part of this schedule. 40
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION SCHEDULE VI For the Years Ended September 30, 1994, 1993 and 1992 (in thousands) Additions Balance Balance at Charged to Translation at End Beginning Costs and Retirement Transfers Adjustment Other of Classification (A) of Period Expenses (C) or Sales (G) (B) (F) (H) Period - - ------------------ ---------- ------------- ---------- --------- ----------- -------- -------- Year Ended September 30, 1992 Buildings $ 16,505 $ 3,112 $ (186) $ (809) $ 53 $ (891) $ 17,784 Manufacturing equipment 77,992 20,328 (13,245) 31 396 (15,015) 70,487 Other equipment and leasehold improvements 20,509 4,968 (4,880) (31) 34 (2,404) 18,196 -------- ------- -------- ------- ---- -------- -------- Total $115,006 $28,408 $(18,311) $ (809) $483 $(18,310) $106,467 ======== ======= ======== ======= ==== ======== ======== Year Ended September 30, 1993 Buildings $ 17,784 $ 3,126 $ (1,109) $ (143) $ -- $ 1,648 $ 21,306 Manufacturing equipment 70,487 21,980 (5,081) 790 -- 20,681 108,857 Other equipment and leasehold improvements 18,196 3,837 (1,218) (647) -- 1,693 21,861 -------- ------- -------- ------- ---- -------- -------- Total $106,467 $28,943 $ (7,408) $ -- $ -- $ 24,022 $152,024 ======== ======= ======== ======= ==== ======== ======== Year Ended September 30, 1994 Buildings $ 21,306 $ 3,891 $ (18) $(1,492) $ -- $ 12 $ 23,699 Manufacturing equipment 108,857 15,011 (3,315) (50) -- (1,712) 118,791 Other equipment and leasehold improvements 21,861 3,869 (2,034) 173 -- (1,313) 22,556 -------- ------- -------- ------- ---- -------- -------- Total $152,024 $ 22,771 $ (5,367) $(1,369) $ -- $ (3,013) $165,046 ======== ======= ======== ======= ==== ======== ======== The accompanying Notes to Supplemental Financial Statement Schedules are an integral part of this schedule.
41 SCHEDULE VIII APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended September 30, 1994, 1993 and 1992 (in thousands)
ADDITIONS DEDUCTIONS ------------------------- ---------- Balance Balance at Charged Accounts Translation at End Beginning to costs and Written Adjustment Other of Classification of Period expenses Recoveries Off (B) (F) Period - - ---------------------------------- ---------- ------------ ---------- ---------- ----------- ----- -------- Year Ended September 30, 1992 Allowance for doubtful collection: Accounts Receivable $ 1,872 $ 889 $ 230 $ (338) $ (9) $ (686) $ 1,958 Notes Receivable -- 2,559 -- -- -- -- 2,559 -------- -------- ----- -------- ---- ------ -------- Total $ 1,872 $ 3,448 $ 230 $ (338) $ (9) $ (686) $ 4,517 ======== ======== ===== ======== ==== ====== ======== Year Ended September 30, 1993 Allowance for doubtful collection: Accounts Receivable $ 1,958 $ 550 $ 739 $ (5) $ -- $ -- $ 3,242 Notes Receivable 2,559 12,009 -- (3,261) -- -- 11,307 -------- -------- ----- -------- ---- ------ -------- Total $ 4,517 $ 12,559 $ 739 $ (3,266) $ -- $ -- $ 14,549 ======== ======== ===== ======== ==== ====== ======== Year Ended September 30, 1994 Allowance for doubtful collection: Accounts Receivable $ 3,242 $ 100 $ 315 $ (28) $ -- $ -- $ 3,629 Notes Receivable 11,307 1,878 -- -- -- -- 13,185 -------- -------- ----- -------- ---- ------ -------- Total $ 14,549 $ 1,978 $ 315 $ (28) $ -- $ -- $ 16,814 ======== ======== ===== ======== ==== ====== ========
The accompanying Notes to Supplemental Financial Statement Schedules are an integral part of this schedule. 42 SCHEDULE IX APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS For the Years Ended September 30, 1994, 1993 and 1992 (dollars in thousands)
Category of Weighted Maximum Amount Average Amount Weighted Average Aggregate Balance at Average Outstanding Outstanding Interest Rate Short-Term End of Interest During the During the During the Borrowings Period Rate Period Period Period (D) - - ------------- ---------- -------- -------------- -------------- ---------------- Notes Payable 1992 $38,111 7.6% $38,275 $35,371 7.5% 1993 $35,198 6.8% $40,953 $36,300 8.2% 1994 $46,062 4.9% $46,062 $42,744 5.6%
The accompanying Notes to Supplemental Financial Statement Schedules are an integral part of this schedule. 43 Notes to Supplemental Financial Statement Schedules APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES SEPTEMBER 30, 1994 (A) Reference is made to Note 1 of the Notes to Consolidated Financial Statements in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1994, with respect to accounting policies for property, plant and equipment. (B) Represents translation adjustments made in accordance with Statement of Financial Accounting Standards No. 52. See Note 1 of Notes to Consolidated Financial Statements. (C) Additions charged to costs and expenses do not include amortization of two facilities included in Other Assets of $.2 million in fiscal 1994 and $.3 million in each of the fiscal years 1993 and 1992, accretion of the discount on a long-term note of $.7 million in fiscal 1994 and $.6 million in fiscal 1993, and amortization of manufacturing processes of $.1 million in fiscal 1992. (D) Represents actual interest expense on short-term borrowings divided by the average monthly amount of short-term borrowings outstanding during the period. (E) Represents loans issued to Company Officers, which are interest free and will be forgiven in equal annual installments, provided their employment is not terminated. The loan to Dr. Balanson was issued on March 2, 1992 and subsequently amended on October 21, 1992. He terminated on July 31, 1994, and the principal balance of the loan was subsequently paid. The loan to Ms. Gehrke was issued on November 3, 1994 and pursuant to the termination agreement dated September 12, 1994, was forgiven. (F) In June, 1992 the Company developed plans to divest its non-core businesses. See Note 8 of the Notes to Consolidated Financial Statements. As a result, Supplemental Financial Statement Schedules V, VI and VIII reflect activities of discontinued operations only through June 30, 1992. -44- (G) Net transfers for the year ended September 30, 1992 represent the transfer to Other Assets of the net book value of two facilities distributed to the Company in the form of a dividend in connection with the sale of the Nortronics subsidiary. Net transfers for the year ended September 30, 1994, represent the transfer of the net book value of one building included in the sale of the Optical Products Division, and transfer of the net book value to Other Assets of a vacant building in Korea held for sale. (H) Other for the year ended September 30, 1992, represents activities of discontinued operations only through June 30, 1992. Other for the year ended September 30, 1993, represents write- down of equipment to estimated net realizable value as a result of various factors, including the unexpectedly rapid market transition from ferrite to thin-film and from thin-film microslider to the nanoslider form factor. See Note 6 of Notes of Consolidated Financial Statements. Other for the year ended September 30, 1993, and September 30, 1994, also includes reclassification of balances from cost to accumulated depreciation as a result of reconciliation of the fixed asset data base to the general ledger balances. -45- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES AND SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS To Applied Magnetics Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Applied Magnetics Corporation's Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated December 22, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. Schedule II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees other than Related Parties; Schedule V - Property, Plant and Equipment; Schedule VI - Accumulated Depreciation and Amortization; Schedule VIII - Valuation and Qualifying Accounts; and Schedule IX - Short-Term Borrowings and the related Notes and the Supplemental Note to Consolidated Financial Statements are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic consolidated financial statements. These schedules and supplemental note have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state 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 22, 1994 -46- EX-10.T 2 LTR AGREE MAC & CIT GROUP EXHIBIT 10(t) The CIT Group/ Business Credit 3rd Floor 300 South Grand Avenue Los Angeles, CA 90071 Tel: 213 613-2575 Fax: 213 613-2588 (LOGO OF THE CIT GROUP) November 14, 1994 Mr. Craig D. Crisman Chief Executive Officer Applied Magnetics Corporation 75 Robin Hill Road Goleta, California 93117 Dear Mr. Crisman: You have asked us to provide Applied Magnetics Corporation (the "Company") with $35,000,000 in secured financing to provide working capital loans. We have reviewed the information you have submitted to us and are pleased to inform you that we have approved a secured committed credit facility ("Line of Credit"), consisting of, and subject to, the following: Borrower: The Company Lender(s): The CIT Group/Business Credit, Inc. ("CITBC") Line of Credit: $35,000,000 1. Revolving Line of Credit: ------------------------- A revolving line of credit (the "Revolving Line of Credit") evidenced by a Financing Agreement ("Agreement") providing for revolving advances ("Revolving Loans") up to the lesser of (a) $35,000,000 or (b) 80% of eligible accounts receivable due from U.S. residents. We will make accounts receivable from certain mutually agreed upon foreign account debtors, including foreign subsidiaries of Maxtor Corporation, Western Digital Corporation and Conner Peripherals, Inc. ("Conner"), eligible accounts receivable, provided that such accounts receivable comply with all of the other criteria of eligibility. Ineligible accounts will include, but not be limited to, i) accounts not payable in U.S. dollars, ii) accounts not originated by, or payable to, the Company, iii) accounts not payable in the United States and (iv) accounts receivable related to the pending sale of tape products operations. In addition, eligible accounts receivable due from any one customer will be limited to 50% of total eligible accounts receivable and eligible accounts receivable will be reduced by the aggregate amount of payables, if any, due-to the debtors of eligible accounts receivable. After giving effect to all loans, advances and extensions of credit to be made at closing, we will require, on the day of closing only, that a minimum additional availability of $5,000,000 exist. It is understood that such requirement contemplates that, on the day of closing, all of the 1 Company's debts, obligations and payables will be current. 2. LETTER OF CREDIT SUBLINE: ------------------------- Within the Revolving Line of Credit we will assist the Company in opening up to $10,000,000 at any time of documentary and standby letters of credit for purposes approved by us. All letters of credit shall be fully reserved from availability. 3. TERM: ----- The Agreement shall have an initial term of three years with automatic annual renewals thereafter (herein each an "Anniversary Date") unless terminated by either of us, as of an Anniversary Date, upon 90 days prior notice. INTEREST RATES, LETTER OF CREDIT CHARGES AND FEES: - - -------------------------------------------------- We will charge: (a) (i) interest on all outstanding Revolving Loans under the Agreement at a rate equivalent to either the Chemical Bank Rate plus one and three-quarters percent (1.75%) per annum, or at the election of the Company, LIBOR plus three and one- quarter percent (3.25%) per annum if the Company's operating earnings in the previous quarter were zero or less; or (ii) interest on all outstanding Revolving Loans under the Agreement at a rate equivalent to either the Chemical Bank Rate plus one and one-quarter percent (1.25%) per annum, or at the election of the Company, LIBOR plus two and three-quarters percent (2.75%) per annum if the Company's operating earnings in the previous quarter were greater than zero; Each change in the rate as set forth above will occur on the first of the month following the filing of the Company's 10Q (or 1 OK if after fiscal year end ) with the SEC and our receipt of a copy thereof. The Company will give the Lender five (5) days prior written notice of any LIBOR election and the Company cannot make a LIBOR election if a default or event of default under the Agreement remains unwaived. Upon the Company's election of a LIBOR option, the Company will specify a one, two, three, or six month LIBOR period. Collections will be credited to the Company's account upon our receipt of good funds at our bank account in New York, New York. Interest on all obligations due us shall be payable monthly. (b) in addition to passing along all bank charges, a service fee in connection with each letter of credit equal to; (i) one and one-half percent (1.5%) per annum on the face amount of each standby letter of credit and (ii) two percent (2.0%) per annum on the face amount of each documentary letter of credit. (c) a Line of Credit Fee, calculated and payable monthly, of one half of one percent (.5%) per annum computed on the difference between the Line of Credit and the average daily Revolving Loan balance due us. This fee will be reduced to one-quarter percent (.25%) per 2 annum if the Company's net income for the previous quarter was positive. Changes in this fee will be made as indicated in (a) above. (d) a Collateral Management Fee of $100,000 per year for each year the Agreement is in effect. Such fee shall be payable annually in advance and shall be non-refundable. This fee will be reduced to $50,000 per year in subsequent years if the Company's net income for the previous fiscal year was positive. (e) a $525,000 Loan Facility Fee payable at closing. EARLY TERMINATION: - - ------------------ Upon any termination of the Agreement by the Company prior to an Anniversary Date we shall be entitled to an Early Termination Fee equal to one percent (1 %) of the Line of Credit. A termination effective on an Anniversary Date will not incur an Early Termination Fee. COLLATERAL: - - ----------- All obligations due us will be secured by a first and exclusive lien on all assets and property of the Company including, without limitation, all present and future accounts receivable, inventory, trademarks, Intellectual Property Collateral, general intangibles and equipment excluding (i) confidential and proprietary know-how and technology, as shall be mutually agreed upon ("Proprietary Know-How"); (ii) real property; (iii) subject to the provisions of the immediately following sentence, certain accounts receivable due from Conner and equipment (the "Conner Collateral") which are subject to a security interest in favor of Conner to secure a payment obligation owed to Conner by the Company in the total principal amount of $8,645,485.44 (the "Conner Debt") in connection with that certain Note Purchase Agreement dated November 25, 1992 (the "Conner Agreement") between the Company and Conner, a copy of which has been provided to us by the Company; (iv) accounts receivable, inventory, trademarks, Intellectual Property, general intangibles and equipment related to the pending sale of the tape products operations; and (v) such other permitted security interests, liens and encumbrances as are mutually agreed by us and the Company. We will require an Intercreditor Agreement with the Company and Conner, on terms and conditions mutually agreed, in good faith, among the parties, pursuant to which we shall be granted a second and subordinate security interest in the Conner Collateral and the Company and Conner shall agree not to amend the Conner Agreement so as to increase the amount of the Conner Debt without our consent, which shall not be unreasonably withheld. We will permit up to $20,000,000, in the aggregate at any one time outstanding, of additional secured financing of equipment and real estate, only so long as, at the time of closing of any loan pursuant to such additional financing (i) there is no default or event of default under the Financing Agreement and (ii) the aggregate amount of such loans are equal to at least 50% of the book value of the pool of assets securing such loans. Additionally, we will require a pledge of 65% of the stock of all subsidiaries, excluding the Company's Malaysian subsidiary, Applied Magnetics Malaysian Sdn. Bhd. ("AMM"). "Intellectual Property Collateral " shall mean patents, patent applications and/or registrations, trademarks and license agreements in which the Company is or becomes licensed to use patents or trademarks of others. Until the occurrence of an event of default by the Company under the Agreement and our exercise of our foreclosure remedies with respect to the pledged stock, the Company shall retain all voting and dividend rights on the pledged stock and, subject to certain terms and 3 provisions, the right to transfer such stock to one or more of its subsidiaries. Further, the Company shall retain, inter alia, the rights to (a) grant licenses or sublicenses in Proprietary Know-How and Intellectual Property Collateral, provided that any such transactions shall take place in a manner consistent with the Company's current and past business practices and upon terms and provisions no less favorable to the licensor than it could have obtained in a comparable arms length transaction except as to transactions with the licensor's subsidiaries and affiliates for which our consent is required but, which consent shall not be unreasonably withheld, and (b) threaten, commence, pursue, settle and conclude litigation or proceedings to enforce, prosecute, defend or otherwise respond to actions, suits or proceedings regarding such Proprietary Know-How and Intellectual Property Collateral. As to the Proprietary Know-How, the Company shall grant us a royalty-free, non- exclusive right and license to use the Proprietary Know-How to sell or otherwise dispose of magnetic recording disk heads; provided, however, that (a) such license shall be subject to any other licenses and rights heretofore or hereafter granted, provided our license is not prohibited or restricted and (b) such right and license will be effective only upon the occurrence of a default under the agreement. As to license agreements that are included within the Intellectual Property Collateral, the security interests granted to us shall be subject to whatever restriction, limitations and terms, including, but not limited to, restrictions or limitations on assignment as are set forth in such license agreements. If the pending sale of the tape products operations has not been completed by March 31,1995, the Agreement will be amended to grant us a first and exclusive lien on all accounts receivable, inventory, trademarks, Intellectual Property, general intangibles and equipment related to the pending sale of the tape products operations. COVENANTS: - - ---------- The Agreement will contain such covenants, warranties, representations, events of default, notice, confidentiality and other provisions as are customary for financing transactions of this type, which will include certain financial covenants, including: Free Cash Flow Limitation on Capital Expenditures Minimum Net Worth Limitation on Dividends Ratio of Total Liabilities to Net Worth Minimum Operating Earnings The Company will be required to submit to us, among other things, monthly interim financial statements plus fiscal year-end financial statements. The year-end statements must be certified by an independent public accountant acceptable to us. We agree that your use of Arthur Anderson & Co. is acceptable to us. KEY CONDITIONS: - - --------------- We will require: (a) completion by the Company of a 12 month Cash Budget Projection on our form prior to closing. 4 (b) the Maybank facility, or a comparable debt facility, must remain in place at all times under terms and conditions at least as favorable to the Company as presently exist or under revised terms and conditions satisfactory to CITBC, and borrowings under that facility must, at all times, equal or exceed the lesser of (a) the amount available under the facility, as presently calculated, based on eligible invoices, or (b) $40,000,000, provided, however, that a breach or violation of this condition shall not occur with respect to (i) any amendment to such facility that would provide a higher rate of interest than that currently in effect provided such increase is not greater than 5% over the then current interest rate, would require granting a security interest, lien or charge on, in or against AMM's properties or assets to Maybank or another lender; or (ii) repayment or refinancing of all or any part of such facility with the proceeds of or in connection with (x) the sale of any assets or properties which are not included within the CITBC Collateral, (y) any new issuance of securities ( including common stock, preferred stock or convertible securities ) by the Company, AMM or any subsidiary of the Company or AMM; provided, however, that after giving effect to such asset sales or issuance of securities, the Company remains in compliance with the Agreement, or (z) any joint venture, or similar arrangement or agreement by and among the Company, AMM, or either of them, and any third party, provided that all of the preceding is, in form and substance, satisfactory to us. (c) the stock of AMM may not be pledged as collateral, or conveyed to any third party provided, however, that a breach or violation of this condition shall not occur with respect to (i) any assignment, transfer or conveyance to any subsidiaries or affiliates of the Company, (ii) any merger, reorganization, or consolidation of AMM with or into any subsidiary or affiliate of the Company,(iii) any pledge, transfer, assignment or conveyance made in order to comply with laws, rules or regulations of the Malaysian government or any agency or instrumentality thereof, (iv) any pledge, assignment, transfer or conveyance in connection with any joint venture, or similar arrangement or agreement by and among the Company, AMM, or either of them, and any third party, so long as any of the preceding does not have an adverse affect on AMM and/or the Maybank facility. (d) that loans, investments and advances in, or to, other persons or entities may not exceed an aggregate amount to be agreed upon, except that investments may be made in obligations of or instruments guaranteed by the U.S. government, certificates of deposit from banks domiciled in the U.S. and other short term investments rated M or better. (e) Additionally, we may require an environmental audit conducted by an environmental engineering firm retained by and acceptable to us but paid for by you, to be performed on each parcel of real estate located in the United States owned by the Company, except for the Company's facility in Santa Maria which is included in the pending sale of the tape products operations. The Company may provide to us a Phase One Report prepared by a licensed environmental consultant retained by the Company of one or more of its domestic U.S. facilities provided such was prepared within the four year period preceding the date of this letter, and upon satisfactory review of the form and substance of any such environmental audit by an environmental engineering firm selected by us but paid for by you, we shall waive the foregoing requirement for an additional audit. Should this audit or, in lieu thereof, the Phase One Report, indicate the presence of hazardous substances or liability (real or potential) stemming from operations and/or hazardous waste disposal practices under any local, state.or federal laws or regulations, we may either, at our option, decline to consummate the proposed arrangement, or impose such additional conditions as we deem necessary. 5 OUT OF POCKET EXPENSES: - - ----------------------- The Company shall pay (whether or not this transaction is consummated) all of our out-of-pocket costs and expenses (including reasonable fees of outside legal counsel, but excluding fees of in-house legal counsel ) incurred in connection with the Agreement, including, but not limited to, those incurred by us in connection with the preparation, execution and closing of this financing transaction. OTHER CONDITIONS OF CLOSING: - - ---------------------------- The foregoing is furnished to you as a means of affording you a guide to, and an outline of, the material terms and conditions of the proposed accommodation being considered. Moreover, you appreciate that the foregoing is subject to: (a) successful completion of all the above items; (b) the execution and delivery of appropriate legal documentation which must be satisfactory in form and substance to each of us and to our respective counsels; (c) on or before closing of the Agreement, all of the tangible non-real estate assets, except for a total of $2.0 million of equipment and/or inventory, of Applied Magnetics (Singapore) Pte. Ltd. will have, in accordance with applicable law, been transferred or dividended to the Company with respect to its accounts receivable or its Subsidiaries with respect to all other assets. Subsequent to this transfer of assets, Applied Magnetics (Singapore) Pte. Ltd. will not purchase or sell any assets except its real estate. (d) the absence of any material adverse change in the financial condition, business, prospects, profitability, assets or operations of the Company or any of its subsidiaries. It is understood and agreed that any adverse change in the terms, conditions, assumptions or projections supplied to us by the Company and on which we based our decision to issue this letter will be construed by us as a material adverse change. CONFIDENTIALITY: - - ---------------- This letter and the financing arrangements described herein are delivered to you with the understanding that neither this letter nor the substance of said proposed financing arrangements shall be disclosed by you to anybody outside your organization, except to those professional advisors who are in a confidential relationship with you and require knowledge thereof to perform their duties (such as your legal counsel, accountants and financial advisers), or where disclosure is required by law. CITBC will protect the confidential or proprietary nature of any Proprietary Know-How. COMMITMENT FEE: - - --------------- To induce us to issue this commitment letter we will require payment by you of a Commitment Fee of $125,000 which will be credited against the Loan Facility Fee upon consummation of the proposed transaction. lf the Agreement is not consummated 6 for any reason whatsoever, $50,000 of the Commitment Fee, less our expenses incurred heretofore or hereafter, will be refunded to the Company and the balance of the Commitment Fee shall be non-refundable. WE EACH HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, ACTION OR CAUSE OF ACTION ARISING UNDER THIS LETTER, ANY TRANSACTION RELATED HERETO, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. This letter (a) embodies the entire agreement and understanding between the parties hereto with respect to the subject matter of this letter and supersedes all prior agreements, commitments, arrangements, negotiations or understandings, whether oral or written, of the parties with respect thereto, and (b) can be changed only by a writing signed by each of the parties hereto and shall bind and benefit each of such parties and their respective successors and assigns. If the foregoing is acceptable to you, please so indicate by signing and returning to us the enclosed copy of this letter together with your check to our order in the amount of $50,000 not later than the close of business on November 14, 1994. We will treat this $50,000 and the $75,000 previously delivered to us under our proposal letter of June 6, 1994 as the Commitment Fee. If not accepted by you as herein provided, this commitment shall expire at the close of business on November 14, 1994. If accepted, the financing facility offered herein will expire at the close of business on January 15, 1995 unless the documents contemplated hereunder have been fully executed. Upon our receipt from you of an executed copy of this letter together with a check for $50,000 we will sign below to confirm our acceptance and return a fully executed copy of this letter to you. Very truly yours, THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Alan Grosshans -------------------------------- Title: Vice President Commitment Letter Accepted: Commitment Letter Accepted: APPLIED MAGNETICS CORPORATION THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Craig D. Crisman By: /s/ Alan Grosshans -------------------------- --------------------------- Title: Chief Executive Officer Title: Vice President 7 EX-10.U 3 STOCK PURCHASE AGREE ================================================================================ EXHIBIT 10(u) ------------- STOCK PURCHASE AGREEMENT dated as of NOVEMBER 4, 1994 by and among SEAGATE TECHNOLOGY, INC., APPLIED MAGNETICS CORPORATION and APPLIED TAPE TECHNOLOGY, INC. ================================================================================ TABLE OF CONTENTS -----------------
Page ARTICLE I FORMATION OF ATTI.................................. 2 SECTION 1.01 Contribution of Assets to ATTI................. 2 SECTION 1.02 Retained Assets................................ 4 SECTION 1.03 Assumption of Liabilities by ATTI.............. 6 SECTION 1.04 Excluded Liabilities........................... 6 SECTION 1.05 Certain Tax Matters............................ 7 ARTICLE II PURCHASE AND SALE OF ATTI SHARES................... 8 SECTION 2.01 Purchase and Sale of ATTI Shares............... 8 SECTION 2.02 Payment for ATTI Shares........................ 8 SECTION 2.03 Preliminary Balance Sheet...................... 8 SECTION 2.04 Adjustment to the Initial Price................ 8 ARTICLE III CLOSING............................................ 10 SECTION 3.01 Time of Closing................................ 10 SECTION 3.02 Payments at Closing............................ 10 SECTION 3.03 Closing Deliveries............................. 10 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER............ 11 SECTION 4.01 Organization of Buyer.......................... 11 SECTION 4.02 Authority...................................... 11 SECTION 4.03 Noncontravention............................... 11 SECTION 4.04 Brokers, Finders............................... 11 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER........... 12 SECTION 5.01 Corporate Organization......................... 12 SECTION 5.02 Authorization of Seller........................ 12 SECTION 5.03 Noncontravention............................... 13 SECTION 5.04 Subsidiaries................................... 13 SECTION 5.05 Contracts and Commitments...................... 13 SECTION 5.06 Inventory...................................... 13 SECTION 5.07 Receivables.................................... 14 SECTION 5.08 Financial Statements........................... 14 SECTION 5.09 Events Subsequent to August Balance Sheet Dat.. 14
i. SECTION 5.10 Assets Are All Assets of the Tape Head Division....................................... 15 SECTION 5.11 Title to the Assets............................ 15 SECTION 5.12 Division Patents and Intellectual Property..... 15 SECTION 5.13 Litigation..................................... 16 SECTION 5.14 Taxes.......................................... 16 SECTION 5.15 Compliance with Law............................ 16 SECTION 5.16 Labor Relations................................ 17 SECTION 5.17 Environmental Matters.......................... 18 SECTION 5.18 No Defaults.................................... 19 SECTION 5.19 Capitalization of Surf Tape.................... 19 SECTION 5.20 Insurance...................................... 20 SECTION 5.21 Restrictions on Business Activities............ 20 SECTION 5.22 Customs........................................ 20 SECTION 5.23 Product Warranty............................... 20 SECTION 5.24 Disclosure..................................... 21 SECTION 5.25 Undisclosed Liabilities........................ 21 SECTION 5.26 Bulk Sales Compliance.......................... 21 SECTION 5.27 Brokers, Finders............................... 21 ARTICLE VI PRE-CLOSING COVENANTS.............................. 21 SECTION 6.01 General Covenants.............................. 22 SECTION 6.02 Notices and Consents........................... 22 SECTION 6.03 Operation of Business.......................... 22 SECTION 6.04 Preservation of Business....................... 22 SECTION 6.05 Compliance with Obligations.................... 22 SECTION 6.06 Access to Financial, Operation, Technical and Scientific Information......................... 22 SECTION 6.07 Notice of Developments......................... 23 SECTION 6.08 Exclusivity.................................... 23 SECTION 6.09 Buyer to Offer Employment...................... 24 SECTION 6.10 Title Insurance................................ 25 SECTION 6.11 Other Insurance................................ 25 SECTION 6.12 Modification and Termination of Existing Agreements..................................... 25 ARTICLE VII POST-CLOSING COVENANTS.............................. 26 SECTION 7.01 General........................................ 26 SECTION 7.02 Litigation Support............................. 26 SECTION 7.03 Transition..................................... 26 SECTION 7.04 Confidentiality................................ 27
ii. ARTICLE VIII CONDITIONS TO OBLIGATION TO CLOSE................ 27 SECTION 8.01 Conditions to Obligation of Buyer............ 27 SECTION 8.02 Conditions to Obligation of Seller........... 30 ARTICLE IX INDEMNIFICATION.................................. 32 SECTION 9.01 Survival..................................... 32 SECTION 9.02 Indemnification Provisions for Benefit of Buyer........................................ 32 SECTION 9.03 Cash Escrow.................................. 33 SECTION 9.04 Indemnification Provisions for Benefit of Seller....................................... 33 SECTION 9.05 Other Indemnification Provisions............. 33 SECTION 9.06 Matters Involving Third Parties.............. 34 SECTION 9.07 Limitations.................................. 34 ARTICLE X TERMINATION...................................... 35 SECTION 10.01 Termination of Agreement..................... 35 SECTION 10.02 Effect of Termination........................ 35 ARTICLE XI MISCELLANEOUS.................................... 35 SECTION 11.01 Expenses..................................... 35 SECTION 11.02 Press Releases and Announcements............. 36 SECTION 11.03 No Third-Party Beneficiaries................. 36 SECTION 11.04 Entire Agreement............................. 36 SECTION 11.05 Succession and Assignment.................... 36 SECTION 11.06 Headings..................................... 36 SECTION 11.07 Notices...................................... 36 SECTION 11.08 Interpretation............................... 37 SECTION 11.09 Governing Law................................ 37 SECTION 11.10 Amendments and Waivers....................... 37 SECTION 11.11 Severability................................. 38 SECTION 11.12 Specific Performance......................... 38 SECTION 11.13 Counterparts................................. 38
iii. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of November 4, 1994, is entered into by and among Seagate Technology, Inc., a Delaware corporation ("Buyer"), Applied Magnetics Corporation, a Delaware corporation ("Seller"), and Applied Tape Technology, Inc., a California corporation and a wholly owned subsidiary of Seller ("ATTI"). RECITALS -------- A. Seller is presently engaged in the business of designing, developing, manufacturing and marketing magnetic recording disks and Tape Heads for use in computer disk and tape drives. As used herein, the term "Tape Head" shall mean a device designed and manufactured for the purpose of recording information on or reading or erasing information from magnetic tape and comprising one or more transducers, a support housing for said transducers and electrical circuit means such as flex circuits. Seller's business of designing, developing, manufacturing and marketing Tape Heads for use in computer tape drives (the "Business") is presently conducted by Seller as a division (the "Division" or "Tape Head Division") with its one principal facility located in Santa Maria, California (the "Santa Maria Facility"), and additional operations at the Seller's other facilities located in Seoul, South Korea (the "Seoul Facility"), and in Chung Ju, South Korea (the "Chung Ju Facility"). The Seoul Facility and the Chung Ju Facility are collectively referred to herein as the "Korean Facilities." B. Seller now desires to sell, and Buyer now desires to acquire, the Business and the Tape Head Division on the terms and conditions hereinafter set forth. C. Prior to the consummation of the contemplated transaction, the parties intend that certain specified assets and liabilities of the Tape Head Division be contributed to ATTI, which was formed by Seller on August 26, 1994. D. The parties further intend that the acquisition of the Business be accomplished by means of an acquisition by Buyer of all of the outstanding capital stock of ATTI. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. ARTICLE I FORMATION OF ATTI SECTION 1.01 Contribution of Assets to ATTI. ------------------------------ (a) On the Closing Date (as defined in Section 3.01 below), Seller shall assign, transfer, convey, deliver and contribute to ATTI, on a going concern basis, in exchange for shares of capital stock of ATTI, all of Seller's right, title and interest in and to all of the assets, properties and rights, other than the Retained Assets (as defined in Section 1.02 below), owned, leased or used by Seller in connection with the Seller's operation of the Tape Head Division or relating to the Business, of every kind and description, whether real, personal or mixed (the "Tape Head Division Assets"), including, without limitation, the following: (i) All real property and all buildings thereon, all improvements thereto and fixtures thereon and all related rights at the Santa Maria Facility, the legal description of which being set forth at Schedule 1.01-A; (ii) All machinery, equipment, leasehold improvements, construction in progress, tooling, furniture, fixtures, motor vehicles, supplies, repair and maintenance parts, fuel, and other fixed assets, including any items of capital equipment that were purchased through funding or co-funding arrangements with third parties and are used in connection with the operation of the Business, a listing of all items described in this subpart (ii) having an original purchase price or cofunded value in excess of $500 being set forth at Schedule 1.01-B; (iii) All accounts receivable arising out of the ordinary course of the Business on or prior to the Closing Date; (iv) All inventory of raw materials, work-in-process and finished goods; (v) All prepaid expenses and prepaid taxes, to the extent not pro rated pursuant to Section 1.05 hereof, lease and rent deposits, and all other current assets, a listing of which being set forth at Schedule 1.01- C; (vi) All claims and rights under all leases, agreements, contracts, licenses, evidences of indebtedness, purchase and sale orders and other executory commitments, including the Contracts (as defined in Section 5.05); (vii) All rights to receive proceeds under insurance policies maintained by the Seller insofar as they (1) relate to the liabilities assumed by Buyer pursuant to this Agreement and (2) provide coverage with respect to the Business or the Tape Head Division Assets for losses occurring after the Closing Date, or claims 2. made after the Closing Date with respect to occurrences prior to the Closing Date, a listing of such insurance policies being set forth at Schedule 1.01-D; (viii) All permits, consents and certificates of any regulatory, administrative or other governmental agency or body that are used in, or are required or necessary for, the ownership or operation of the Business and the Tape Head Division Assets; (ix) All rights relating to or arising out of the Business under express or implied warranties from its suppliers insofar as they relate to the Tape Head Division Assets; (x) Subject to (1) certain rights and licenses granted under the AMB Agreement, the Nortronics Agreement, the IBM Agreement, the 3M Agreement, the Kodak Agreement and the STK Agreement (as those terms are defined herein), and (2) the license retained by Seller pursuant to the License Agreement referred to in Section 8.01(j) hereof, all patents, patent applications and invention disclosures that are used primarily for the design, development, manufacture and marketing of Tape Heads a listing of which being set forth in Schedule 1.01-E (the "Division Patents"); (xi) Subject to certain rights and licenses granted under the AMB Agreement, the Nortronics Agreement, the IBM Agreement, the 3M Agreement, the Kodak Agreement and the STK Agreement (as those terms are defined herein), all (1) copyrights and registrations and applications for registration thereof; (2) masks, mask designs and mask works, and registrations and applications for registration thereof; (3) computer software, data, and documentation; (4) trade secrets (including ideas, formulas, compositions, inventions, whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data and copyrightable works; (5) registered and common law trademarks, servicemarks, tradenames, trademark and servicemark applications and copies thereof and tangible embodiments thereof (in whatever form or medium) that are used solely for the design, development, manufacture and marketing of Tape Heads ("Intellectual Property"); (xii) All rights under Seller's existing employee confidentiality and assignment agreements to employee inventions, discoveries and improvements with respect to Division Patents and Intellectual Property; 3. (xiii) Copies (whether in written or electronically recorded form or otherwise) of all books of account, general ledgers, sales invoices, accounts payable and payroll records, drawings, files, papers and all other records relating to the operation of the Business; and (xiv) All other intangible assets and goodwill related to or arising out of the Business. (b) Seller, ATTI and Buyer acknowledge that the Business has used in the ordinary course, the trademarks, trade names or service marks "Applied Magnetics," "Applied Magnetics Corporation," and "/+" and various geometric representations or stylized versions or combinations of the foregoing (collectively, "AMC Marks") in connection with documents, product brochures, stationery, sales and promotional literature, visual expressions of computer software and programs and the like ("Visual Materials"). While nothing contained herein shall be deemed to grant to Buyer or ATTI any right or license to use AMC Marks, ATTI shall be permitted, for a period not exceeding 180 days following the Closing, to use such Visual Materials which exist at Closing and which contain or incorporate AMC Marks, provided that in using the same ATTI shall undertake its best reasonable efforts to obliterate, overprint or otherwise obscure or eliminate such marks. After the expiration of such 180 day period, ATTI shall forever cease and desist from using such marks. SECTION 1.02 Retained Assets. Notwithstanding anything in Section 1.01 to the contrary, Seller shall retain all of its right, title and interest in and to, and there shall be excluded from the transfer of assets contemplated by Section 1.01, the following assets and rights (collectively, the "Retained Assets"): (i) All cash and cash equivalents; (ii) All of Seller's right, title and interest in and to the real property, and all buildings thereon, all improvements thereto and fixtures thereon, and all related leases and rights, at the Korean Facilities; (iii) All rights to the use of the AMC Marks, except to the extent contemplated by Section 1.01(b); (iv) All patents, patent applications and invention disclosures owned or held by Seller other than Division Patents; (v) The consideration delivered to Seller pursuant to this Agreement; 4. (vi) All of the Seller's rights under confidentiality and assignment agreements and under applicable law with respect to the obligations of employees of the Tape Head Division ("Division Employees") to not disclose or misappropriate Seller's confidential and proprietary information and trade secrets which are not Division Patents and Intellectual Property, and with respect to the disclosure, assignment, ownership, and prosecution of inventions, patents, and patent applications other than Division Patents and Intellectual Property; (vii) All of the Seller's rights under (1) that certain Agreement dated as of March 11, 1993, between the Seller and Applied Magnetics Belgium, N.V. (the "AMB Agreement"), (2) that certain Stock Purchase Agreement dated as of November 16, 1991 among Seller, Nortronics Company, Inc., Alan C. Kronfeld, Thomas Philipich and Robert Cistori (the "Nortronics Agreement"), (3) that certain Agreement dated as of June 12, 1991, between Seller and Center for Magnetic Recording Research, University of California at San Diego, (4) that certain Agreement dated as of June 8, 1990, between Seller and Carnegie Mellon University, Data Storage Center, and (5) subject to the rights of ATTI as an "Operating Subsidiary", that certain License Agreement between Seller and International Business Machines Corporations dated as of July 1, 1986 (the "IBM Agreement"). (viii) With respect to (1) that certain agreement dated as of January 1, 1994, between Seller and Storage Technology Corporation (the "STK Agreement"); (2) that certain agreement dated as of December 19, 1994, between Seller and 3M Corporation (the "3M Agreement"); (3) that certain agreement dated as of May 10, 1993, between Seller and Eastman Kodak Company (the "Kodak Agreement"); and (4) non-disclosure agreements with actual or prospective customers and suppliers of the Division, all rights that (x) impose on the parties to such agreements and contracts obligations or restrictions with respect to the use or disclosure of AMC's confidential or proprietary information, Excluded Intellectual Property or Licensed Trade Secrets (as defined in 1.02(xi) and (xii) below), (y) grant to AMC any actual or prospective rights or licenses in any inventions, improvements or discoveries to make, have made, use or sell products or services other than Tape Heads, or (z) relate to, involve or are connected with, in any manner whatsoever, either the enforcement, perfection or performance of the obligations, restrictions, rights and licenses described in clauses (x) and (y) above, or, in the case of a violation, breach or default by any party of such obligations, restrictions, rights and licenses, the ability of AMC to pursue any and all remedies at law or in equity; (viii) All of Seller's capital stock in each of its subsidiaries other than ATTI; (ix) The original books of account, general ledgers, sales invoices, accounts payable and payroll records, drawings, files, papers and all other records relating thereto; 5. (x) All rights to all (1) copyrights and registrations and applications for registration thereof; (2) masks, mask designs, mask works, and registrations and applications for registration thereof; (3) computer software, data, and documentation; (4) trade secrets (including ideas, formulas, compositions, inventions, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data and copyrightable works); (5) registered and common law trademarks, service marks, trade names, trademark and service mark applications; and copies and tangible embodiments thereof (in whatever form or medium), in each case other than the Intellectual Property ("Excluded Intellectual Property"); and (xii) All rights to Licensed Trade Secrets as defined in and subject to the license granted to ATTI under the License Agreement contemplated by Section 8.01(j). SECTION 1.03 Assumption of Liabilities by ATTI. Concurrently with the conveyance of the Tape Head Division Assets to ATTI, Seller shall cause ATTI to assume, and become responsible for paying and satisfying, the following debts, liabilities and obligations of Seller (and only such debts, liabilities and obligations) (the "Assumed Liabilities"): (i) All trade and other accounts payable of Seller exclusively related to the Business which shall have arisen, and shall have been booked, in the ordinary course of the Business on or prior to the Closing Date; (ii) All accrued vacation and paid leave benefits for Seller's employees at the Santa Maria Facility as of the Closing Date; (iii) All product warranty obligations arising after Closing but which relate to products sold by the Tape Head Division prior to Closing; (iv) All liabilities and obligations of the Business under the Contracts listed in Schedule 1.03; and (v) All liabilities and obligations relating to the offers of employment which Buyer has ATTI make as contemplated under Section 6.09(a) and (b), and any employment agreements, expressed or implied, oral or in writing, arising therefrom. SECTION 1.04 Excluded Liabilities. Except as otherwise provided in Section 1.03 and as contemplated under certain of the agreements described in Article VIII, neither Buyer nor ATTI shall by the execution, delivery and performance of this Agreement, 6. or otherwise, assume or otherwise be responsible for any liability or obligation of any nature of Seller, known or unknown, contingent or otherwise, or any liability or obligation arising out of or related to Seller's ownership of the Tape Head Division Assets or operation of the Business on or prior to the Closing Date (the "Excluded Liabilities"). The disclosure by Seller elsewhere in this Agreement or in a Disclosure Schedule (as defined in Article V) of a fact, condition or circumstance that may give rise to a possible liability, obligation or claim of or against Seller, ATTI or Buyer following the Closing shall in no way affect the preceding limitation. Specifically, but without intending to limit the foregoing, Seller acknowledges and agrees that neither Buyer nor ATTI shall have any liability whatsoever with respect to those liabilities and obligations Seller (or its subsidiaries) may have as of the Closing Date in respect of Seller's employees at the Korean Facilities, including any liabilities associated with payroll, severance, retirement and all other employee benefits. In addition, the parties hereto acknowledge that (i) all claims, suits and charges threatened or pending against the Business or the Tape Head Division as of the Closing Date or which may arise after the Closing Date but which are based upon or relate to events or circumstances occurring or existing prior to the Closing Date shall be deemed Excluded Liabilities for purposes of this Agreement, notwithstanding the fact that such threatened or pending claims, suits or charges shall have been disclosed by Seller on Schedule 5.13 of the Disclosure Schedule, and (ii) any Environmental Liability (as defined in Section 5.17) that ATTI or Buyer may incur, and any remediation costs incurred in connection therewith, shall be covered as an Excluded Liability by the indemnification rights set forth in Section 9.02(b), notwithstanding the fact such potential Environmental Liabilities shall have been disclosed by Seller on Schedule 5.17 of the Disclosure Schedule. SECTION 1.05 Certain Tax Matters. ------------------- (a) Returns and Payments. Seller agrees to bear, pay promptly when due, and file all necessary returns with respect to, all Taxes that arise in or are attributable to the operations of the Tape Head Division (or its incorporation) for any taxable period ending prior to or on the Closing Date. Buyer agrees to bear, pay promptly when due and file all necessary returns with respect to all Taxes that are attributable to the operations of STTI for any taxable period beginning after the Closing Date. For taxable periods that begin before and end after the Closing Date, Seller agrees to pay all Taxes attributable to the pre-Closing Date period on the basis of an interim closing of the books as of the end of the Closing Date. Buyer shall file all returns required to be filed for taxable periods ending after the Closing Date. For purposes of this section, Tax and/or Taxes means any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise, capital, paid-in capital, profits, greenmail, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind, together with any interest or any penalty, addition to tax or additional amount imposed by any taxing authority, provided that Buyer shall reimburse Seller for actual transfer and sales taxes arising as a result of the transfer of assets pursuant to this Agreement up to a maximum reimbursement of $10,000. 7. (b) Section 338(h)(10) Election. Buyer shall have the option to make elections under Section 338(h)(10) of the Internal Revenue Code ("IRC") (or the state equivalent) for federal and/or state tax purposes. Seller agrees to join with Buyer in making timely, effective and irrevocable IRC Section 338(h)(10) elections (or the state equivalent) in the taxing jurisdictions identified by Buyer. Buyer shall retain a nationally recognized firm to appraise the value of the assets of ATTI that are deemed to have been acquired pursuant to the Section 338(h)(10) Election. The costs, fees and expenses of such firm shall be borne by Buyer. Buyer shall allocate the modified aggregate deemed sales price as such term is defined in Regulation Section 1.338(h)(10)-1(f), among the assets of ATTI in accordance with the appraisal and the regulations promulgated under Section 338(h)(10). Such allocation shall be the price allocation and shall be binding on the parties hereto. ARTICLE II PURCHASE AND SALE OF ATTI SHARES SECTION 2.01 Purchase and Sale of ATTI Shares. Subject to the terms and conditions of this Agreement, on the Closing Date, Buyer shall purchase from Seller, and Seller shall sell to Buyer, all of the ATTI Shares (as defined in Section 5.19 below) for the consideration specified herein. SECTION 2.02 Payment for ATTI Shares. The total purchase price due at Closing (the "Initial Price") for the ATTI Shares shall be $21,500,000 of which $7,500,000 in the aggregate shall be held in escrow pursuant to the Escrow Agreement. Such Initial Price shall be paid in the manner described in Section 3.02. SECTION 2.03 Preliminary Balance Sheet. Schedule 2.03 to this Agreement presents an unaudited balance sheet (the "August Balance Sheet") prepared by Seller that sets forth (i) the Tape Head Division Assets and the Assumed Liabilities as of August 27, 1994 (the "August Balance Sheet Date") with line item entries that have been prepared in accordance with generally accepted accounting principles ("GAAP") and on a basis consistent with Seller's past accounting practices except that such August Balance Sheet shall reflect a reserve for product warranty claims on Tape Head Division product sales through the August Balance Sheet Date which is not consistent with Seller's past accounting practices, and (ii) a calculation of the net book value of such assets and liabilities as of such date (the "August Net Value"). SECTION 2.04 Adjustment to the Initial Price. ------------------------------- (a) Closing Date Statement. Not more than 20 days following the Closing Date, Seller shall deliver to Buyer an unaudited closing balance sheet of the Tape Head Division Assets and the Assumed Liabilities as of the Closing Date (the "Closing Date Statement") with line item entries that have been prepared in accordance with GAAP and on a basis consistent with the methodologies and assumptions used in preparing the August 8. Balance Sheet, which shall set forth the net book value of such assets and liabilities as of the Closing Date (the "Closing Net Value"). Upon receipt of the Closing Date Statement, Buyer, and, if so desired by Buyer and at Buyer's expense, Buyer's independent accountants, shall be permitted during the succeeding 30-day period to examine, and Seller shall make available, the books and records of Seller associated with the Business and any work papers and reconciliations prepared by Seller in the preparation of the Closing Date Statement. As promptly as practicable and in no event later than the last day of such 30-day period, Buyer shall either inform Seller in writing that the Closing Date Statement is acceptable, or object to the Closing Date Statement by delivering to Seller a written statement setting forth a specific description of Buyer's objections to the Closing Date Statement (the "Statement of Objections"). If Buyer shall fail to deliver such a Statement of Objections within such 30-day period, the Closing Date Statement shall be deemed to have been accepted by Buyer. In the event Buyer shall object to the Closing Date Statement as provided above, Seller and Buyer shall attempt in good faith to resolve any such objections within 14 days of Seller's receipt of Buyer's Statement of Objections. If Seller and Buyer shall be unable to resolve the matter within such 14-day period, they shall, within 30 days thereafter, jointly select and engage a nationally recognized firm of U.S. independent certified public accountants to resolve any unresolved objections of Buyer and to make any adjustments to the unresolved items on the Closing Date Statement. In making any such adjustments, such accountants shall evaluate the line item entries that have been set forth in the August Balance Sheet and in the Closing Date Statement to the extent that they have been prepared in accordance with GAAP and on a basis consistent with the Seller's past accounting practices. The fees of such firm shall be divided equally between Seller and Buyer. Seller and Buyer and their respective accountants shall each make readily available to such firm all relevant books and records and work papers prepared by them relating to the Closing Date Statement as may be requested by such firm to resolve the disputes. Such firm's resolution of the dispute and its adjustments to the Closing Date Statement shall be conclusive and binding upon the parties. (b) Adjustment to Initial Price. Upon the later to occur of (i) acceptance of the Closing Date Statement or (ii) the resolution of Buyer's objections in connection therewith, Seller shall pay to Buyer the amount, if any, by which $10,000,000 exceeds the Closing Net Value or, conversely, Buyer shall pay to Seller the amount, if any, by which the Closing Net Value exceeds $10,000,000; provided, however, that no adjustment payment shall be required of either Seller or Buyer pursuant to the foregoing to the extent that the Closing Net Value shall not differ (either positively or negatively) from $10,000,000 by more than $100,000. If the difference shall, however, be greater than $100,000, then the receiving party shall be entitled to the full amount of such difference. The applicable amount shall be paid by wire transfer of immediately available funds to the appropriate party within five business days after its determination. If the foregoing procedure shall indicate that Seller shall be required to make a post-Closing adjustment payment to Buyer and if such payment shall not have been made by Seller within such prescribed period, 9. Buyer shall be entitled, but not required, to make a claim against the Claims Deposit (as defined in Section 9.03(a)) for the appropriate amount. If the foregoing procedure shall indicate that Buyer shall be required to make a post- Closing adjustment payment to Seller and if such payment shall not have been made by Buyer within such prescribed period, Seller shall be entitled, but not required, to receive a payment from the Claims Deposit for the appropriate amount. If Seller receives such a payment, Buyer shall be required to deposit the amount of such payment in the Escrow Fund. ARTICLE III CLOSING SECTION 3.01 Time of Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Brobeck, Phleger & Harrison, One Market Plaza, Spear Street Tower, San Francisco, California as soon as practicable following satisfaction or waiver of the latest to occur of the conditions set forth in Article VIII, or such other place or date as Buyer and Seller may mutually agree in writing (the date on which the Closing shall occur, "Closing Date"). SECTION 3.02 Payments at Closing. At the Closing, in addition to any other amounts required to be paid hereunder or under any other agreements between or among Buyer and Seller, Buyer shall pay (i) to Seller $14,000,000, and (ii) to the Escrow Agent (as defined in Section 9.03(a)) named in the Escrow Agreement (also as defined in Section 9.03(a)) $7,500,000, to be held and disbursed by such Escrow Agent in accordance with the terms of such Escrow Agreement and in such accounts as are set forth in such Escrow Agreement, of which (a) an aggregate of $5,000,000 shall be held in escrow pursuant to the License Agreement, (b) an aggregate of $1,000,000 and $500,000 shall be held in escrow pursuant to the Wafer Supply Agreement and Manufacturing Agreement, respectively, and (c) an aggregate of $1,000,000 shall be held in escrow pursuant to the terms of Section 9.03 hereof. Such payments shall be made by Buyer to Seller and the Escrow Agent by means of a wire transfer of immediately available funds. The payment to Seller shall be made to Seller's account at First Interstate Bank of California, Goleta, California Branch, Account No. 308- 7-02356 or at such other account as Seller may designate in writing not later than three (3) days prior to the Closing Date. SECTION 3.03 Closing Deliveries. At the Closing, (i) Seller shall deliver to Buyer the various certificates, instruments and documents referred to in Section 8.01, all duly and properly executed, (ii) Buyer shall deliver, in addition to the payments referred to in Section 3.02 above, the various certificates, instruments and documents referred to in Section 8.02, all duly and properly executed, and (iii) Seller shall deliver to Buyer a share certificate representing all of the ATTI Shares, endorsed in blank or accompanied by duly executed assignment documents. 10. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that the statements contained in this Article IV are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though then made and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV). SECTION 4.01 Organization of Buyer. Buyer is a corporation duly organized and validly existing under the laws of the State of Delaware. SECTION 4.02 Authority. Buyer has the requisite corporate power and authority to enter into this Agreement, perform its obligations hereunder and consummate the transactions contemplated hereby and by the ancillary agreements contemplated by Article VIII hereof. This Agreement has been duly authorized, executed and delivered and constitutes a valid and binding obligation of Buyer, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principals. Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement other than those consents mandated by the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). SECTION 4.03 Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) assuming compliance with the HSR Act, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which Buyer is subject or any provision of its charter or bylaws, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any material contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness or other arrangement to which Buyer is a party or by which it is bound or to which any of its assets is subject. SECTION 4.04 Brokers, Finders. The transactions contemplated hereby were not submitted to Buyer by any broker, finder or other person entitled to a commission, fee or like payment thereon and were not, with the consent of Buyer, submitted to Seller by any broker, finder or other person, and the actions of Buyer have not given rise to any claim by any person against Seller for a commission, fee or like payment. 11. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer that, except as set forth in a document which identifies the Section and subsection to which the disclosures set forth therein relate and is delivered by Seller to Buyer prior to the date hereof (the "Disclosure Schedule"), the statements contained in this Article V are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though then made and as though the Closing Date were substituted for the date of this Agreement throughout this Article V). Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule shall identify the exception with reasonable particularity and shall describe the relevant facts in reasonable detail. For purposes of this Article V, any representation or warranty made by Seller with respect to itself, the Tape Head Division, the Tape Head Division Assets or the Assumed Liabilities shall be deemed to have been made in a like manner with equal force with respect to ATTI and its organization, operations and assets. In addition, all references in this Article V to "Seller" shall also be deemed to include ATTI. SECTION 5.01 Corporate Organization. Each of Seller and ATTI is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation with all requisite corporate power and authority to carry on the Business. Prior to Closing, ATTI shall be duly qualified to do business as a foreign corporation and be in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities as of the Closing makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a material adverse affect on the condition (financial or otherwise), assets, properties, liabilities, results of operations or prospects of the Business (a "Material Adverse Effect") and a listing of each such jurisdiction is set forth in Schedule 5.01 of the Disclosure Schedule. SECTION 5.02 Authorization of Seller. Seller has the requisite corporate power and authority to enter into this Agreement, perform its obligations hereunder and consummate the transactions contemplated hereby and by the ancillary agreements contemplated by Article VIII hereof. This Agreement has been duly authorized, executed and delivered and constitutes a valid and binding obligation of Seller, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principals. Seller need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement other than those consents mandated by the applicable requirements of the HSR Act. 12. SECTION 5.03 Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) assuming compliance with the HSR Act, violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which Seller is subject or any provision of the charter or bylaws of Seller, except for such violations which, individually or in the aggregate, would not have a Material Adverse Effect, and (ii) except for the contemplated modification of the 3M Agreement, the termination of the STK Agreement as required in Sections 8.01(n) and (o) hereof and the credit facilities contemplated under Section 8.01(v) hereof, respectively, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate or cancel any material contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, security interest, or other arrangement to which Seller is a party or by which it is bound or to which any of the Tape Head Division Assets is subject, (iii) result in the imposition of any lien, security interest, mortgage, pledge, charge or encumbrance of any kind (a "Lien") upon any of the Tape Head Division Assets; or (iv) except for the contemplated modification of the 3M Agreement and the termination of the STK Agreement, create in a party to a Contract the right to accelerate, modify or cancel such Contract. SECTION 5.04 Subsidiaries. ATTI does not have any direct or indirect interest or equity participation in any corporation, partnership, trust or other business association or entity. SECTION 5.05 Contracts and Commitments. Schedule 5.05 of the Disclosure Schedule sets forth all material contracts, commitments, leases, permits, purchase orders, sales orders and other instruments binding upon Seller with respect to the Business (collectively, the "Contracts"). Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all items listed in Schedule 5.05, and any amendments thereof. To Seller's knowledge, all such Contracts are in full force and effect and are valid, binding and enforceable in all material respects in accordance with their respective provisions, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Seller is not in default nor, to Seller's knowledge, has there occurred an event or condition which, with the passage of time or giving of notice (or both), would constitute a default with respect to the payment or performance of any obligation thereunder; and no claim of such a default has been asserted and, to Seller's knowledge, there is no reasonable basis upon which such a claim could validly be made. SECTION 5.06 Inventory. The inventory of Seller with respect to the Business reflected on the August Balance Sheet was valued at cost (determined on a first-in first-out basis) or market, whichever is lower, with proper allowance for excess and obsolete items in accordance with GAAP. Except for such amounts as are reserved in accordance 13. with GAAP, such inventory consists of items which are of quality usable or saleable in the normal course of business of the Tape Head Division, and is of a quantity that is not in excess of the reasonable requirements of the Business for the next six months based upon the current operation and projected operations of the Business (as projected by the Seller based on current operations). No items included in the inventory shown on the August Balance Sheet are pledged as collateral or are held by Seller on consignment from others. SECTION 5.07 Receivables. The accounts receivable reflected on the August Balance Sheet arose from sales in the ordinary course of business, have been collected or are collectible in the book amounts thereof, less an amount not in excess of the allowance for doubtful accounts provided for in such balance sheet. The receivables of the Tape Head Division arising after the date of the August Balance Sheet but prior to the Closing Date arose or will arise in the ordinary course of business and have been collected or are or will be collectible in the book amounts thereof, less an allowance for doubtful accounts calculated in a manner consistent with the methodologies and assumptions used in preparing the August Balance Sheet. None of such accounts receivable have been pledged as collateral or factored by Seller. Schedule 5.07 of the Disclosure Schedule sets forth an accounts receivable aging schedule which allocates the accounts receivable balance shown on the August Balance Sheet on a 30-day, 60- day, 90-day and over 90-day basis and further sets forth the amount of the allowance for doubtful accounts. SECTION 5.08 Financial Statements. The Seller has delivered to Buyer the August Balance Sheet and an income statement (the "Income Statement") for the Tape Head Division for the 11 months ended August 27, 1994 (collectively, the "Financial Statements"). The August Balance Sheet is a special purpose balance sheet that reflects only the assets to be acquired and liabilities to be assumed by ATTI and the line items accruals with respect to such assets and liabilities have been properly stated in accordance with GAAP and on a basis consistent with Seller's past accounting practices except that such August Balance Sheet shall reflect a reserve for product warranty claims on Tape Head Division product sales through the August Balance Sheet Date which is not consistent with Seller's past accounting practices. The Income Statement fairly presents the results of operations of the Tape Head Division for the period covered thereby and is consistent with the books and records of Tape Head Division. The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except that none of the required footnotes, the cashflow statements or other supplemental disclosures have been provided. The Business Plan dated as of August, 1994 presented by Seller to Buyer regarding the future prospects and operations of the Tape Head Division was prepared by the management of Seller in good faith based upon estimates and assumptions deemed reasonable and appropriate by management provided that Seller makes no other representation or warranty, expressed or implied, regarding the Business Plan or the attainment of the projected results set forth in the Business Plan. SECTION 5.09 Events Subsequent to August Balance Sheet Date. Since the August Balance Sheet Date, there has not been any material adverse change in the 14. assets, liabilities, business, properties, financial condition, or results of operations of the Business, and, except for this Agreement and the transactions contemplated hereunder, Seller has conducted the Business in the ordinary course. SECTION 5.10 Assets Are All Assets of the Tape Head Division. Except for the fact that ATTI will not have any direct manufacturing capabilities in Korea following the Closing, the Tape Head Division Assets, together with the rights conveyed to ATTI under the various agreements contemplated under Sections 8.01(h), (j), (k), (l) and (n), include all of the real and personal property (or interests therein), machinery, tools, equipment, inventory, intellectual property and other property which are used by Seller (or its subsidiaries) in the conduct of the Business and which are necessary for the continued operation of the Business in a manner consistent with its current operations, giving effect to usual and customary production planning and manufacturing considerations based on existing and anticipated customer orders. SECTION 5.11 Title to the Assets. ------------------- (a) Except for the Lien of any current assessments or taxes not yet delinquent and mechanics and similar Liens arising in the ordinary course of business, and except, as of the date of this Agreement, for the Liens listed in Schedule 5.11 in favor of 3M (the "3M Liens"), Seller has, and at the time of the Closing Seller will convey to ATTI, good and marketable title to the Tape Head Division Assets, free and clear of all pledges, liens, encumbrances, security interests, equities, charges, clouds and restrictions of any nature whatsoever, including, at the time of the Closing, the 3M Liens. (b) Except as set forth in Schedule 5.11 attached, the equipment owned or leased by Seller is, taken as a whole, (i) adequate for the conduct of the Business consistent with its past practice, (ii) suitable for the uses to which it is currently employed, (iii) in good usable condition, normal wear and tear excepted, (iv) reasonably maintained in accordance with Seller's normal and customary business practices relating to the Business, and (v) not in need of renewal or replacement, except for renewal or replacement in the ordinary course of business. SECTION 5.12 Division Patents and Intellectual Property. The Division Patents and Intellectual Property, to be transferred to ATTI and the Licensed Patents and Licensed Trade Secrets which will be licensed to ATTI under the License Agreement provided for in Section 8.01(j) hereof, constitute all of the intellectual property, whether or not owned by Seller, used by it to any material extent in the conduct of the Business. Except as set forth on such Schedule: (a) none of such Division Patents, or Intellectual Property has been assigned, transferred or licensed to or from any third party, and (b) the validity or enforceability of such Division Patents, and Intellectual Property as used in the conduct of the Business has not been challenged by others in any proceeding or dispute about which Seller has received notice in writing, nor is there any pending or, to the best knowledge of Seller, threatened litigation or proceeding challenging Seller's right to use any 15. of such Division Patents, and Intellectual Property. Seller's use of the Division Patents and Intellectual Property in connection with its operation of the Business in the ordinary course does not, to its knowledge, conflict with or constitute an infringement of the rights of any other person. The consummation of the transactions contemplated by this Agreement will not adversely affect ATTI's rights to the Division Patents and Intellectual Property. SECTION 5.13 Litigation. There is no claim, litigation, action, suit or proceeding, administrative or judicial, pending or, to the best knowledge of Seller, threatened against Seller involving the Tape Head Division or the Business, at law or in equity, before any federal, state, local or foreign court or regulatory agency, or other governmental authority. Seller has delivered to Buyer correct and complete copies of all audit response letters prepared by its counsel for Seller's independent public accountants, if any, relative to the Tape Head Division or the Business in connection with the audit of Seller's financial statements for its most recent fiscal year end, and any such correspondence since such date. SECTION 5.14 Taxes. Seller has no tax, deficiency or claim outstanding or assessed against it, or, to the best of Seller's knowledge, proposed against it, and, to the best of Seller's knowledge, there is no basis for any such deficiency or claim, which is reasonably likely to result in the imposition of any lien, claim or encumbrance on the Tape Head Division Assets or against Buyer or ATTI. All tax returns and reports by Seller required to be filed by Seller and which are material to the Business have been duly and timely filed and all taxes which were required to be paid have been paid. Schedule 5.14 of the Disclosure Schedule constitutes a complete list of all real property and personal property tax bills of Seller, with respect to the Tape Division Assets, for the current and prior property tax years, indicating whether or not Seller is aware of any proposal by any such taxing authority to change the assessed values or assessment rate reflected in such bills. SECTION 5.15 Compliance with Law. Seller is in compliance in all material respects with all applicable federal, state and local laws, statutes, licensing requirements, rules and regulations, and judicial or administrative decisions applicable to the Business. Seller has been granted any and all licenses, permits (temporary and otherwise), authorizations and approvals from federal, state, local and foreign government regulatory bodies necessary to carry on the Business as currently conducted, all of which are valid and in full force and effect, except where failure to have such licenses, permits, authorizations or approvals granted would not have a Material Adverse Effect on the Business. Each such license, permit, authorization and approval that is material to the continued operation of the Business has been set forth in Schedule 5.15 of the Disclosure Schedule. As of the date of this Agreement, there has been no order issued, investigation or proceeding pending, or to the best knowledge of Seller threatened, or notice served with respect to any violation of any law, ordinance, order, writ, decree, rule or regulation issued by any federal, state, local or foreign court or governmental agency or instrumentality applicable to the Business. 16. SECTION 5.16 Labor Relations. --------------- (a) With respect to its Tape Head Division operations at the Santa Maria Facility, (i) to its knowledge, Seller is in compliance with all currently applicable laws and regulations of the State of California and of the United States respecting employment, discrimination in employment, verification of immigration status, terms and conditions of employment and wages and hours and occupational safety and health and employment practices (collectively, "Employment Regulations") and is not engaged in any unfair labor practice, (ii) Seller has not received, with respect to any Division Employees any notice from any governmental entity with respect to a violation of Employment Regulations within three years preceding the date hereof, (iii) there has not, to the Seller's knowledge, been asserted before any governmental entity any claim, action or proceeding alleging a violation of Employment Regulations with respect to Division Employees or an unfair labor practice committed by the Seller with respect to the Division Employees and (iv) there is neither pending, nor to the knowledge of Seller, threatened any investigation or hearing concerning the Division Employees arising out of or based upon any such Employment Regulations. (b) The Seller's employees listed in Exhibit 8.01F and each other Division Employee who is employed at the Santa Maria Facility in a technical, managerial or executive capacity and whose departure as an employee would have a Material Adverse Effect on the Business have the right under applicable U.S.immigration laws to work in their present locations for at least two years from the Closing Date; provided, however, that at or immediately following the Closing, ATTI or Buyer (i) obtains new I-9 verification forms from such employees and (ii) is substituted as named petitioner with respect to all such employees, if any, who hold H-1, L-1, H-3, F-1 or other similar temporary visas. (c) There are no material labor controversies pending or, to the best of Seller's knowledge, threatened as of the date of this Agreement between Seller and any of the Division Employees of the Tape Head Division, and Seller is not aware of any basis for such controversies. (d) Seller is not a party to any collective bargaining or union contract in connection with the Business as conducted at the Santa Maria Facility. (e) Schedule 5.16 of the Disclosure Schedule constitutes a complete and correct list of (i) all employment, bonus, profit-sharing, percentage compensation, employee benefit plans, incentive plans, pension or retirement plans, stock purchase and stock option plans, contracts or agreements with officers, employees or unions, or consulting agreements, to which Seller is a party or is subject as of the date of this Agreement and which relate to the Division Employees; (ii) the names and current salary rates of all Division Employees who have officer titles (vice president and above), and (iii) the wage rates for the non-executive Division Employees by classification. Schedule 5.16 of the Disclosure Schedule also sets forth a listing of all bonuses paid to Division Employees at the Santa Maria Facility since December 31, 1992. 17. (f) Seller is not a party to or bound by any express, written employment agreements or any employment contracts that are not terminable at will without extraordinary severance payments or other penalties, other than as required by law or the Seller's benefit plans with any of the Division Employees. SECTION 5.17 Environmental Matters. --------------------- (a) Seller has not within the five (5) years preceding the date hereof received, with respect to its operations at the Santa Maria Facility, any written notice, demand, citation, summons, complaint or order or any notice of any penalty, lien or assessment, and, to the knowledge of Seller, no investigation or review is pending by any governmental entity, with respect to any (i) alleged violation by the Tape Head Division of any Environmental Law (as defined in subsection (e) below), (ii) alleged failure by the Tape Head Division to have any environmental permit, certificate, license, approval, registration or authorization required, under any Environmental Law, in connection with the conduct of the Business or (iii) Regulated Activity (as defined in subsection (e) below). (b) Except as set forth on Schedule 5.17 of the Disclosure Schedule, the Tape Head Division has no Environmental Liabilities (as defined in subsection (e) below), and the Tape Head Division has not had within the five (5) years preceding the date hereof a release of Hazardous Substances (as defined in subsection (e) below) into the environment in violation of any Environmental Law or environmental permit. (c) Seller shall reimburse ATTI or Buyer for any costs incurred by ATTI or Buyer in connection with remediating any violations of Environmental Laws by Seller which shall have occurred prior to the Closing Date and Buyer shall reimburse Seller for any costs incurred by Seller in connection with remediating any violations of Environmental Laws by ATTI which shall occur after the Closing Date. (d) Seller has delivered to Buyer copies of all environmental audits and other similar reports which have been prepared by or for the Tape Head Division with respect to the Santa Maria Facility within five (5) years preceding the date hereof. (e) For the purposes of this Section 5.17, the following terms have the following meanings: "Environmental Laws" shall mean any and all federal, state and local laws, regulations or ordinances, relating to the protection of human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. 18. "Environmental Liabilities" shall mean all liabilities, whether vested or unvested, contingent or fixed, which (i) arise under or relate to Environmental Laws and (ii) relate to actions occurring or conditions existing on or prior to the Closing Date with respect to the Santa Maria Facility and Seller's operation of the Business. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance regulated by any Environmental Law, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any material constituent elements displaying any of the foregoing characteristics. "Regulated Activity" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances. SECTION 5.18 No Defaults. Seller is not, and has not received notice that it would be with the passage of time, (i) in violation of any provision of its charter or bylaws or (ii) in default or violation of any term, condition or provision of (A) any judgment, decree, order, injunction or stipulation applicable to the Tape Head Division or (B) any material agreement, note, mortgage, indenture, contract, lease or instrument, permit, concession, franchise or license relating to the Tape Head Division to which Seller is a party or by which Seller or the Tape Head Division Assets may be bound. SECTION 5.19 Capitalization of ATTI. The authorized capital stock of ATTI consist of 1,000 shares of common stock without par, of which 100 shares will, as of the Closing, be issued and outstanding and owned by Seller (such issued and outstanding shares, the "ATTI Shares"). All outstanding shares of capital stock of ATTI have been duly authorized and validly issued and are fully paid and nonassessable. Except as contemplated by Section 2.01, 2.02, Article III, Section 5.18 and Article VIII, there are outstanding (i) no shares of capital stock or other voting securities of ATTI, (ii) no securities of ATTI convertible into or exchangeable for shares of capital stock or voting securities of ATTI, and (iii) no options or other rights to acquire from Seller or ATTI, and no obligation of ATTI to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of ATTI (collectively, "ATTI Securities"). There are no outstanding obligations of ATTI to repurchase, redeem or otherwise acquire any ATTI Securities. There are no voting or other shareholder agreements in effect with respect to the ownership or voting of ATTI Securities. Seller has delivered to Buyer copies of ATTI's Articles of Incorporation and Bylaws as in effect on the date hereof. Seller has valid and marketable title to the ATTI Shares and, upon payment for such ATTI Shares by Buyer as provided in Section 3.02, Buyer shall acquire valid and marketable title thereto, free and clear of any restrictions on transfer, claims, taxes, security interests, liens, pledges, hypothecations, options, warrants, rights, contracts, calls, commitments, equities, demands or other encumbrance. 19. SECTION 5.20 Insurance. Schedule 5.20 of the Disclosure Schedule constitutes a list of all insurance policies and bonds in force with respect to Seller showing for each such policy or bond: (i) the owner, (ii) the coverage of such policy or bond, (iii) the premium, (iv) the name of the insurer, and (v) the termination date of the policy or bond. SECTION 5.21 Restrictions on Business Activities. Except for this Agreement and the transactions contemplated hereby, there is no agreement, judgment, injunction, order or decree binding upon Seller which has or could reasonably be expected to have the effect of prohibiting or materially impairing the operations of the Tape Head Division as they are presently being conducted, any acquisition of property by the Tape Head Division or the conduct of the Business as currently conducted by Seller. SECTION 5.22 Customs. Seller has not violated in any material respect any United States and foreign import and export control laws and regulations, exports licensing laws and regulations and customs regulations applicable to Seller. Seller has not during the past four (4) years been cited by the United States Department of Commerce, the United States Customs Service or any other relevant Governmental Entity for any material violation of United States laws or regulations relating to importing or exporting of products, materials or services. All Tape Heads and related components imported into the United States or any other country by Seller ("Imported Goods") have been properly valued and classified, in all material respects, in accordance with applicable tariff laws, rules and regulations and all proper duties, tariffs or excise taxes have been paid with respect to the Imported Goods. No penalties have been assessed, asserted or claimed with respect to such Imported Goods. All Imported Goods have been properly marked as to country of origin, content and material. All claims for drawback with respect to Imported Goods have been validly filed and are not subject to challenge, or if challenged, will not have a material effect on the business SECTION 5.23 Product Warranty. Each Tape Head product manufactured, sold, and delivered by the Tape Head Division has been in conformity, in all materials respects, with all express and implied warranties, if any, with respect to such products, and the Tape Head Division has no liability (and there is to the Seller's knowledge, no basis for any present or future claim or demand against any of them giving rise to any liability) for replacement or repair thereof or other damages in connection therewith, subject only to the reserve for product warranty claims set forth in the August Balance Sheet, as such reserve may be adjusted for the passage of time through the Closing Date. No Tape Head product manufactured, sold, leased, or delivered by the Tape Head Division is subject to any guaranty, warranty, or other indemnity beyond the applicable standard terms and conditions of sale, lease or license, a summary of such standard terms and conditions being set forth at Schedule 5.23 of the Disclosure Schedule. A summary of the Tape Head Division's policies regarding customer credits and product returns has also been set forth at Schedule 5.23 of the Disclosure Schedule. Schedule 5.23 of the Disclosure Schedule also sets forth a schedule of those product returns which have been authorized by Seller and which are pending as of the date hereof. 20. SECTION 5.24 Disclosure. No representation or warranty made by Seller in this Agreement or any ancillary agreements contemplated by Article VIII of this Agreement, nor any financial statement, certificate, schedule or exhibit which is either attached to this Agreement or that is prepared and furnished by Seller pursuant hereto, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. There is no event, fact or condition known to Seller that materially and adversely affects the Business, or that reasonably could be expected to do so, that has not been set forth in, or is not contemplated by, this Agreement or in the Disclosure Schedules. SECTION 5.25 Undisclosed Liabilities. There are no liabilities of the Tape Head Division of any kind whatsoever, including liabilities that may arise by reason of the transactions contemplated by this Agreement, that are material to the Business (and, to the best knowledge of Seller, there is no basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand against the Tape Head Division giving rise to any such liability), except for (i) liabilities disclosed or provided for in the August Balance Sheet, (ii) liabilities under the Contracts, (iii) liabilities which have arisen after the date of the August Balance Sheet in the ordinary course of business and which are not material in amount in the aggregate, and (iv) Excluded Liabilities. SECTION 5.26 Bulk Sales Compliance. Consummation of the transactions contemplated by this Agreement does not constitute a "bulk sale" or "bulk transfer" under any applicable bulk sale or transfer laws of the state of California. SECTION 5.27 Brokers, Finders. The transactions contemplated hereby were not submitted to Seller by any broker, finder or other person entitled to a commission, fee, or like payment thereon, and were not, with the consent of Seller, submitted to Buyer by any broker, finder or other person, and, except as set forth in an agreement dated as of October 15, 1993 between Seller and Lehman Bros, Inc. (the "Lehman Agreement") the actions of Seller have not given rise to any claim by any person for a commission, fee or like payment against any of the parties hereto or the Tape Head Division Assets and Seller agrees to bear all costs and expenses relating to commissions, taxes and like payments that may be payable by it pursuant to the Lehman Agreement. ARTICLE VI PRE-CLOSING COVENANTS The parties hereto agree as follows with respect to the period between the date of this Agreement and the Closing: 21. SECTION 6.01 General Covenants. Each of the parties hereto will use its best efforts to take all action and to do all things necessary, proper, or advisable to consummate and make effective the transactions contemplated by this Agreement (including satisfying the closing conditions set forth in Article VIII below). SECTION 6.02 Notices and Consents. Seller will give any notices to third parties and use its best efforts to obtain those third-party consents described as necessary in this Agreement or the Disclosure Schedules. Each of the parties hereto will take any additional action that may be necessary, proper, or advisable in connection with any notices to, filings with, and authorizations, consents, and approvals of governments, governmental agencies, and third parties that it may be required to give, make, or obtain. SECTION 6.03 Operation of Business. Except as set forth in this Agreement and the transactions contemplated hereby, Seller will not engage in any practice, take any action, embark on any course of inaction, or enter into any transaction in connection with the Business outside the ordinary course of business. Specifically, but without intending to limit the foregoing, Seller shall not (a) transfer or take any steps to transfer Seller's SCS or 13GB assets or processes relating thereto from the Santa Maria Facility nor (b) increase the salary, wages or benefits of any Division Employees other than nominal wage increases except with the prior approval of the Buyer, which approval will not be unreasonably withheld. SECTION 6.04 Preservation of Business. Except as set forth in this Agreement and the transactions contemplated hereby, Seller will keep the Business and the Tape Head Division Assets substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers, agents, management and employees. If Seller becomes aware of a material deterioration in the relationship with any material customer or supplier or Seller's employees listed in Exhibit 8.01F, it will promptly bring such information to the attention of Buyer in writing and, if requested by Buyer, will exert its best efforts to restore the relationship. SECTION 6.05 Compliance with Obligations. Seller shall comply with (i) all material federal, state, local and foreign laws, rules and regulations applicable to the Tape Head Division Assets or the Business, (ii) all material agreements and obligations, including its charter and bylaws, by which it, or, in the case of agreements and obligations, the Tape Head Division or the Tape Head Division Assets, are bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to the Business or the Tape Head Division Assets. SECTION 6.06 Access to Financial, Operation, Technical and Scientific Information. Subject to the provisions of the Confidentiality Agreement between Seller and Buyer (the "Confidentiality Agreement") described in Section 7.04 hereof, Seller will give Buyer, its counsel, financial advisors, lenders, auditors and other authorized agents and representatives reasonable access during normal business hours to the offices, properties, 22. books and records of the Tape Head Division, will furnish to Buyer, its counsel, financial advisors, lenders, auditors and other authorized agents and representatives such financial and operating data and all other scientific and technical information as such persons may reasonably request (including, without limitation, Seller's personnel records, retirement plans, employment agreements, leases and contracts with suppliers and customers) and will instruct Seller's employees, counsel and financial advisors to cooperate with Buyer in its investigation of the Business; provided that no investigation pursuant to this Section shall affect any representation or warranty given by Seller to Buyer hereunder. SECTION 6.07 Notice of Developments. Seller will give prompt written notice to Buyer of any material development affecting the assets, liabilities, business, financial conditions, operations, results of operations, or future prospects of Business which becomes known to Seller. Each party hereto will give prompt written notice to the other of any material development affecting the ability of the parties to consummate the transactions contemplated by this Agreement. No disclosure by any party pursuant to this Section 6.07 shall, however, be deemed to amend or supplement the Disclosure Schedules or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. SECTION 6.08 Exclusivity. Neither Seller nor its affiliates or officers, directors, employees, investment bankers or other representatives and agents will directly or indirectly, (i) take any action to solicit, initiate or encourage the making of any Acquisition Proposal (as defined below) or (ii) subject to the fiduciary duties of Seller's Board of Directors, after receiving the advice of counsel, engage in negotiations with, or disclose any non-public information relating to the Business or afford access to the properties, books or records of the Business to, any person or entity that Seller knows or has reason to know may be considering making, or has made, an Acquisition Proposal. Seller is not presently considering any Acquisition Proposal other than Buyer's. Seller will not, on its own behalf or through its agents, directors or employees, individually or collectively, directly or indirectly, enter into any agreement to merge or consolidate with, or sell a substantial portion of the Tape Head Division Assets or any equity interest in any entity presently formed or to be formed to hold the Tape Head Division Assets to, any person or entity. Seller will immediately notify Buyer orally and in writing after receipt of any Acquisition Proposal or any request for non-public information relating to the Business or for access to the properties, books or records of the Tape Head Division by any person or entity that Seller knows or has reason to know may be considering making, or has made, an Acquisition Proposal, and will keep Buyer informed of any such Acquisition Proposal or request. No party shall without the prior written consent of the other parties issue any public statement or communication regarding any Acquisition Proposal unless such party is advised by counsel that disclosure thereof is required by law. As used in this Agreement, the term "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Tape Head Division or the acquisition of a substantial equity interest in any entity presently formed or to be formed to hold the Tape Head Division Assets, or an acquisition of a substantial portion of the Tape Head Division Assets, other than the transactions contemplated hereby. 23. SECTION 6.09 Buyer to Offer Employment. (a) With respect to all Division Employees who are employed by Seller on the Closing Date, Buyer shall cause ATTI to offer employment, effective as of the close of business on the Closing Date, with a level of compensation and on other terms and conditions of employment similar to each such employee's existing arrangements with Seller. Such offers of employment may, however, be conditioned upon the execution of a proprietary information and inventions agreement that is in form satisfactory to Buyer. Division Employees who are offered employment by ATTI shall be offered the opportunity to participate in Buyer's existing employee benefit plans to the extent that similarly situated employees of Buyer are permitted to participate in such plans. (b) Except as otherwise contemplated by the Administrative Services Agreement described in Section 8.01(1) below, (i) effective at the close of business on the Closing Date, all Division Employees who accept ATTI's offer of employment shall cease to be covered by Seller's employee welfare benefit plans, including plans, programs, policies and arrangements which provide medical and dental coverage, life and accident insurance and disability coverage (collectively, "Welfare Plans") except to the extent, if any, that such Division Employees may have continuing rights or benefits under such Welfare Plans, pursuant to the terms and conditions of such Welfare Plans, subsequent to the Closing Date; and (ii) Seller shall retain the responsibility for all Welfare Plans claims incurred by all employees of the Seller (and their dependents) on or prior to the Closing Date. A summary of such Welfare Plans is set forth as Schedule 6.09 of the Disclosure Schedule. As soon as practicable after the Closing Date, Seller shall cause the account balances of those Division Employees who accept ATTI's offer of employment under the Seller's 401(k) plan to be transferred to an appropriate qualified plan of Buyer. (c) Seller shall pay those employees of Seller at the Santa Maria Facility all wages to which they are entitled through the Closing Date. Such payment shall be made by Seller on the next regularly scheduled payroll payment date following the Closing Date. (d) Effective as of the Closing Date, ATTI shall assume all liability for and thereafter have sole responsibility for all vacation time accrued for all Division Employees who accept ATTI's offer of employment. Seller agrees that it shall, if requested by Buyer in writing, solicit from those Division Employees who have accepted offers of employment from ATTI consents concerning transfer of accrued but unpaid vacation time from Seller to ATTI. (e) Other than as set forth herein, Buyer shall have no obligation to any employees of Seller. 24. SECTION 6.10 Title Insurance. Within 15 business days after the date of this Agreement, Seller shall, at Buyer's expense by Continental Land Title Company ("Title Company") cause a preliminary report for an American Land Title Association ("ALTA") Owners Policy of title insurance to be issued, in an amount to be specified by Buyer in writing within five (5) days following the date of this Agreement, for the real property comprising the Santa Maria facility. If such surveys and reports shall reveal any exception to or defect in title inconsistent with the representations set forth in Section 5.11 (an "Exception"), Seller shall promptly advise Buyer of such Exception and the parties shall negotiate in good faith to resolve the same or make appropriate adjustments to this Agreement. If the parties are unable to resolve the matter prior to Closing, then Buyer may elect either (i) to proceed with Closing, in which case the Exception shall be deemed included in the Disclosure Schedules and waived by Buyer, or (ii) to terminate this Agreement. SECTION 6.11 Other Insurance. Effective as of the Closing, Seller shall cause Buyer to be named as an additional named insured on all of Seller's presently maintained insurance policies relating to the Tape Head Division (other than those relating to employee benefits) and shall assign to Buyer all of Seller's rights and benefits under all of Seller's past and present insurance policies (other than those relating to employee benefits), except as such rights and benefits may relate to coverages for Retained Assets and Excluded Liabilities. Seller shall grant to Buyer the right and power to control the administration of such policies, including the decision as to whether to make claims thereunder and the timing thereof. Seller shall, however, retain all right and power to control the administration of such policies as they relate to coverage for any of the Retained Assets and Excluded Liabilities. SECTION 6.12 Modification and Termination of Existing Agreements. The parties acknowledge that it is a condition to Closing that (i) the 3M Agreement be modified in a manner reasonably satisfactory to Buyer, (ii) the STK Agreement be terminated in a manner reasonably satisfactory to Buyer and Seller and (iii) Seller shall have obtained such releases and waivers as it considers necessary and appropriate from certain parties to those agreements, commitments and contracts listed in Schedule 5.05 that are not being assumed by Buyer pursuant to Section 1.03 hereof. Seller shall use its reasonable best efforts to cause the foregoing to occur as soon after the date hereof as practicable. Buyer agrees to take all reasonable steps to facilitate this process such that it may proceed in an expeditious manner; provided that such commitment on the part of Buyer shall not require Buyer to expend any additional sums other than those expressly provided for under this Agreement and other than those amounts that, including outside counsel fees, Buyer may be required to spend in allocating time and internal resources in satisfying such commitment. 25. ARTICLE VII POST-CLOSING COVENANTS The parties hereto agree as follows with respect to the period following the Closing: SECTION 7.01 General. (a) In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as any other party reasonably may request, all at the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification therefor under Article IX below). Seller acknowledges and agrees that, subject to the provisions of Section 1.02(x) hereof, from and after the Closing Buyer will be entitled to possession of all documents, books, records, agreements, and financial data of any sort relating to the Tape Head Division. Seller shall approve, in writing, a written request by ATTI to IBM pursuant to Section 3.2 of the IBM Agreement. (b) Seller and Buyer shall reasonably cooperate to maintain the full force and effect of all sales and supply contracts and agreements between the Tape Head Division and all third parties under which Seller or any entity affiliated with Seller has obligations which continue after the Closing Date. Seller agrees to transfer promptly orders for and correspondence and inquiries related to Tape Head Division products which it receives on or after the Closing Date to Buyer. SECTION 7.02 Litigation Support. In the event and for so long as any party hereto actively is contesting or defending against any charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Tape Head Division, each of the other parties will cooperate with it and its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending party (unless the contesting or defending party is entitled to indemnification therefor under Article IX below). SECTION 7.03 Transition. Except as set forth in this Agreement and the transactions contemplated hereby, Seller will not take any action that primarily is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of Seller from maintaining the same business relationships with the Tape Head Division and ATTI after the Closing as it maintained with the Tape Head 26. Division prior to the Closing. Seller will refer all customer inquiries relating to the Business to Buyer from and after the Closing. SECTION 7.04 Confidentiality. Each party hereto will treat and hold as confidential, in accordance with and subject to the terms of a Confidentiality Agreement, to be dated as of the date of this Agreement and in substantially the form of that attached as Exhibit 7.04 (the "Confidentiality Agreement") all such Confidential Information (as defined in the Confidentiality Agreement), refrain from using any of the Confidential Information except as permitted in this Agreement and the Confidentiality Agreement. ARTICLE VIII CONDITIONS TO OBLIGATION TO CLOSE SECTION 8.01 Conditions to Obligation of Buyer. The obligation of Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of each of the following conditions (any one or more of which may be waived by Buyer, but only in a writing signed by Buyer): (a) Accuracy of Representations and Warranties. The representations and warranties set forth in Articles V shall be true and correct in all material respects at and as of the Closing Date. (b) Compliance with Covenants. Seller shall have performed and complied with all of its covenants hereunder in all material respects through the Closing. (c) Consents. Seller shall have procured all of the third-party consents, assignments, waivers or authorizations required by Buyer pursuant to Section 6.02. (d) Legal Proceedings. No action, suit, or proceeding shall be filed before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (iii) affect adversely the right of Buyer to own, operate, or control ATTI Shares or the Business (and no such judgment, order, decree, stipulation, injunction or charge shall then be in effect). (e) No Material Adverse Change. There shall have been no material adverse change in the assets, liabilities, business, financial condition, operations, results of operations or future prospects of the Business since the August Balance Sheet Date. 27. (f) Certificate of Satisfaction. Seller shall have delivered to Buyer a certificate (without additional qualifications as to knowledge or materiality or otherwise) to the effect that each of the conditions specified above in subsections (a)-(e) is satisfied in all respects except that with respect to the condition set forth in subsection (d) above, Seller need only certify that no such action, suit or proceeding shall have been filed against Seller). (g) HSR Act Compliance. The applicable waiting period under the HSR Act shall have expired or been terminated. (h) Manufacturing Agreement. A Manufacturing Agreement, in a form reasonably satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.01A, with such revisions to the pricing terms, if any, as the Buyer and Seller shall agree to, shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (i) Non-Competition Agreement. A Non-Competition Agreement, in a form reasonably satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.01B shall have been duly executed by Seller, and such agreement shall remain in full force and effect. (j) License Agreement. A License Agreement, in a form reasonably satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.01C, shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (k) Wafer Supply Agreement. A Wafer Supply Agreement, in a form reasonably satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.01D, with such revisions to the pricing terms, if any, as the Buyer and Seller shall agree to, shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (l) Administrative Services Agreement. An Administrative Services Agreement, in a form reasonably satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.01E shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (m) Escrow Agreement. The Escrow Agreement contemplated by Section 9.03 shall have been duly executed by Seller, Buyer and the Escrow Agent, and such agreement shall remain in full force and effect. (n) Modification of 3M Agreement. The 3M Agreement shall have been modified in a manner reasonably satisfactory to Buyer, which modification shall include at a minimum a release of all Liens presently held by 3M on certain of the Tape Head Division Assets, and such modification shall remain in full force and effect. 28. (o) Termination of STK Agreement. The STK Agreement shall have been terminated in a manner reasonably satisfactory to Buyer. (p) Retention of Key Employees. Buyer shall be reasonably satisfied in good faith that the key employees of the Tape Head Division listed in Exhibit 8.01F will not terminate their employment with ATTI following the Closing and Seller shall certify that it has no knowledge that any of such employees intends to terminate their employment with ATTI following the Closing. (q) Title Policies. Buyer shall have been furnished with evidence that the Title Company is prepared to issue at the Closing its ALTA policy of title insurance in an amount, to be specified by Buyer in writing within five (5) days following the date of this Agreement, insuring that fee simple title to the Santa Maria Facility is vested in ATTI as of the Closing Date free and clear of all encroachments and of all other matters affecting title except for the Lien of non-delinquent property taxes for the current year. (r) Approval of Formation of New Subsidiary. Buyer and its counsel shall be reasonably satisfied (i) with the form and substance of the documentation employed to convey the Tape Head Division Assets to ATTI and cause ATTI to assume the Assumed Liabilities, and (ii) that at the time of Closing ATTI meets the requirements of the "Operating Subsidiary" contemplated by Section 3.2 of the Agreement dated as of July 1, 1986 between International Business Machines Corporation and Seller. (s) Legal Opinion. To the extent deemed necessary by Buyer, Buyer shall have received from counsel to the Seller an opinion with respect to the matters set forth in Exhibit 8.01G attached hereto, addressed to Buyer and dated as of the Closing Date. (t) Resignations of Officers and Directors. To the extent deemed necessary by Buyer, Buyer shall have received the resignations, effective as of the Closing, of each director and officer of ATTI other than those whom Buyer shall have specified in writing at least two business days prior to the Closing. (u) Patent License Agreement. A Patent License Agreement in substantially the form of that described at Exhibit 8.01H shall have been duly executed by Buyer and Seller and such agreement shall remain in full force and effect. (v) Credit Facilities. At Closing, Seller shall have either (1) entered into either separately or together with one or more of its subsidiaries other than ATTI (i) one or more loans, credit agreements, notes, note purchase agreements, debentures, conditional sale or other title-retention agreements with respect to property acquired or to be acquired, capital leases, equipment lease financing arrangements, sale-leaseback arrangements or other obligations or instruments of indebtedness, (herein collectively "Indebtedness"), (ii) any replacements, extensions, refinancings, substitutions or renewals 29. ("Refinancing") of Indebtedness currently owed by Seller or any of its subsidiaries (other than the credit facilities currently in place between Seller's subsidiary, Applied Magnetics Malaysia, Sdn. Bhd. and Malaysian Bank Berhad, and the Revolving Credit Facility dated February 13, 1992, as amended between Seller and Union Bank, except that increases in such facilities shall be construed as Refinancing to the extent of such increases), or (iii) any combination of Indebtedness or Refinancings which, individually or in the aggregate, reflect contractually available credit, loan or financing amounts of not less than $35,000,000 with maturities, termination dates or term expirations (except as affected by events of default or by refinancing, repayment or voluntary termination by AMC) not earlier than twelve (12) months following the Closing Date; or (2) Seller and Buyer shall enter into a Security Agreement in substantially the form of that attached hereto as Exhibit 8.01I and Seller shall provide one or more commitment letters or letters of intent ("Commitments") with respect to prospective Indebtedness or Refinancing, or any combination thereof, which reflect non-binding, unexpired commitments for credit, loan or financing amounts in an aggregate of not less than $35,000,000 with maturities, termination dates or term expirations (except as affected by events of default, or by refinancing, repayment or voluntary termination by AMC) not earlier than twelve (12) months following the Closing Date. Such Indebtedness, Refinancings and Commitments may be secured or unsecured and, if secured, by any or all properties, of whatever kind, nature or location, or assets of whatever kind, nature or location, of Seller or any one or more of its subsidiaries, including, but not necessarily limited to, the purchase consideration payable by Buyer under this Agreement and may be on such terms, covenants and conditions as Seller, in its sole discretion, determines. SECTION 8.02 Conditions to Obligation of Seller. The obligation of Seller to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of each of the following conditions (any one or more of which may be waived by Seller, but only in a writing signed by Seller): (a) Accuracy of Representations and Warranties. The representations and warranties set forth in Article IV shall be true and correct in all material respects at and as of the Closing Date. (b) Compliance with Covenants. Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing. (c) Legal Proceedings. No action, suit, or proceeding shall be filed before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such judgment, order, decree, stipulation, injunction or charge shall then be in effect). 30. (d) Certificate of Satisfaction. Buyer shall have delivered to Seller a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified above in subsections (a)-(c) is satisfied in all respects (except that with respect to the condition set forth in subsection (c) above Buyer need only certify that no such action, suit or proceeding shall have been filed against Buyer). (e) HSR Act Compliance. The applicable waiting period under the HSR Act shall have expired or been terminated. (f) Legal Opinion. To the extent deemed necessary by Seller, Seller shall have received from counsel to Buyer an opinion with respect to the matters set forth in Exhibit 8.02A attached hereto, addressed to Seller and dated as of the Closing Date. (g) Escrow Agreement. The Escrow Agreement contemplated by Section 9.03 shall have been duly executed by Seller, Buyer and the Escrow Agent, and such agreement shall remain in full force and effect. (h) Guaranty. A Guaranty in a form reasonable satisfactory to Buyer and Seller substantially embodying those key terms described at Exhibit 8.02B shall have been executed by Buyer and shall remain in full force and effect. (i) Manufacturing Agreement. The Manufacturing Agreement contemplated by Section 8.01(h), with such revisions to the pricing terms, if any, as the Buyer and Seller shall agree to, shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (j) License Agreement. The License Agreement contemplated by Section 8.01(j) shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (k) Wafer Supply Agreement. The Wafer Supply Agreement contemplated by Section 8.01(k), with such revisions to the pricing terms, if any, as the Buyer and Seller shall agree to, shall have been duly executed by Seller and ATTI, and such agreement shall remain in full force and effect. (l) Patent License Agreement. A Patent License Agreement in substantially the form of that described at Exhibit 8.01H shall have been duly executed by Buyer and Seller and such agreement shall remain in full force and effect. (m) Opinion of Investment Advisors. The Seller shall have received an opinion from its financial advisors as to the fairness, from a financial point of view, of the transaction contemplated by this Agreement. 31. (n) Modification of 3M Agreement. The 3M Agreement shall have been modified in a manner reasonably satisfactory to Seller, which modification shall include at a minimum a release of all Liens presently held by 3M on certain of the Tape Head Division Assets, and such modification shall remain in full force and effect. (o) Termination of STK Agreement. The STK Agreement shall have been terminated in a manner reasonably satisfactory to Seller. (p) Releases. Seller shall have obtained the releases or waivers contemplated under Section 6.12(iii) hereof. ARTICLE IX INDEMNIFICATION SECTION 9.01 Survival. The representations, warranties, covenants and agreements of Seller and of Buyer shall survive the Closing without regard to any investigations made by the Seller or Buyer, as the case may be, or any knowledge by either of any breach of any such representations, warranties, covenants or agreements; provided, however, that all representations, warranties, covenants and agreements of Seller other than the representations and warranties set forth in Sections 5.11, 5.14, 5.17 and 5.19, in respect of which Buyer has not given written notice to Seller of an Indemnification Event (as defined below in Section 9.02) shall automatically terminate on the second anniversary of the Closing Date. The representations and warranties set forth in Sections 5.11, 5.17 and 5.19 shall survive the Closing and continue in full force and effect forever thereafter. The representation and warranty set forth in Section 5.14 shall survive the Closing and continue in full force and effect until the expiration of the relevant periods for assessment of Tax (including any extensions granted or consented to) under applicable Tax statutes. Upon the giving of any notice referred to in the first sentence of this Section, any representations, warranties, covenants and agreements (even those not expressly indicated in the notice) relating to any such Indemnification Event will continue to survive in respect of any such Indemnification Event until final resolution, including the expiration of all relevant appeals and appeals periods. SECTION 9.02 Indemnification Provisions for Benefit of Buyer. (a) Subject to the limitations hereinafter set forth, Seller hereby agrees to indemnify and to hold Buyer and ATTI harmless from and against any and all causes of action, demands, suits, claims (whether such claims are brought by Buyer or ATTI, or brought by any third party against Buyer or ATTI), damages, assessments, losses, liabilities, costs and expenses (including legal and accounting fees and costs and costs of defense or in enforcing any of its rights hereunder and interest and penalties), together with interest from the date on which a claim hereunder shall be made (collectively, "Damages"), which arise out of breaches of any representations, warranties, covenants or agreements of 32. Seller in this Agreement or in any Exhibit, Schedule, certificate, list or other instrument delivered pursuant hereto (collectively, the "Indemnification Events"); provided, that in no event shall Seller be liable for any Indemnification Event of which written notice is not given by Buyer or ATTI to Seller on or prior to the second anniversary of the Closing Date (except with respect to Indemnification Events arising out of breaches of the representations and warranties set forth in Sections 5.11, 5.14, 5.17 and 5.19). (b) Seller shall defend and indemnify Buyer and ATTI from and against all Excluded Liabilities, including the entirety of any Damages Buyer or ATTI may suffer following the Closing resulting from or arising out of any Excluded Liability. SECTION 9.03 Cash Escrow. (a) On the Closing Date, $7,500,000 of the Purchase Price shall be deposited in escrow (the "Escrow Deposit") with an escrow agent to be mutually selected by Buyer and seller prior to Closing (the "Escrow Agent"), subject to and in accordance with all the terms and conditions of an Escrow Agreement to be entered into among Buyer, Seller, ATTI and the Escrow Agent on or prior to the Closing Date, which shall be in substantially the form attached hereto as Exhibit 9.03 (the "Escrow Agreement"). Buyer and ATTI may obtain recovery from and for any and all Damages resulting from or arising out Indemnification Events contemplated by Section 9.02 above (collectively, "Escrow Claim Events") with respect to up to $1,000,000 of the Escrow Deposit (the "Claims Deposit") which shall be held by the Escrow Agent in the Indemnity Account, as provided in the Escrow Agreement; provided that in no event shall there by any such recovery by Buyer from the Indemnity Account in respect of which a written claim against such Claims Deposit is not made by Buyer or ATTI before the first anniversary of the date of this Closing Date, all as more fully provided in the Escrow Agreement. All fees charged by the Escrow Agent in connection with the administration of the Escrow Deposit shall be borne by Buyer. (b) In addition to the foregoing, in the event that Buyer shall suffer any Damages following the Closing resulting from or arising out of any Retained Liability, Buyer shall be entitled to recover such amount of Damages from the Indemnity Account. SECTION 9.04 Indemnification Provisions for Benefit of Seller. Buyer shall defend and indemnify Seller from and against all Assumed Liabilities, including the entirety of any Damages Seller may suffer following the Closing resulting from or arising out of any Assumed Liability. SECTION 9.05 Other Indemnification Provisions. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory or common law remedy any party may have for breach of representation, warranty, or covenant. The amount of the Escrow Fund shall in no way be deemed to limit the indemnification rights of Buyer under Section 9.02. 33. SECTION 9.06 Matters Involving Third Parties. If any third party shall make a claim against any party hereto (the "Indemnified Party") with respect to any matter which may give rise to a claim for indemnification against the other party hereto (the "Indemnifying Party") under this Article IX, then the Indemnified Party shall notify the Indemnifying Party thereof promptly; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any liability or obligation hereunder unless (and then solely to the extent) the Indemnifying Party is prejudiced by such delay. The Indemnifying Party shall defend the Indemnified Party against the claim with counsel of its choice reasonably satisfactory to the Indemnified Party. The Indemnified Party may retain separate co-counsel at its sole cost and expense (except that the Indemnifying Party will be responsible for the fees and expenses of the separate co-counsel to the extent the Indemnified Party reasonably concludes that the counsel the Indemnifying Party has selected has a conflict of interest and except that the Indemnifying Party will be responsible for fees and expenses of Indemnified Party incurred pursuant to the last sentence of this Section). Neither party will consent to the entry of any judgment or enter into any settlement with respect to the matter without the written consent of the other party (not to be withheld unreasonably). The Indemnified Party shall cooperate with the Indemnifying Party in connection with the Indemnifying Party's defense of the claim, including but not limited to testifying in court with respect to the claim and making available to the Indemnifying Party all of the Indemnified Party's books and records with respect to the claim. The Indemnifying Party will not, without the written consent of the Indemnified Party (not to be withheld unreasonably), consent to the entry of any judgment with respect to the claim, or enter into any settlement which does not include a provision whereby the plaintiff or claimant in the claim releases the Indemnified Party from all Liability with respect thereto. In the event the Indemnifying Party fails to notify the Indemnified Party within 15 days after the Indemnified Party has given notice of the claim that the Indemnifying Party is assuming the defense thereof, the Indemnified Party may defend against, or enter into any settlement with respect to, the claim in any manner it reasonably may deem appropriate, in which event the Indemnifying Party shall be obligated to reimburse the Indemnified Party for all the Indemnified Party's costs and expenses in connection therewith. SECTION 9.07 Limitations. The entitlement of Buyer and ATTI to indemnification from Seller with respect to Indemnification Events pursuant to Section 9.02 shall be effective with respect to an Indemnification Event (or, if more than one Indemnification Event is asserted, with respect to all such Indemnification Events) only to the extent the aggregate amount of Damages exceeds one hundred thousand dollars ($100,000.00), in which event Buyer and ATTI shall be entitled to make a claim for all such Damages including the initial one hundred thousand dollars ($100,000.00). Further, to the extent any Indemnification Event occurs with respect to Section 5.07 and as to which Buyer has made a proper and timely claim for Damages and has received payment or distribution from or on behalf of Seller or Escrow Holder, Buyer shall assign, transfer, and convey or cause ATTI to assign transfer and to Seller all rights, title and interest in and to the account(s) receivable giving rise to such Indemnification Event, including all rights to make 34. demand for and to commence, sue, prosecute, settle, compromise and otherwise proceed against the account debtor. Buyer and ATTI may not claim as Damages under this Section 9.07 any amounts which have been reflected in a post-Closing adjustment to Buyer pursuant to Section 2.04(b) and any amounts which are reimbursed under Seller's insurance policies as provided in Section 1.01(a)(vii). ARTICLE X TERMINATION SECTION 10.01 Termination of Agreement. Certain of the parties hereto may terminate this Agreement as provided below: (a) Buyer and Seller may terminate this Agreement by mutual written consent of Buyer and Seller at any time prior to the Closing; (b) Buyer may terminate this Agreement by giving written notice to Seller at any time prior to the Closing in the event Seller is in breach, and Seller may terminate this Agreement by giving written notice to Buyer at any time prior to the Closing in the event Buyer is in breach, of any representation, warranty or covenant contained in this Agreement in any material respect, and such breach has not been promptly cured after notice (in reasonable detail) to the breaching party; or (c) Either Buyer or Seller may terminate this Agreement by giving written notice to the other at any time prior to the Closing if the Closing shall not have occurred on or before December 31, 1994; provided, however, that the right to terminate this Agreement under this subsection (c) shall not be available to any party whose breach or failure to fulfill any obligation under this Agreement shall have been the substantial cause of the failure of the Closing to occur by such date. SECTION 10.02 Effect of Termination. In the event of termination of this Agreement as provided above, this Agreement shall forthwith become void, and there shall be no liability hereunder on the part of either Buyer or Seller, except that the agreements set forth in Section 7.04 shall survive the termination hereof; provided, however, that upon such termination each party shall be entitled to any remedies at law or in equity in the event of a breach of this Agreement by the other party. ARTICLE XI MISCELLANEOUS SECTION 11.01 Expenses. Each of the parties hereto will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. Seller agrees and acknowledges that ATTI will not bear any of Seller's costs and expenses (including any of its legal fees and 35. expenses) in connection with the negotiation and execution of this Agreement or any of the transactions contemplated hereby. SECTION 11.02 Press Releases and Announcements. No party hereto shall issue any press release or announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of the other party; provided, however, that any party may make any public disclosure it believes in good faith, after receiving the advice of counsel, is required by law or regulation (in which case the disclosing party will advise the other parties prior to making the disclosure). SECTION 11.03 No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. SECTION 11.04 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements, or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof. SECTION 11.05 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective heirs, executors, administrators, successors and permitted assigns. No party may assign either this Agreement or any of such party's rights, interests, or obligations hereunder without the prior written approval of each other party hereto; provided, however, that Buyer may (i) assign any or all of its rights and interests hereunder to one or more of its affiliates and (ii) designate one or more of its affiliates to perform its obligations hereunder (in any or all of which cases Buyer nonetheless shall remain liable and responsible for the performance of all of its obligations hereunder). As used herein, affiliates shall mean as to any party, any parent or subsidiary of such party or any entity in which such party has a controlling interest. SECTION 11.06 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 11.07 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: 36. If to Buyer or ATTI: Seagate Technology, Inc. 920 Disc Drive Scotts Valley, CA 95066 Attn: Chief Financial Officer Telecopy: (408) 438-2957 With a copy to: Brobeck, Phleger & Harrison One Market Plaza Spear Street Tower San Francisco, CA 94105 Attn: William L. Hudson, Esq. Telecopy: (415) 442-1010 If to Seller: Applied Magnetics Corporation 75 Robin Hill Road Goleta, CA 93117 Attn: General Counsel Telecopy: (805) 967-2677 Any party may give any notice, request, demand, claim, or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth. SECTION 11.08 Interpretation. The English language text, and the American usage thereof, shall control the interpretation of this Agreement and all other writings among Buyer, Seller and ATTI. SECTION 11.09 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California (without reference to its conflicts of law rules). SECTION 11.10 Amendments and Waivers. No amendment of any provisions of this Agreement shall be valid unless the same shall be in writing and signed by each party hereto. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 37. SECTION 11.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. SECTION 11.12 Specific Performance. Each of the parties acknowledges and agrees that the other parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that the other parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in addition to any other remedy to which they may be entitled, at law or in equity. SECTION 11.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. \\\ \\\ \\\ \\\ \\\ \\\ [Signature Page Follows] 38. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. APPLIED MAGNETICS CORPORATION By: ______________________________ Craig D. Crisman Chief Executive Officer SEAGATE TECHNOLOGY, INC. By: ______________________________ Title: APPLIED TAPE TECHNOLOGY, INC. dba SEAGATE TAPE TECHNOLOGY, INC. By: _______________________________ Title: President, General Manager 39. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. APPLIED MAGNETICS CORPORATION By:__________________________ Title: SEAGATE TECHNOLOGY, INC. By:__________________________ Title: SENIOR VICE PRESIDENT, CORPORATE DEVELOPMENT APPLIED TAPE TECHNOLOGY INC. dba SEAGATE TAPE TECHNOLOGY, INC. By:__________________________ Title: 39A EX-10.V 4 LTR AGREE AMC & W.R. AND [APPLIED MAGNETICS CORPORATION LOGO AND LETTERHEAD] EXHIBIT 10(v) ------------- September 12, 1994 Mr. William R. Anderson 1000 Veronica Springs Road Santa Barbara, CA 93105 Dear Bill: This letter confirms the agreement that has been reached between you and Applied Magnetics Corporation (the "Company") regarding your resignation as an officer and director of the Company and the termination of your employment relationship with the Company. Subject to the terms and conditions set forth herein and in consideration of the agreements, promises, representations, releases and payments described herein, you and the Company agree as follows: 1. Definitions. Except as otherwise provided, capitalized terms used in this agreement shall have the following definitions: 1.1 "Resignation Date" shall mean September 12, 1994. 1.2 "Termination Date" shall mean October 5, 1994. 1.3 "1982 Plan" shall mean the Company's 1982 Long Term Incentive Plan. 1.4 "1989 Plan" shall mean the Company's Amended and Restated 1989 Long Term Incentive Plan. 1.5 "Restricted Stock" and "Restrictions" shall have the meanings ascribed to such terms under the 1989 Plan. 1.6 "Interested Litigation" shall mean commercial and other disputes, controversies and lawsuits which relate to or involve your former duties and responsibilities as an employee and/or officer of the Company in which (a) you are named in a complaint, cross-complaint or counter claim as a defendant, together with the Company, any of its subsidiaries, or any officers, directors or employees of the Company or such subsidiaries, (b) allegations, claims or charges that have been made or threatened against you and/or the Company (or any of its subsidiaries) which relate to or involve your former, current or future duties as a director, employee or officer of the Company (or any such subsidiaries), Mr. William R. Anderson September 12, 1994 Page 2 or (c) you are or may be either (i) entitled to indemnification from the Company pursuant to its By-Laws or the Delaware General Corporations Law or (ii) entitled to coverage under one or more directors' and officers' or other insurance policies maintained at any time by the Company. 1.7 "PTO" shall mean the Company's Paid Time Off practices and policies. 1.8 "Consulting Services" shall have the meaning set forth in Section 6 hereof. 1.9 "Consulting Term" shall mean the period commencing October 2, 1994 and expiring September 30, 1996. 2. Resignation. Effective as of the Resignation Date (a) you resigned as President and Chief Operating Officer and as a member of the Board of Directors of the Company, (b) you have resigned as an officer and member of the boards of directors of any and all subsidiaries of the Company and (c) your resignations have been accepted. 3. Termination of Employment. Effective as of the Termination Date, your employment relationship with (a) the Company and (b) any and all subsidiaries of the Company (to the extent there are any such employment relationships) will terminate. 4. Responsibilities. As of the close of business on the Resignation Date, you have been relieved of your responsibilities and duties as President and Chief Operating Officer of the Company and in connection with your management and supervision of the general management activities and functions over which you have previously exercised management control and direction. During the period September 13, 1994 through the Termination Date, you will continue to be employed by the Company and the Company will continue to pay you your current salary ($5,769.23 per week) in accordance with the Company's usual and customary payroll practices. 5. Benefit/Compensation Plans. As of the Termination Date, all of your rights to participate in the Company's employee benefit plans (including, but not limited to group medical, life and disability insurance plans, Stock Option, Cash Profit Sharing, Stock Purchase and other plans) will terminate, except as follows: Mr. William R. Anderson September 12, 1994 Page 3 5.1 Group Medical Insurance. You will be entitled to continue participation in the Company's group medical insurance plan under COBRA should you elect to do so, subject to the terms and conditions of the plan and payment by you of the applicable premiums. If you are interested in making such an election, please contact Human Resources. 5.2 1982 Plan and 1992 and 1994 Stock Option Plans ("Option Plans"). You will, for a period of ninety (90) days following the Termination Date, be permitted to exercise the option installments which became exercisable on or before the Termination Date (to the extent you have not previously exercised such option installments) subject, however, to the terms and conditions of the Option Plans. All option installments which become exercisable under the Option Plans after the Termination Date will be forfeited. 5.3 PTO Benefits. On the Termination Date, the Company will pay to you all accrued and unpaid/unused PTO benefits (payable at your salary rate in effect as of August 31, 1994). 5.4 Secretarial Support. During the 90 day period commencing on the Termination Date the Company will make available to you an office at the Company's facility in Goleta, California, and access to voice mail messages and limited secretarial support to provide phone answering and mail sorting services to you in connection with your Consulting Services and your efforts to obtain employment elsewhere. 5.5 1989 Plan. You have been issued and there are outstanding in your name 11,549 shares (the "Shares") of Restricted Stock under the terms of the 1989 Plan. As of the Termination Date the Restrictions applicable to the Shares (as to which Restrictions have not already been removed) shall be removed. 6. Consulting Services. As used in this Agreement, "Consulting Services" shall mean advice, counsel and assistance in connection with (a) providing information and advice to members of the Company's senior management staff as part of and in connection with the transfer of projects, assignments, duties and responsibilities formerly performed or managed by you or under your direction; (b) the development and implementation of plans and efforts involving the Company's Tape Head Division, including, but not limited to, the possible sale of the business and assets of the Tape Head Division; (c) preparation and support relating to the Company's participation in the AEA Monterey Financial Mr. William R. Anderson September 12, 1994 Page 4 Conference during October, 1994; (d) the development and implementation of proposals and plans to obtain funding, through debt or equity securities or other means, to support or assist the Company in financing its ongoing magnetoresistive ("MR") thin film disk head products; and (e) analysis and development of strategic alternatives involving the Company's subsidiary, Applied Magnetics Ireland, Ltd., Inc. 6.1 You shall be paid the sum of $600,000 payable in 24 equal monthly installments of $25,000 each, without interest (the "Installment Payments"), per month during the Consulting Term at the beginning of each month commencing October 5, 1994. During the 90 day period commencing on the Termination Date, you will be expected to concentrate your Consulting Services and to dedicate between 20 and 40 hours per week of your services on the projects described above which the Company expects to conclude within that period. Thereafter, any projects that are assigned to you or as to which you are requested to provide Consulting Services will be (a) provided pursuant to paragraph 6.4 hereof on a case-by-case basis subject to your availability and mutually acceptable scheduling; and (b) compensated on the basis of an appropriate hourly or daily rate in addition to the Installment Payments, such hourly or daily rate to be subject to the mutual agreement of you and the Company. 6.2 The Company will reimburse you for actual and reasonable out-of-pocket costs paid by you for telephone, travel, lodging, and other similar expenses incurred by you in the course of your providing Consulting Services under this engagement. You will be expected to comply with the Company's policies, practices and procedures regarding these expenses. Travel to foreign destinations in connection with Consulting Services must be approved, in advance, by the Chief Executive Officer. We will reimburse you for these expenses and for any hourly or daily fees that become due and payable to you under Section 6.1 hereof upon receipt of a written statement or invoice explaining, in reasonable detail, the nature and amount of the expense incurred and services rendered and the date or dates on which such travel occurred or services were rendered. Such statement should be submitted on a monthly basis and should be accompanied by receipts for any expense items exceeding $25.00. Mr. William R. Anderson September 12, 1994 Page 5 6.3 The Consulting Term may be terminated at any time after January 1, 1995, by the Company, at its convenience, provided, however, that if the Company so terminates this consulting arrangement, it shall deliver written notice thereof to you and it shall pay to you an amount equal to the Installment Payments set forth in paragraph 6.1 hereof multiplied by the number of calendar months remaining in the Consulting Term after delivery of the Company's termination notice to you. The payment required under clause (b) of this Section 6.3 shall be in a lump sum payment within 30 days after the effective date of termination. 6.4 All instructions, interpretations, work schedules and other related matters concerning this consulting arrangement shall be determined by the Company's Chief Executive Officer or such other person or persons as may be designated by the Chief Executive Officer. 6.5 The Standard Terms and Conditions attached as Exhibit A are incorporated herein by reference. 7. Litigation Support. The Company is involved, and may in the future be involved, in certain commercial and other disputes, controversies and lawsuits which relate to or involve your former duties and responsibilities as an employee, officer or director of the Company (herein "Company Litigation"). You agree to cooperate in all reasonable respects with the Company and its attorneys in connection with the Company's prosecution or defense of or response to the Company Litigation including, for example, making yourself available to the Company's representatives and to the Company's attorneys for purposes of conferences, meetings, compilation and communication of records and facts, and appearing as a witness or prospective witness in connection with deposition or other testimony that may be required in connection with such defense. It is our expectation that you will do this on a basis which will be at such times and places that are mutually convenient to you, the Company, the Company's attorneys and plaintiff's attorneys. You agree to exert your best reasonable efforts to obtain such consent. The Company will reimburse you for all travel and other reasonable out-of-pocket expenses relating to your attendance at conferences, meetings, depositions and the like relating to the Company Litigation. Travel and lodging arrangements will be consistent with the Company's then current practices regarding selection and class of travel and accommodations and are to be made through the Company's travel department. In connection with your involvement in the defense of the Company Litigation you also understand and agree that the matters that you discuss with the Company and its attorneys are likely to be of a confidential and Mr. William R. Anderson September 12, 1994 Page 6 privileged nature and you agree to comply with all instructions and advice provided to you by the Company and its attorneys with respect to the confidential and privileged nature of such communications. You will not be entitled to receive from the Company any additional compensation or payment in connection with the litigation support to be provided by you pursuant to this agreement so long as the Company Litigation for which your services are required or requested involves matters or actions which constitute Interested Litigation. If the Company Litigation as to which you provide support and assistance involves matters or disputes other than Interested Litigation, you will be compensated at an agreed hourly consulting rate. 8. Release. You acknowledge and agree that this letter agreement constitutes a full and complete settlement, release and discharge of any and all claims that you may have against the Company or any of its agents, officers, directors, employees, stockholders, subsidiaries and affiliates (collectively the "AMC Group") for fault, wrongdoing or liability of whatsoever nature arising from or in connection with your employment relationship with the Company or any member of the AMC Group or the termination of that relationship. No covenants, terms or conditions hereof shall be deemed an admission by the Company or any member of the AMC Group in connection with or otherwise arising from your employment relationship with the Company or any members of the AMC Group or the termination of such employment relationship. Subject to the provisions set forth herein, you hereby fully release the Company and each member of the AMC Group and their respective agents, officers, directors, servants, stockholders, employees, representatives, assigns and successors from all rights, claims, demands, causes, liabilities and actions of any nature whatsoever, known or unknown, fixed or contingent, suspected or unsuspected, which you now have, hold or claim to own, arising out of, or in any way connected with or relating to your employment with the Company or any member of the AMC Group, or the termination of any such employment, including, but not necessarily limited to: rights, claims, demands, allegations, causes or liabilities relating to, arising from, connected with allegations or assertions of wrongful discharge, unjust dismissal, the California Fair Employment and Housing Act, impairment of economic ability, breach of implied covenants of good faith and fair dealing, emotional distress, personal injury or other tort (collectively the "Released Claims"); provided, however, that nothing contained herein shall be construed as a release or discharge of: (i) any rights to indemnification under and subject to the provisions of Article VII of the By-Laws of the Company, a copy of which has been furnished to you, (ii) any rights under California Labor Code (S)2802, or (iii) any rights under the Company's Directors' and Officers' Insurance Policy and Company Mr. William R. Anderson September 12, 1994 Page 7 Reimbursement Policy No. 440-99-28 with National Union Fire Insurance Company, subject, however, to the terms, conditions, limitations and exclusions set forth in such policy. You further acknowledge and agree that this release constitutes a release and discharge of known and unknown claims and that you hereby expressly waive the benefits of California Civil Code (S)1542 which provides in part that: "A general release does not extend to claims which the creditor does not know or suspect to exist in his/her favor at the time of executing the release, which if known by him/her must have materially affected his/her settlement with the debtor." You hereby waive and relinquish benefits which you may have under Section 1542 and acknowledge that you may hereafter discover facts in addition to or different from those which you now know or believe to be true with respect to the Released Claims, but it is your intention to fully and finally and forever settle and release any and all matters, disputes and differences, known or unknown, suspected and unsuspected, which now exist, may exist or heretofore have existed between you and the Company. Nothing contained herein shall be deemed an admission by the Company of any liability in connection with or arising from the Released Claims. 9. Confidentiality. You acknowledge that you have entered into a Confidentiality and Assignment Agreement ("Confidentiality Agreement") with the Company and that, as an employee and officer of the Company, you are obliged to comply with the Company's policies and procedures with respect to confidential, proprietary and non-public information. You also acknowledge that during the term of your employment with the Company, you have had access to and knowledge of sensitive, confidential and proprietary information and data including, without limitation, financial information, business plans and strategic information (such as, but not limited to plans, prospects and considerations regarding resource planning, corporate financial strategies, possible credit and financing agreements, capital formation strategies, operations and financial projections and forecasts, merger, acquisition and corporate partnering strategies) identification of executives, managers and employees of the Company, including their specific skills, knowledge, compensation and other data (collectively "Confidential Information"). Mr. William R. Anderson September 12, 1994 Page 8 You agree that you will not, without the Company'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 of such Confidential Information in any manner which would injure the Company or interfere with its contractual relations. You further agree that you will refrain from any acts or omissions that would reduce the value of such Confidential Information to the Company, including, but not necessarily limited to, any conduct or activity which would cause disruption, damage or otherwise impair or interfere with the Company's business by interfering with or raiding its employees, soliciting employees to leave the Company to accept employment with, or provide personal services to, any other firm or Company, or by disrupting its relationships with its employees, customers, vendors, agents, representatives or otherwise. You and the Company agree to keep this letter agreement, including the existence and contents hereof, in confidence and not to disclose the same or any of its terms to any third party without the written consent of the other. However, nothing contained herein shall prevent (a) either party from disclosing this letter agreement or the terms thereof to their respective accountants and attorneys and, in the case of the Company, to its employees and directors who have a need to know of the existence and contents hereof; (b) you from disclosing the terms of this letter agreement to your spouse or to banks or other financial institutions in connection with your obtaining loans or credit from such entities provided that you shall first advise those firms of the confidential nature of this letter agreement; or (c) the Company from disclosing either (i) the termination of your employment relationship with the Company, or (ii) the terms and conditions of this letter agreement or from filing copies of this letter agreement with any state or federal regulatory agencies, including the Securities and Exchange Commission, if such disclosure or filing of copies is considered by the Company as necessary or appropriate to comply with federal or state securities laws or regulations or other legal or regulatory requirements. 10. General Provisions ------------------ 10.1 Governing Law/Entire Agreement. This letter agreement, which is made under and shall be governed by the laws of the state of California, contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter, and there are no other agreements, representations, or warranties relating to the subject matter of this letter agreement that are not set forth herein. Mr. William R. Anderson September 12, 1994 Page 9 10.2 Successors and Assigns. This agreement shall extend to and be binding upon you and your legal representatives, heirs, beneficiaries and distributees, and the Company's obligations to make the Installment Payments under Section 6.1 hereof shall survive your death and be payable to your legal representatives, heirs or beneficiaries. No amendment, waiver or modification of this agreement, or any of the terms or conditions hereof, shall be deemed effective unless made in writing and signed by you and an officer of the Company. 10.3 Representation by Counsel. The Company has not furnished legal representation to you in connection with this agreement but has been represented by its counsel. The Company and its counsel have advised you that you may seek independent counsel in connection with this agreement and you have been afforded the opportunity to do so. 10.4 Resignations. You agree to execute and deliver such letters and other documents as the Company may reasonably request confirming your resignation, as of the Resignation Date or such other date as may be requested by the Company, as an officer or director of the Company or any of the Company's directly or indirectly owned subsidiaries. 10.5 Payroll Withholdings, etc. All amounts payable to you hereunder prior to the Termination Date shall be paid in accordance with the Company's normal payroll practices and shall be subject to usual and customary payroll deductions for federal and state withholding taxes, and the like. The Company will not withhold usual and customary federal and state withholding taxes from the consulting fees payable hereunder on the understanding that you will be solely responsible for the income taxes attributable to such fees. 11. Acceptance, Time to Execute and Return Agreement and Release. All of the Company's duties and obligations, and your rights, hereunder are subject to the express condition precedent that you sign this letter agreement and return the signed copy to me or Mr. Raymond P. Le Blanc on or before 6:00 p.m., October 3, 1994. Mr. William R. Anderson September 12, 1994 Page 10 I am pleased that we were able to conclude this in a professional and cooperative manner. If the provisions of this letter are acceptable, please sign and return the enclosed copy in accordance with paragraph 11 above. Yours very truly, APPLIED MAGNETICS CORPORATION Craig D. Crisman President & Chief Executive Officer ACKNOWLEDGED AND ACCEPTED this 28th day of September, 1994. - - ------------------------------ William R. Anderson EXHIBIT A ========= APPLIED MAGNETICS CORPORATION STANDARD TERMS AND CONDITIONS FOR CONSULTING SERVICES Letter Agreement Dated : September 12, 1994 ("Agreement") Consultant : William R. Anderson ("Consultant") 1. Definitions. Capitalized terms used in this Exhibit have the same meanings as are set forth in the Agreement. 2. No Agency. Consultant is not an agent of the Company and nothing contained herein shall be deemed to create or imply a principal agent, employer- employee or similar relationship between Consultant and the Company. Consultant agrees not to enter into any contract or agreement, expressed or implied, oral or in writing, on behalf of the Company or any of its subsidiaries, including, but not limited to, any agreement or contract relating to the purchase or sale of any facilities, operations, divisions, subsidiaries or business units of the Company or of any goods, supplies, materials or services on behalf of the Company without prior written authorization to do so and shall not have and does not have any authority to bind the Company for the sale, purchase or lease of any property, equipment, materials, supplies or services nor shall Consultant have any authority to commit the Company in any manner whatsoever. 3. Independent Contractor. In rendering services hereunder, Consultant shall be responsible for all costs and expenses in connection with any travel required by him unless otherwise expressly agreed to by the Company. In performing the Consulting Services hereunder, Consultant is to be considered as an independent contractor and not as an employee of the Company. As such, Consultant shall be wholly responsible for payment of federal and state taxes, insurance and such other benefits as may be required by the laws and regulations of any federal, state or municipal governments or any political subdivisions thereof. Except as otherwise set forth in the Letter Agreement, Consultant is not eligible for and shall not be covered by any of the Company's group insurance plans or other employee benefits. 4. Rights in Data. Any and all documentation, sketches, drawings, specifications, computer programs (including source and object codes) or other information or data in tangible or intangible form, graphic or otherwise, which is or may be generated by Consultant in the performance under this Agreement shall be and remain the sole property of the Company. 5. Intellectual Property Assignment. Consultant agrees to transfer and assign to the Company all right, title, and interest in and to all inventions or discoveries that he may conceive or develop, either alone or jointly with others, in rendering the Consulting Services hereunder and to sign all papers and perform all lawful acts which the Company deems necessary or advisable for the preparation, prosecution, issuance, procurement and/or maintenance of patent application and patents in the U.S. or foreign countries and assignments thereof to the Company or its nominees. 6. Third Party Information. Consultant agrees to dedicate and use, in the performance of his services hereunder, his general and specific knowledge, skills, experience and education. Consultant further agrees not to participate in any activity or conduct involving misappropriation of trade secrets or proprietary information belonging to third parties or any disclosure or use of confidential or proprietary information of third parties in violation of any third party rights. Consultant hereby represents and warrants that he has not and will not, without proper authorizations and consents, disclose to the Company, induce the Company to use or solicit other persons to disclose to the Company any trade secrets, confidential information or other material owned by other parties. 7. Computer Programs and Software. Consultant agrees to preserve as confidential all computer programs which relate to the Company's business and technology which it may have access to or use during the term of this Agreement and to use such programs only within the scope of the services to be provided by Consultant. All such computer programs are made available to Consultant solely on the basis of his relationship with the Company and solely for the purpose of performing services under the Agreement. Consultant will not without written authority from the Company: (i) use, print, copy, provide or otherwise make available, in whole or in part, any portion of such computer programs, or (ii) reconstruct in whole or in part the object code, source code or algorithms contained in such computer programs. All copyrights, copyright registrations and copyrightable subject matter related to such computer programs or resulting from services provided by Consultant for or on behalf of the Company or based on the Company's information, are hereby irrevocably assigned, set over, sold and transferred to the Company. Any and all codes, procedures, password combinations or similar devices or arrangements for accessing (by manual, electronic, telecommunication or other means), the Company's telecommunications, E-mail or computer data processing systems which are furnished to Consultant by the Company, or which are otherwise disclosed or made known to Consultant in the scope of Consultant's duties, are considered confidential to the Company; shall be and remain the sole and exclusive property of the Company; and shall not be disclosed to any other person or used in any manner whatsoever, except for the purpose of performing services. EX-10.W 5 LTR AGREE AMC & DR. R.D. [APPLIED MAGNETICS LOGO AND LETTERHEAD] Exhibit 10(w) ------------- June 21, 1994 Dr. Richard D. Balanson 2280 Ortega Ranch Road Santa Barbara, CA 93108 Re: Resignation - Employment Termination (407:94\RPL:sj) Dear Rich: This will confirm the substance of our discussions on June 20, 1994 with respect to the termination of your employment relationship with Applied Magnetics Corporation (the "Company") and your resignation as President and Chief Operating Officer of the Company. 1. Resignation/Termination of Employment ------------------------------------- This will confirm that the Company has received your voluntary resignation from the Company under your letter of June 15, 1994. This will also confirm that at its meeting on June 16, 1994, the Board of Directors accepted this resignation and, therefore, your services as President and Chief Operating Officer of the Company and your employment relationship with the Company have terminated as a result of your voluntary resignation effective as of June 17, 1994 (the "Effective Date"). You will be paid your current salary through the Effective Date together with all accrued paid time off benefits through that date. 2. Employment Agreement -------------------- Reference is made to that certain Employment Agreement between you and the Company dated October 30, 1992 ("Employment Agreement"). Except as otherwise defined herein, capitalized terms used in this letter will have the same meaning as those which are defined in the Employment Agreement. 2.1 Company Loan. You and the Company acknowledge and agree that, as a result of your voluntary termination from the Company, you are obligated, under the provisions of Section 4 of the Employment Agreement, to pay to the Company on or before June 21, 1994, the remaining outstanding principal amount due under the October Note (namely, $250,000), plus Dr. Richard D. Balanson Re: Resignation - Employment Termination June 20, 1994 Page 2 interest accrued thereon in the total aggregate amount, through June 16, 1994. For purposes of convenience, the principal and interest now due under the October Note is herein referred to as the "Balanson Debt". Without either (a) prejudicing its rights under the Employment Agreement or the October Note or (b) waiving any of its rights under the Employment Agreement or the October Note, the Company hereby agrees to grant you an extension of time until July 31, 1994, to pay in full and satisfy the Balanson Debt, plus all interest that continues to accrue on the unpaid principal portion from June 17, 1994 in accordance with the terms of the October Note. 2.2 Restricted Shares Under 1989 Plan. You acknowledge that there are still outstanding 12,500 shares of Restricted Stock which had been previously issued to you under the 1989 Plan and which are subject to Restrictions pursuant to such plan. You acknowledge and affirm that by virtue of your voluntary resignation you will forfeit all right, title or interest in such shares that you may have and the Company shall have no further or continuing liability to you or your successors and assigns in connection therewith. 2.3 Stock Option Grants. To the extent, if any, that stock options to acquire the Company's Common Stock, which have primarily been issued to you under the Company's 1992 and 1994 Stock Option Plans ("Option Plans"), have become exercisable, under the terms of the Option Plans, on or before the Effective Date (herein "Exercisable Options") you may exercise such Exercisable Options, in accordance with the terms of the Option Plans within 90 days following the Effective Date. All other options are forfeit. 2.4 Payment Without acknowledging any liability to you in connection with your separation, the Company will pay to you, on or before June 23, 1994 an amount equal to your normal salary, at your current rate, from the period June 17, 1994 through July 29, 1994. 3. Litigation Support. The Company is involved, and may in the future be involved, in certain commercial and other disputes, controversies and lawsuits which relate to or involve your former, current or future duties and responsibilities as an employee or officer of the Company (herein "Company Litigation"). In consideration of the payments and forbearances provided herein, you agree to cooperate in all reasonable respects with the Company and its attorneys in connection with the Company's prosecution, defense or response of the Company Litigation including, for example, making yourself available to the Company's representatives and to the Company's attorneys for purposes of Dr. Richard D. Balanson Re: Resignation - Employment Termination June 20, 1994 Page 3 conferences, meetings, compilation and communication or records and facts, and appearing as a witness or prospective witness in connection with deposition or other testimony that may be required in connection with such defense. It is our expectation that you will do this on a basis which will be at such times and places that are mutually convenient to you, the Company, the Company's attorneys and plaintiff's attorneys. The Company will reimburse you for all travel and other reasonable out-of-pocket expenses relating to your attendance at conferences, meetings, depositions and the like relating to the Company Litigation. Travel and lodging arrangements will be consistent with the Company's then current practices regarding selection and class of travel and accommodations and are to be made through the Company's travel department. In connection with your involvement in the defense of the Company Litigation you also understand and agree that the matters that you discuss with the Company and its attorneys are likely to be of a confidential and privileged nature and you agree to comply with all instructions and advice provided to you by the Company and its attorneys with respect to the confidential and privileged nature of such communications. You will not be entitled to receive from the Company any additional compensation or payment in connection with the litigation support to be provided by you pursuant to this agreement so long as the Company Litigation for which your services are required or requested involve matters or actions in which (a) you are named in a complaint, cross-compliant or counter claim as a defendant, together with the Company, any of its subsidiaries, or any officers, directors or employees of the Company or such subsidiaries, (b) allegations, claims or charges have been made or threatened against you and/or the Company (or any of its subsidiaries)which relate to or involve your former, current or future duties as an employee or officer of the company, or (c) you are or may be either (i) entitled to indemnification from the Company pursuant to the Bylaws of the Delaware General Corporations Law or (ii) entitled to coverage under one or more directors' and officers' or other insurance policies maintained at any time by the Company (herein, collectively, "Interested Litigation"). 4. NonCompete The Company confirms that, in as much as your termination is a voluntary termination, it does not have the right to impose the non-competition provisions under paragraph 8.3 of the Employment Agreement and does not intend to exercise such rights. Nonetheless, the Company does not waive any rights to enforce any obligations and duties you may have to the Company to keep in confidence and not disclose or use without the Company's consent any confidential or proprietary information of AMC. Dr. Richard D. Balanson Re: Resignation - Employment Termination June 20, 1994 Page 4 If you are in agreement with the provisions of this Letter Agreement, please sign and return the enclosed copy of this letter. Yours very truly, William R. Anderson President and Chief Executive Officer ACKNOWLEDGED AND UNDERSTOOD: /s/ Richard D. Balanson - - ---------------------------- Richard D. Balanson, PhD. Richard Balanson #11299 [LOGO OF APPLIED MAGNETICS CORPORATION] This booklet contains the following documents: . CONFIDENTIALITY AND ASSIGNMENT AGREEMENT . FACILITY ACCESS PROCEDURE . CONFLICT OF INTEREST EMPLOYMENT QUESTIONNAIRE Please take your time to read and review the enclosed material carefully. If you have any questions, feel free to ask the Human Resources Representative for clarification at this time. It is a condition of employment with Applied Magnetics Corporation and/or any of its subsidiaries (the "Company") that this booklet be completed and signed by each employee. Nothing contained in this booklet shall be deemed to create a contract of employment for any specific term or to modify the Company's policy that it and its employees have the right to terminate employment with or without cause and with or without notice at any time. No manager, supervisor, or representative, other than the Company's President or any Executive Vice President, has any authority to enter into an agreement with any employee or to make any representation which is contrary to this policy. For future reference, copies of the enclosed material will be provided upon request following review and completion of the agreements and questionnaire. CONFIDENTIALITY AND ASSIGNMENT AGREEMENT For and in consideration of my employment and the salary and/or wages paid by the Company, I ("Employee") agree as follows: 1. CONFIDENTIALITY A. I will regard and preserve as confidential all trade secrets and information, data, material and know-how relating to the Company's business (collectively "Company Information") as to which I may have access from Company specifications, data, computer programs, drawings, reproductions, and other information sources of any kind and I will not, without written authority from the Company to do so, disclose to others or myself use, either during my employment or thereafter, except for the purpose of performing my duties as an employee, Company Information, whether or not developed, invented, devised, discovered, or originated by me; and I will not take or retain any Company Information or any other property of the Company including but not limited to specifications, drawings, blueprints, reproductions or other documents or things. B. The obligations set forth in paragraph 1A shall also apply to trade secrets, information, data and know-how belonging to third parties in the Company's possession. These obligations apply not only to technical information, but also to any business information that the Company treats as confidential. Any information of the Company which is not readily available to the public shall be considered to be a trade-secret unless the Company advises me otherwise. 2. THIRD PARTY INFORMATION I agree that I will not, without proper authorization, disclose to the Company, induce the Company to use or solicit other persons to disclose to the Company any trade secrets, confidential information or other material owned by other parties. The term "other parties" includes but is not limited to former employers. 3. INVENTIONS-PATENT ASSIGNMENT A. The term "Invention" means any new and novel art, machine, manufacture, method, process, apparatus, composition of matter, design or configuration of any kind, patentable or unpatentable, conceived, made, produced, or discovered, or any improvements thereon. The term "patent" includes utility or design patents. -5- B. All Inventions conceived or made by me during the term of my employment, either alone or with others, shall be and are the sole property of the Company and all right, title and interest therein are hereby assigned by me to the Company. This provision does not apply to any invention for which no equipment, supplies, facilities, property or trade secret information of the Company was used and which was developed entirely on my own time and (i) which does not relate either to the business of the Company or to the Company's actual or demonstrably anticipated research and development, or (ii) which does not result from any work performed by me for the Company. C. I will disclose promptly and in writing to the Company all inventions made by me and, with respect to those inventions which are subject to this Agreement, I agree not to disclose the same to others without the prior written consent of the Company. I will, at any time, upon request of the Company, execute specific assignments of all title in any of said inventions as well as execute all papers and perform all lawful acts which are reasonably necessary to enable the Company to secure patents in the United States and/or foreign countries for said inventions. Should the Company require my assistance after termination of my employment, I shall be compensated for my time actually spent in providing that assistance at an hourly rate equivalent to my salary or wages during the last period of my employment with the Company. D. For purposes of this Agreement, an invention is deemed to have been made during the term of my employment if, during such term, the invention was conceived or first actually reduced to practice, and I agree that any patent application filed by me or in my behalf, either alone or with others, within one year after termination of my employment shall be presumed to relate to an invention which was made during the term of my employment unless I can provide evidence to the contrary. E. THIS AGREEMENT DOES NOT APPLY TO ANY INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA LABOR CODE, A COPY OF WHICH IS AVAILABLE FROM THE COMPANY ON REQUEST. 4. COMPUTER PROGRAMS A. I agree to regard and preserve as confidential all computer programs which relate to the Company's business, including its technical, commercial, financial, and research and development activities, whether owned by the Company or by third parties and in the possession of the Company, to which I may have access during my employment. I further agree to keep in confidence all such computer programs created by me (either alone or with others) within the scope of my employment or based upon any information that I receive from the Company. B. I understand that all such computer programs are made available to me solely on the basis of my employment relationship with the Company and solely for the purpose of performing my duties as an employee. I also agree that I will not without written authority from the Company: (i) use, print, copy, provide or otherwise make available, in whole or in part, any portion of such computer programs, (ii) reconstruct in whole or in part the object code, source code or algorithms contained in such computer programs. C. All copyrights, copyright registrations and copyrightable subject matter related to such computer programs or resulting from my services during employment with the Company or based on the Company's information, including the right to secure any copyright worldwide in the name of the Company, or otherwise, in any medium, and to hold those copyrights shall be the sole and exclusive property of the Company and all of the same, together with all rights, title and interest therein, are hereby irrevocably assigned, setover, sold and transferred to the Company. D. Any and all codes, procedures, passwords, combinations or similar devices or arrangements for accessing (by manual, electronic, telecommunication or other means) the Company's computer systems or computer networks or any other information stored in the Company's computer data processing systems (herein "Access Codes") which are furnished to me by the Company or which are otherwise disclosed or made known to me in the scope of my employment are considered confidential to the Company; shall be and remain the sole and exclusive property of the Company; and shall not be disclosed to any other person or used in any manner whatsoever, except for the purpose of performing my duties as an employee, without written authority from the Company. 5. GENERAL To the extent reasonably possible, the provisions of this Agreement shall inure to the benefit of and be binding upon the heirs, personal representatives, successors, and assigns of the parties hereto. This Agreement shall be governed by the laws of the State of California. Dated: 3/2/92 Signature of Employee: /s/ Richard Balanson --------------- --------------------- FACILITY ACCESS PROCEDURES The continued growth and success of our Company depends to a large degree upon our ability to safeguard our property, techniques, and inventions. A primary means of preventing security losses is to restrict unauthorized access to the Company's facilities including its Computer Systems and Networks. 1. Identification Badge Procedure To aid in controlling unauthorized visitors, each Company employee shall display and wear his or her identification badge upon entering, and while located in, each Company facility. The badge must be displayed, picture facing out, and in a manner in which it is readily visible when facing the viewer. All authorized visitors will also be provided with special identification badges which must be worn and displayed while visiting the Company's facilities. Under no circumstances are any persons to enter Company research, design or production areas without an identification badge. Every employee should be alert to anyone in Company facilities who does not have an identification badge, and report this fact to his or her Supervisor/Manager, or a Security Officer. If an employee forgets to bring his or her badge to work, such employee must report to the Security Desk to be issued a temporary pass before entering his or her work area. Temporary passes must be signed and dated for each day's work. Each employee must take every reasonable precaution to prevent the loss of Company identification badges. When not at work, the badge should be kept in a safe place in the home. A lost badge must be reported to the Security Office as soon as the loss is discovered. Requests for replacement badges will be honored by the Security Office. However, frequent requests for replacement may be subject to assessment of a replacement charge. 2. Computer Access Procedure Access to and communication with the Company's computer systems and computer networks and use of Company computer program is limited only to those employees who are furnished an "Access Code" which for purposes hereof means any code, procedure, password, combination or similar device or arrangement for accessing, communicating with, storing information in or retrieving information from any of the Company's computer systems or computer networks. Access Codes are the property of the Company and assignment of such an Access Code to an employee shall be solely for the purpose of permitting employee to perform his or her specific employment duties during the term of employment. If limited to use on any specific terminal or other peripheral device at the time of assignment, such Access Code shall be restricted solely to use on or in connection with the operation of the specifically assigned equipment. Each employee to whom an Access Code is assigned shall keep the same in confidence and shall not use or disclose such Access Code except in the performance of his or her specific duties as an employee or as otherwise permitted in writing by the Company. Further, each such employee must take every reasonable precaution to prevent the loss or inadvertent disclosure of such Access Code, shall immediately notify the Company of any such loss or inadvertent disclosure and shall immediately discontinue the use thereof if so instructed by the Company or upon termination of employment for any reason. I understand that intentionally accessing a computer system for fraudulent purposes may be punishable as a felony under the laws of the state of California or other states in which the Company's operations are conducted. I have read and understand the Facility Access Procedures set forth herein. Richard Balanson ------------------------------------------ Signature 3/1/92 ------------------------------------------ Date CONFLICT OF INTEREST EMPLOYMENT QUESTIONNAIRE The following questions have been prepared to assist you in determining the nature and extent of any outside interest you may have which might involve actual or potential conflicts of interest with the affairs of Applied Magnetics Corporation (the "Company") as described in its Conflict of Interest Policy Statement. Please read each question carefully. In the event that you have any doubt as to the meaning of a question, you should answer that question to the best of your ability and list the reasons why you are in doubt in the Comments Section. 1. Are you or your spouse, or any of your dependent children presently (or has any such person been during the past two years) an officer, director, employee or consultant of, or otherwise employed or retained by, any supplier, customer or competitor of the Company? [X] YES [_] NO 2. Are you or your spouse, or any of your dependent children or any trust of which you are trustee or in which you have substantial beneficial interest or any corporation or other entity in which you have a substantial ownership interest: (a) The owner, directly or indirectly of any position with a supplier, customer or competitor of the Company which is in excess of 1% of the issued and outstanding shares of any class of any such company (or of the total equity interest, in the case of a partnership of proprietorship)? [_] YES [X] NO (b) Engaged directly or indirectly in any business venture or dealings or transactions of any nature whatsoever with any supplier, customer or competitor of the Company or with any employee, agent or representative of such supplier, customer or competitor? [_] YES [X] NO (c) Engaged in any other business activity not within the scope of the foregoing questions which might affect your performance for the Company? [_] YES [X] NO If at any time during my employment with the Company my circumstances change in regard to any of the foregoing questions, I hereby agree that I will immediately inform my supervisor or manager. Date 3/1/92 Signature /s/ Richard Balanson ________________ _______________________________ If the answer to any question is "Yes", please fill in the appropriate section on the reverse of this page and sign again at the bottom. COMMENTS/EXCEPTIONS TO CONFLICTS OF INTEREST EMPLOYMENT QUESTIONNAIRE Date:____________ By:_________________________________________________________ Employee's Signature -9- EX-10.X 6 LTR AGREE AMC & K.E. GEM [APPLIED MAGNETICS CORPORATION LETTERHEAD] EXHIBIT 10(x) -------------- September 12, 1994 Mrs. Kathryn E. Gehrke 965 Via Fruteria Santa Barbara, CA 93110 Dear Kathryn: This letter confirms the agreement that has been reached between you and Applied Magnetics Corporation (the "Company") regarding your resignation as an officer of the Company and certain changes in your employment relationship with the Company. Subject to the terms and conditions set forth herein and in consideration of the agreements, promises, representations, releases and payments described herein, you and the Company agree as follows: 1. Definitions. Except as otherwise provided, capitalized terms used in this agreement shall have the following definitions: 1.1 "Retention Agreement" shall mean that certain Retention Agreement between you and the Company dated as of November 3, 1993. 1.2 "Executive Note" shall have the meaning set forth in the Retention Agreement. 1.3 "Resignation Date" shall mean August 16, 1994. 1.4 "Leave Period" shall mean the period commencing on the Resignation Date and ending November 30, 1994. 1.5 "Employment Period" shall mean the period commencing on December 1, 1994, and ending on the Termination Date. 1.6 "Termination Date" shall mean May 31, 1995, or such earlier date as may be established, pursuant to Section 4.6 hereof, by either you or the Company as the date on which your employment with the Company terminates. 1.7 "1989 Plan" shall mean the Company's Amended and Restated 1989 Long Term Incentive Plan. Mrs. Kathryn E. Gehrke September 12, 1994 Page 2 1.8 "Severance Claim" shall mean the claim referred to in Section 5.3 of this agreement. 1.9 "Full Time Employment" shall mean providing personal services as an employee, officer or director of any person, corporation, partnership or other form of business, commercial or professional enterprise (other than AMC or any of its subsidiaries) under terms involving a regular work schedule of not less than thirty (30) hours per week. 2. Retention Agreement; Rescission and Termination. You and the Company agree that the Retention Agreement is hereby fully and completely rescinded, terminated and canceled in all respects whatsoever and that both you and the Company are fully and completely released and discharged from their respective obligations and duties thereunder. 3. Resignation as Officer. This will confirm that subject to the terms and conditions of this agreement and in consideration of the agreements, promises and representations set forth herein, effective as of the Resignation Date (a) you have submitted your resignation as Vice President, Chief Financial Officer and Treasurer of the Company, (b) you have advised the Company that you are pursuing other employment and (c) your resignation as Vice President, Chief Financial Officer and Treasurer has been accepted by the Company. 4. Leave of Absence/Responsibilities. Except as set forth in this paragraph and in paragraphs 7 and 9 hereof, as of August 16, 1994, you have been relieved of your responsibilities and duties as Vice President, Chief Financial Officer and Treasurer and in connection with your management and supervision of the financial management, accounting and fiscal activities and other functions and projects over which you have previously exercised management control and direction and, further, that as of August 17, 1994, you are no longer serving as the Company's Principal Financial Officer for purposes of the rules and regulations promulgated under the Federal Securities Laws. 4.1 During the Leave Period, you will be on paid leave of absence and the terms of your employment shall be as follows: A. You will be available, on an occasional basis, to provide personal services consisting of advice and assistance relating to the transition of your former duties. Mrs. Kathryn E. Gehrke September 12, 1994 Page 3 B. You will inform the Company promptly upon your accepting Full Time Employment. C. Should you start Full Time Employment with another firm prior to November 30, 1994, such employment will not affect your continued status as an employee of the Company or the Company's obligations under subparagraph D below, provided that you have not otherwise materially breached any of your obligations and duties to the Company. D. The Company will continue to pay you your current salary ($3,076.92 per week) in accordance with the Company's usual and customary payroll practices. 4.2 During the Leave and Employment Periods, the Company will make available to you access to voice mail messages and limited secretarial support to provide phone answering and mail sorting services to you in connection with your efforts to obtain employment elsewhere. 4.3 During the Employment Period, and provided you have not commenced Full Time Employment, you will continue to be employed by the Company and will be expected to work on temporary assignments in the Santa Barbara area, in matters consistent with your skills and experience, under the direction of certain officers or managers of the Company from time to time and the terms of your employment shall be as follows: A. You will be paid a salary at the rate of $1,538.46 per week in accordance with the Company's usual and customary payroll practices. B. During the Employment Period your employment will be that of a twenty (20) hour per week part-time employee with work schedule arrangements to be agreed between you and the Chief Executive Officer, the President or such other Company officer or member of management as the Chief Executive Officer or President may designate. C. You will inform the Company promptly upon your accepting Full Time Employment with another firm. Mrs. Kathryn E. Gehrke September 12, 1994 Page 4 4.4 You will continue to accrue paid time off ("PTO") benefits during the Leave and Employment Periods so long as you continue to be employed by the Company. On the Termination Date, the Company will pay to you all accrued and unpaid/unused PTO benefits (payable at your salary rate in effect as of the Resignation Date). 4.5 Your employment by the Company during the Leave and Employment Periods shall be subject to the same policies, practices and procedures that applied to your status as an employee prior to the date hereof, including, but not limited to, (a) your continuing obligations to perform your duties and responsibilities diligently and in a professional and loyal manner in accordance with the Company's policies and your general and specific obligations as an employee, including, for example, duties concerning the preservation and protection of confidential information and refraining from participating in any conduct, activities, relationships or investments which conflict with the interests of the Company, or which compete with the business and operations of the Company, and (b) the at-will nature of your employment relationship with the Company and, subject to the provisions of paragraph 4. 6 below, the rights of both you and the Company to terminate this employment relationship with or without notice or cause. 4.6 Either the Company or you may terminate your employment during either the Leave or Employment Periods subject to the following: A. If your employment during the Leave Period is terminated (i) by you, the Company shall be obliged to continue making salary payments to you in accordance with Section 4.1E hereof, the Termination Date shall be November 30, 1994, you will be paid all accrued and unpaid PTO benefits on such date, and the Company shall have no further or continuing liability to you after such date except for the obligation to reimburse you for uninsured medical expenses as described in Section 5.1 hereof; or (ii) by the Company, the Company shall be obliged to continue making salary payments to you in accordance with Section 4.1E, the Termination Date shall be November 30, 1994, the Company shall pay to you all accrued and unpaid PTO benefits plus the sum of $46,000 and the Company shall have no further or continuing obligation or liability to make additional payments to you except for the obligation to reimburse you for uninsured medical expenses as described in Section 5.1 hereof. Mrs. Kathryn E. Gehrke September 12, 1994 Page 5 B. If your employment relationship is terminated during the Employment Period: (i) by the Company, the Company will pay to you an amount equal to the number of full weeks remaining from the date of such termination to May 31, 1995, multiplied by $1,769.22 (ii) by you, from and after such termination, you will forfeit, will not be entitled to receive and hereby release and discharge the Company from, any continuing obligation to pay to you any further or continuing weekly or other salary. C. For purposes of clauses 4.6A(i) and 4.6B(ii) above, if you commence Full Time Employment during the Leave Period or the Employment Period, as the case may be, your employment shall be deemed to have been terminated by you. 5. Benefit/Compensation Plans. As of the Resignation Date, all of your rights under the 1989 Plan shall expire and all Restricted Stock Grants previously issued to you under this Plan which are subject to Restrictions (as defined in the 1989 Plan) are forfeited. As of the Termination Date, all of your rights to participate in the Company's employee benefit plans (including, but not limited to group medical, life and disability insurance plans, Stock Option, Cash Profit Sharing, Stock Purchase and other plans) will terminate, except as follows: 5.1 Group Medical Insurance. You will be entitled to continue participation in the Company's group medical insurance plan under COBRA should you elect to do so, subject to the terms and conditions of the plan and payment by you of the applicable premiums. If you are interested in making such an election, please contact Human Resources. We will reimburse you for the uninsured portion of medical costs incurred by, and provided to you, during the Leave Period; provided, however, that (a) the Company's reimbursement obligation shall not exceed $6,000 in the aggregate, and (b) neither such reimbursement nor the Company's agreement to reimburse shall be deemed an admission on the Company's part that it is liable for these costs. Bills and statements with respect to these costs shall be submitted to the Company (Attention: General Counsel) on or before January 30, 1995. 5.2 1992 and 1994 Stock Option Plans ("Option Plans"). You will, for a period of ninety (90) days following the Termination Date, be permitted to exercise the option installments which became exercisable on or before the Termination Date (to the extent you have not previously exercised such option installments) subject, however, to the terms and conditions Mrs. Kathryn E. Gehrke September 12, 1994 Page 6 of the Option Plans. All option installments which become exercisable under the Option Plans after the Termination Date will be forfeited. 5.3 Retention Agreement Payments. Without limiting the generality of any release, discharge or rescission made, executed or provided by you, or agreed by you to be made, executed or provided, under this letter agreement, in consideration of the agreements, promises and covenants of the Company, including, but not limited to, the loan forgiveness provisions of paragraph 6, below, you hereby agree that you hereby waive, release and discharge the Company from any obligation or duty to pay to you either (i) the aggregate amount of $366,666 (the "Severance Claim") which you have alleged is due you from the Company as the Minimum Bonus and other payments under Section 6.2(b) and 6.2(c) of the Retention Agreement or (ii) any other severance or other payment in connection with, arising from or relating to the termination of your employment with the Company. 6. Loan Forgiveness. You and the Company acknowledge that the Company has loaned to you the principal sum of $150,000 pursuant to the Executive Note. For and in consideration of the agreements, rescissions, releases, waivers and discharges provided by you hereunder, including, but not limited to, those set forth in Section 5.3 hereof, the Company agrees that upon your acceptance of this letter agreement in the manner provided below, the obligations to pay the Executive Note shall be completely forgiven and discharged and the Company will, as promptly as practicable, execute and deliver to you the Executive Note marked "canceled" and a reconveyance of the Deed of Trust securing such Executive Note. 7. Litigation Support. It is acknowledged that the Company is involved, and may in the future be involved, in certain commercial and other disputes, controversies and lawsuits which relate to or involve your former, current or future duties and responsibilities as an employee and/or officer of the Company (herein "Company Litigation"). You agree to cooperate in all reasonable respects with the Company and its attorneys in connection with the Company's prosecution or defense of or response to the Company Litigation including, for example, making yourself available to the Company's representatives and to the Company's attorneys for purposes of conferences, meetings, compilation and communication of records and facts, and appearing as a witness or prospective witness in connection with deposition or other testimony that may be required in connection with such defense. It is our expectation that you will do this on a basis which will be at such times and places that are mutually convenient to Mrs. Kathryn E. Gehrke September 12, 1994 Page 7 you, the Company, the Company's attorneys and plaintiff's attorneys. We understand that attendance at such conferences, meetings, depositions, etc. may otherwise require taking time off from any new job you may secure, and we acknowledge that your availability will be contingent upon your obtaining consent from any new employer to take such time off. You agree to exert your best reasonable efforts to obtain such consent. The Company will reimburse you for all travel and other reasonable out-of-pocket expenses relating to your attendance at conferences, meetings, depositions and the like relating to the Company Litigation. Travel and lodging arrangements will be consistent with the Company's then current practices regarding selection and class of travel and accommodations and are to be made through the Company's travel department. In connection with your involvement in the defense of the Company Litigation you also understand and agree that the matters that you discuss with the Company and its attorneys are likely to be of a confidential and privileged nature and you agree to comply with all instructions and advice provided to you by the Company and its attorneys with respect to the confidential and privileged nature of such communications. You will not be entitled to receive from the Company any additional compensation or payment in connection with the litigation support to be provided by you pursuant to this agreement so long as the Company Litigation for which your services are required or requested involve matters or actions in which (a) you are named in a Complaint, Cross-Complaint or counter claim as a defendant, together with the Company, any of its subsidiaries, or any officers, directors or employees of the Company or such subsidiaries, (b) allegations, claims or charges that have been made or threatened against you and/or the Company (or any of its subsidiaries) which relate to or involve your former, current or future duties as an employee or officer of the Company, or (c) you are or may be either (i) entitled to indemnification from the Company pursuant to the By- Laws or the Delaware General Corporations Law or (ii) entitled to coverage under one or more directors' and officers' or other insurance policies maintained at any time by the Company herein (collectively, "Interested Litigation"). If the Company Litigation as to which you provide support and assistance involves matters or disputes other than Interested Litigation, you will be compensated at an hourly rate of $50.00 for each hour of service provided by you at the request of the Company to the extent, and only to the extent, that such service exceeds twenty (20) hours in any calendar quarter. 8. Release. You acknowledge and agree that this letter agreement constitutes a full and complete settlement, release and discharge of any and all claims that you may have against the Company or any of its agents, officers, directors, employees, stockholders, subsidiaries and affiliates (collectively the "AMC Mrs. Kathryn E. Gehrke September 12, 1994 Page 8 Group") for fault, wrongdoing or liability of whatsoever nature arising from or in connection with your employment relationship with the Company or any member of the AMC Group or the termination of that relationship. No covenants, terms or conditions hereof shall be deemed an admission by the Company or any member of the AMC Group in connection with or otherwise arising from your employment relationship with the Company or any members of the AMC Group or the termination of such employment relationship. Subject to the provisions set forth herein, you hereby fully release the Company and each member of the AMC Group and their respective agents, officers, directors, servants, stockholders, employees, representatives, assigns and successors from all rights, claims, demands, causes, liabilities and actions of any nature whatsoever, known or unknown, fixed or contingent, suspected or unsuspected, which you now have, hold or claim to own, arising out of, or in any way connected with or relating to the Retention Agreement and to your employment with the Company or any member of the AMC Group, or the termination of any such employment, including, but not necessarily limited to: (a) the Severance Claims, (b) any rights, claims, demands, allegations, causes or liabilities relating to, arising from, connected with or relating to the Retention Agreement, or (c) wrongful discharge, unjust dismissal, the California Fair Employment and Housing Act, impairment of economic ability, breach of implied covenants of good faith and fair dealing, emotional distress, personal injury or other tort (collectively the "Released Claims"); provided, however, that nothing contained herein shall be construed as a release or discharge of: (i) any rights to indemnification under and subject to the provisions of Article VII of the By-Laws of the Company, a copy of which has been furnished to you, (ii) any rights under California Labor Code (S)2802, or (iii) any rights under the Company's Directors' and Officers' Insurance Policy and Company Reimbursement Policy No. 440-99-28 with National Union Fire Insurance Company, subject, however, to the terms, conditions, limitations and exclusions set forth in such policy. You further acknowledge and agree that this release constitutes a release and discharge of known and unknown claims and that you hereby expressly waive the benefits of California Civil Code (S)1542 which provides in part that: "A general release does not extend to claims which the creditor does not know or suspect to exist in his/her favor at the time of executing the release, which if known by him/her must have materially affected his/her settlement with the debtor." Mrs. Kathryn E. Gehrke September 12, 1994 Page 9 You hereby waive and relinquish benefits which you may have under Section 1542 and acknowledge that you may hereafter discover facts in addition to or different from those which you now know or believe to be true with respect to the Released Claims, but it is your intention to fully and finally and forever settle and release any and all matters, disputes and differences, known or unknown, suspected and unsuspected, which now exist, may exist or heretofore have existed between you and the Company. To the extent that, after the execution of this agreement, any claim or action including but not limited to any claim under 11 U.S.C. (S)(S) 544, 547 or 548, California Civil Code (S)3439.01, et seq or any other provision relating to bankruptcy or insolvency claims, the effect of which is to set aside or avoid a fraudulent transfer, preference payment or other consideration made to or received by you in connection with this Agreement or the transactions contemplated hereunder ("Avoidance Actions") is brought by or for the benefit of the Company or any of its creditors, past, present or future, or any trustee in bankruptcy or receiver acting for the estate of the Company, the Severance Claim (together with any other claims that you may have against the Company or any trustee in bankruptcy or receiver acting for the estate of the Company as a result of such Avoidance Actions) may be interposed by you in defense of such Avoidance Actions, may be used in settlement thereof and may be asserted against the settlement thereof and may be asserted against the plaintiffs in such Avoidance Actions as a claim against the Company or its estate and for all such purposes, but only such purposes, shall not be deemed to have been released, settled or compromised. Nothing contained herein shall be deemed an admission by the Company of any liability in connection with or arising from the Released Claims. 9. Confidentiality. You acknowledge that you have entered into a Confidentiality and Assignment Agreement ("Confidentiality Agreement") with the Company and that, as an employee and officer of the Company, you are obliged to comply with the Company's policies and procedures with respect to confidential, proprietary and non-public information. You also acknowledge that during the term of your employment with the Company, you have had access to and knowledge of sensitive, confidential and proprietary information and data including, without limitation, financial information, business plans and strategic information (such as, but not limited to plans, prospects and considerations regarding resource planning, corporate financial strategies, possible credit and financing agreements, capital formation strategies, operations and financial projections and forecasts, merger, acquisition and corporate partnering Mrs. Kathryn E. Gehrke September 12, 1994 Page 10 strategies) identification of executives, managers and employees of the Company, including their specific skills, knowledge, compensation and other data (collectively "Confidential Information"). You agree that you will not, without the Company'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 of such Confidential Information in any manner which would injure the Company or interfere with its contractual relations. You further agree that you will refrain from any acts or omissions that would reduce the value of such Confidential Information to the Company, including, but not necessarily limited to, any conduct or activity which would cause disruption, damage or otherwise impair or interfere with the Company's business by interfering with or raiding its employees, soliciting employees to leave the Company to accept employment with, or provide personal services to, any other firm or Company, or by disrupting its relationships with its employees, customers, vendors, agents, representatives or otherwise. You and the Company agree to keep this letter agreement, including the existence and contents hereof, in confidence and not to disclose the same or any of its terms to any third party without the written consent of the other. However, nothing contained herein shall prevent (a) either party from disclosing this letter agreement or the terms thereof to their respective accountants and attorneys and, in the case of the Company, to its employees and directors who have a need to know of the existence and contents hereof; (b) you from disclosing the terms of this letter agreement to your spouse or to banks or other financial institutions in connection with your obtaining loans or credit from such entities provided that you shall first advise those firms of the confidential nature of this letter agreement; or (c) the Company from disclosing either (i) the termination of your employment relationship with the Company, or (ii) the terms and conditions of this letter agreement or from filing copies of this letter agreement with any state or federal regulatory agencies, including the Securities and Exchange Commission, if such disclosure or filing of copies is considered by the Company as necessary or appropriate to comply with federal or state securities laws or regulations or other legal or regulatory requirements. 10. General Provisions ------------------ 10.1 Governing Law/Entire Agreement. This letter agreement, which is made under and shall be governed by the laws of the state of California, contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with Mrs. Kathryn E. Gehrke September 12, 1994 Page 11 respect to such subject matter, and there are no other agreements, representations, or warranties relating to the subject matter of this letter agreement that are not set forth herein. 10.2 Successors and Assigns. This agreement shall extend to and be binding upon you and your legal representatives, heirs, beneficiaries and distributee, and no amendment, waiver or modification of this agreement, or any of the terms or conditions hereof, shall be deemed effective unless made in writing and signed by you and an officer of the Company. 10.3 Representation by Counsel. The Company has not furnished legal representation to you in connection with this agreement but has been represented by its counsel. The Company and its counsel have advised you that you may seek independent counsel in connection with this agreement and you have been afforded the opportunity to do so, and have in fact consulted with independent legal counsel, prior to your execution of this agreement. 10.4 Resignations. You agree to execute and deliver such letters and other documents as the Company may reasonably request confirming your resignation, as of the Resignation Date or such other date as may be requested by the Company, as an officer or director of the Company or any of the Company's directly or indirectly owned subsidiaries. 10.5 Payroll Withholdings, etc. All amounts payable to you hereunder shall be paid in accordance with the Company's normal payroll practices and shall be subject to usual and customary payroll deductions for federal and state withholding taxes, and the like. You acknowledge that the loan forgiveness provisions of this letter agreement will result in taxable income to you and will be reflected in your W-2 income for 1994. The Company will withhold from your final paycheck during the Leave Period an amount sufficient to cover FICA withholding obligations (1.45%) of the income attributable to the loan forgiveness. The Company will not withhold usual and customary federal and state withholding taxes from this amount on the understanding that you will be solely responsible for the income taxes attributable to this amount. Mrs. Kathryn E. Gehrke September 12, 1994 Page 12 11. Acceptance, Time to Execute and Return Agreement and Release. All of the Company's duties and obligations, and your rights, hereunder are subject to the express condition precedent that you sign this letter agreement and return the signed copy to me or Mr. Raymond P. Le Blanc on or before 6:00 p.m., September 13, 1994. 12. Certification. In accordance with the provisions of Section 8 of the Retention Agreement, the officer executing this letter agreement on behalf of the Company hereby certifies that the termination and rescission of the Retention Agreement has been approved by a Disinterested Board. I am pleased that we were able to conclude this in a professional and cooperative manner. If the provisions of this letter are acceptable, please sign and return the enclosed copy in accordance with paragraph 11 above. Yours very truly, APPLIED MAGNETICS CORPORATION William R. Anderson President & Chief Operating Officer ACKNOWLEDGED AND ACCEPTED this 13 day of September, 1994. - - -------------------------------- Kathryn E. Gehrke EX-10.Y 7 LTR AGREE AMC & GRISANTI [Applied Magnetics Corporation Letterhead] EXHIBIT 10(y) ------------- August 1, 1994 Grisanti, Galef & Goldress, Inc. 987 Tahoe Boulevard, Suite 206 Incline Village, Nevada 89451 Attention: Mr. Craig Crisman Gentlemen: This will confirm the understanding and agreement between Grisanti, Galef & Goldress, Inc., a Nevada corporation ("GGG") and Applied Magnetics Corporation (the "Company") as follows: 1. ENGAGEMENT. The Company hereby engages GGG to provide executive management consulting services to implement a strategic plan in an effort to turn around the Company, conserve and increase its cash and working capital and return it to profitability. It is expected that GGG will retain the services of Mr. Craig Crisman as the principal, lead consultant to provide these services, that Mr. Crisman will devote his full-time attention and efforts to this engagement and that his specific responsibilities will include: . Review of financial and operating policies and practices, including overhead and S,G&A expense structure, R&D expenses and all cash out flows . Analysis of asset redeployment opportunities . Analysis of relationships with present and potential lenders, present and potential credit arrangements and other sources for obtaining additional financing . Assistance in negotiating/implementing pending or additional financing arrangements . Consideration of restructuring and reorganization alternatives . Implementation of pending strategic partnering alternatives . Development of new partnering/strategic options Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 2 . Consideration of exit/contingency strategies such as debtor protection alternatives This engagement shall not preclude the Company from employing or engaging its officers, employees, attorneys and accountants, on usual and customary terms, to provide advisory services and participate in these and other matters. 2. APPOINTMENT. Mr. Crisman is hereby appointed to the office of Chief Executive Officer of the Company, to serve at the pleasure of the Board of Directors subject, solely, to the control of the Board of Directors and not to any other officers or employees of the Company. In this capacity Mr. Crisman will be expected to serve as the Company's principal executive officer, and subject to the confidentiality provisions set forth below, will have access to the Company's books, records, accounts, financial statements and files, including, but not limited to, personnel, payroll and human resources records as may be reasonable and appropriate in connection with this appointment. 3. TERM, TERMINATION. GGG's engagement and Mr. Crisman's appointment as Chief Executive Officer shall commence on August 2, 1994, or as soon thereafter as is practicable and shall continue at the pleasure of the Board and the Board of Directors may at any time, by resolution adopted at a meeting or by written consent without meeting, terminate this engagement with or without notice or cause and remove Mr. Crisman as Chief Executive Officer with or without notice or cause. The Company will deliver or cause to be delivered to GGG a certified copy of such Board resolution as promptly as practicable following the effective date of the termination of this engagement or the removal of Mr. Crisman as Chief Executive Officer, but the failure to so deliver this resolution shall not affect the termination of this engagement. GGG may terminate this engagement at any time upon delivery of written notice to AMC. 4. ACCESS TO INFORMATION. The Company shall (a) furnish to GGG and Mr. Crisman information relating to parties with whom the Company has had discussions or contacts prior to or during the term of this engagement concerning the Company's efforts to obtain financing and/or strategic partnering arrangements and the status of these efforts and discussions, and (b) make available to GGG and Mr. Crisman all information concerning, the business, assets, operations, financial condition and prospects of the Company which GGG and Mr. Crisman reasonably request in connection with the performance of their obligations hereunder. To the Company's knowledge, all Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 3 such information shall be complete and accurate in all material respects and, while GGG and Mr. Crisman shall be entitled to rely upon the accuracy and completeness of all such information without independent verification, neither shall make any representations or warranties on behalf of the Company which are inconsistent with or would, under the circumstances, be misleading. 5. CONFIDENTIALITY. In connection with GGG's engagement, GGG and Mr. Crisman will have access to and the Company is willing to disclose certain information it considers proprietary and confidential. Accordingly, GGG and Mr. Crisman hereby agree as follows: 5.1 "Confidential Information" shall mean any information concerning the Company (whether prepared by the Company, its advisors or otherwise and irrespective of the form of communication) which has been or will be furnished to GGG or to Mr. Crisman or other consultants, agents or employees of GGG (collectively "GGG's Representatives") by or on behalf of the Company, including, without limitation, the information described in paragraph 4 above and the following information: data, information, documents and other material relating to the business, assets, properties and operations of the Company, including, but not necessarily limited to, (a) historical financial information, (b) future projections and forecasts concerning revenues, profits, gross margins, assets, net worth, market share and the like, (c) technical, marketing and other information concerning new products under development or contemplated by the Company, (d) descriptions of the experience, job responsibilities, salaries and compensation of key management, technical and other employees, (e) sales and marketing operations and plans, (f) information and data concerning projects, services, processes, specifications, technology, research, know-how, engineering drawings, sketches, plants, facilities, personnel and management, (g) information and data regarding the Company's current efforts to enter into a strategic partnering arrangement ("Partnership Transaction"), with one or more other companies or enterprises, to provide funding through an equity investment or acquisition or merger, to assist the Company in the development and commercialization of new, advanced products and technology, including, but not limited to, the identity of potential Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 4 partners and the terms, conditions and other provisions with respect to a possible Partnership Transaction, and (h) information regarding actual, threatened or pending disputes, lawsuits, claims and other legal or regulatory proceedings involving the Company. The term "Confidential Information" shall be deemed to include all notes, analyses, computations, studies, interpretations or other documents prepared by GGG or GGG's Representatives which contain, reflect or are based upon, in whole or in part, the information furnished to GGG or its Representatives pursuant hereto. The term "Confidential Information" does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by GGG or its Representatives, (ii) was within GGG's possession prior to its being furnished to GGG by or on behalf of the Company pursuant hereto, provided that the source of such information was not known by GGG to be bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, the Company or any other party with respect to such information or (iii) becomes available to GGG on a non-confidential basis from a source other than the Company or any Company Representatives (as defined in paragraph 5.2), provided that such source is not bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, the Company or any other party with respect to such information. 5.2 GGG agrees to keep in confidence all Confidential Information which is received by GGG or GGG's Representatives from the Company or from the Company's attorneys, accountants, investment bankers, or financial advisors (herein "Company Representatives"). GGG also agrees that, unless it has obtained the prior written consent of the Company, it will neither (a) use such Confidential Information for any purpose except solely for the purposes of performing the services contemplated under this Agreement nor (b) disclose any Confidential Information received by it from the Company or the Company's Representatives to any third party or to any person or persons other than GGG's Representatives who have a need to know such Confidential Information for the purposes contemplated by this Agreement, and who agree to keep such information confidential and who are provided with a copy of this letter agreement and agree to be bound by the terms hereof to the same extent as if they were parties hereto. In any event, GGG shall be Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 5 responsible for any breach of this Agreement by any of its Representatives and GGG agrees, at its sole expense, to take all reasonable measures (including, but not limited to, court proceedings) to restrain GGG's Representatives from prohibited or unauthorized disclosure or use of the Confidential Information. 5.3 In the event that GGG or any of its Representatives are requested or required (by deposition, interrogatories, requests of information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the Confidential Information, GGG shall provide the Company with prompt written notice of any such request or requirement so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this letter agreement. If, in the absence of a protective order or other remedy or the receipt of a waiver by the Company, GGG or any of its Representatives are nonetheless in the written opinion of GGG's counsel, legally compelled to disclose Confidential Information to any tribunal or else stand liable for contempt or suffer other censure or penalty, GGG or its Representative may, without liability hereunder, disclose to such tribunal only that portion of the Confidential Information which such counsel advises is legally required to be disclosed, provided that GGG exercises its best efforts to preserve the confidentiality of this Confidential Information, including, without limitation, by cooperating with the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information by such tribunal. 6. COMPENSATION. As compensation for the services rendered by GGG hereunder, the Company shall pay GGG as follows: (a) a monthly fee of $70,000 which shall be paid, in advance, at the beginning of each month during the Term of this engagement; provided, however, that the first such payment shall be paid not later than seven (7) days after the commencement of the Term; (b) a success fee, the amount, terms, conditions and method (e.g. cash, equity, options, etc.) of payment, and the quantifiable performance measures of which shall be agreed between GGG and the Company's Board of Directors within sixty days following the date hereof; and Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 6 (c) the Company shall pay an advance of $5,000 against out-of-pocket expenses promptly after execution of this Agreement and, thereafter, shall reimburse GGG for reasonable out-of-pocket travel and lodging expenses incurred in connection with this engagement promptly following receipt of expense reports, accompanied by appropriate invoices, receipts and statements explaining in reasonable detail the date, amount and nature of such expenses. 7. OTHER CONSULTANTS/PROFESSIONALS. It is contemplated that, in performing its service under this Agreement, GGG will retain the services of other consultants, advisors, employees and independent contractors ("Other Professionals") with expertise, skills and knowledge of turnaround matters and in advising financially distressed companies, including, in particular, persons with professional, financial and accounting experience. GGG represents and covenants that it will engage only such Other Professionals who have the necessary skills, qualifications and professional experience required for this engagement. GGG will (a) use its best efforts to consult, in advance, with the Board of Directors prior to engaging Other Professionals, (b) assume all responsibility for recruiting, hiring, employing and engaging Other Professionals (c) pay and be responsible for all salaries, wage expenses, benefits (including life, medical, health and workers compensation insurance benefits, if any) due or to become due to such Other Professionals at no additional cost or expense to the Company (and indemnify the Company for any claims made against it by Other Professionals with respect to these matters) and (d) be responsible for the management and direction of such Other Professionals. 8. INDEMNIFICATION. The Company shall indemnify GGG and Mr. Crisman ("Indemnified Parties") and hold such Indemnified Parties harmless against any and all losses, claims, damages or liabilities to which they may become subject arising in any manner out of or in connection with the rendering of services by GGG hereunder, unless it is finally judicially determined that such losses, claims, damages or liabilities resulted directly from the bad faith, negligence or willful misconduct of any Indemnified Parties or from failure to perform any obligation to the Company hereunder. If any lawsuit, claim or proceeding (including any investigation) shall be brought or asserted against an Indemnified Party in respect of which indemnity may be sought from the Company, such Indemnified Party shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. An Indemnified Party shall have the right to employ separate counsel in any such Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 7 action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at its expense unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company shall have failed promptly to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding or (iii) the named parties to any such action or proceeding include the Indemnified Party and the Company and the Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to the Indemnified Party which are different from or additional to those available to the Company, in which case, if the Indemnified Party notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of the Indemnified party; it being understood, however, that the Company shall not, in connection with any one such lawsuit, claim or proceeding, or separate but substantially similar or related lawsuits, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses or more than one separate firm of attorneys. 9. EMPLOYMENT OF OTHER PROFESSIONALS. In the event that an offer of employment is made by the Company to, and accepted by, any Other Professionals within one year following the termination of this engagement, the Company agrees to pay a fee to GGG in an amount equal to thirty-five percent (35%) of the first year's annual salary, plus any cash incentive bonus, paid to such person by the Company. 10. GENERAL. 10.1 GGG and the Company are independent contractors and nothing contained herein shall be deemed to create the relationship of principal and agent between GGG and the Company nor shall this Agreement create the relationship of employer and employee between the Company and Mr. Crisman, any Other Professional, or any other person engaged by GGG to provide services hereunder. Neither GGG nor the Company shall have the right to make a commitment or enter into any agreement or contract on behalf of the other. This Agreement does not create any "finder", broker, commission agent or similar relationship between GGG and the Company and the Company shall not be obligated to GGG for any commission, broker or agent fees or similar compensation, fees, Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 8 expenses or costs as a result of this Agreement or the Credit Transaction. 10.2 No licenses or rights, patent or otherwise, are granted by this Agreement or by any disclosure hereunder. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. 10.3 This Agreement has been entered into as of the day and year first above written, in Santa Barbara, California, United States of America, and shall be governed by the laws of that State. No waiver of any breach or default hereunder shall be considered valid unless in writing and signed by the party granting such waiver and no such waiver shall be deemed a waiver of any other or subsequent breach or default. 10.4 GGG hereby acknowledges that it is aware and agrees that it will advise its Representatives who may have knowledge of this Agreement or of the fact that the United States securities laws prohibit any person who has material, nonpublic information, concerning, for example, the information which may be disclosed to or made available to GGG or its Representatives under this Agreement from (a) purchasing or selling the Company's securities, or (b) communicating such information to any other person for that purpose. GGG agrees to indemnify and hold the Company harmless from any and all costs, liabilities and expenses relating to any charges, complaints, suits, investigations, or other proceedings brought or threatened against the Company in any Court or by any regulatory agency arising from or relating to any violation by GGG or its Representatives of these prohibitions. 10.5 GGG and Mr. Crisman also acknowledge that by virtue of his appointment as Chief Executive Officer he will have certain obligations and responsibilities under the United States Securities Laws, including, particularly, certain reporting obligations under the provisions of Section 16(a) of the Securities Exchange Act of 1934. It is expected that GGG and Mr. Crisman will fully comply with these duties and obligations. 10.6 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement which shall remain in full force and effect. Grisanti, Galef & Goldress, Inc. August 1, 1994 Page 9 11. PRIVILEGED INFORMATION. Notwithstanding the Company's agreements in this letter to provide GGG with information, data, records, files and the like, the Company shall not be required to deliver or make available any such information to GGG or GGG's Representatives, if in the opinion of the Company's counsel, any attorney-client or attorney work-product privilege would be jeopardized or lost. If the foregoing correctly sets forth the understanding and agreement between you and the Company, please so indicate in the space provided for that purpose below, whereupon this letter shall constitute a binding agreement as of the date first above written. APPLIED MAGNETICS CORPORATION By:_____________________________ William R. Anderson Chief Executive Officer AGREED: GRISANTI, GALEF & GOLDRESS, INC. By _____________________________ Its Partner ----------------------------- EX-11 8 COMPUTATION OF EARNINGS Exhibit 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (in thousands except per share data)
For the Fiscal Year Ended September 30, 1994 ------------------------- Net loss $ (52,670) ========= Weighted average common shares outstanding 22,082 Dilutive common stock equivalents -- --------- Total weighted average common shares outstanding 22,082 --------- Net loss per share $ (2.39) =========
EX-13 9 ANNUAL REPORT FORM 10-K EXHIBIT 13 ========== ANNUAL REPORT APPLIED MAGNETICS CORPORATION [INSERT HERE EDGARIZED VERSION OF ANNUAL REPORT] 1994 ANNUAL REPORT [LOGO OF APPLIED MAGNETICS CORPORATION] COMPANY PROFILE Founded in 1957, Applied Magnetics Corporation is a leading independent supplier of magnetic recording heads for disk drive applications for the worldwide data storage segment of the computer industry. Applied Magnetics is among the largest independent suppliers of inductive thin-film and ferrite disk heads. In addition, the Company has made significant progress in the development of magnetoresistive (MR) thin-film disk heads. The Company's customers include most major disk and tape drive manufacturers and several computer systems companies. Applied Magnetics operates in five countries and employs approximately 5,500 persons worldwide. The Company's stock is listed on the New York Stock Exchange and trades under the symbol APM. APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES COMPARATIVE HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS)
1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- OPERATIONS Net sales................... $275,927 $335,898 $297,864 $385,053 $304,465 Income (Loss) from continuing operations...... (52,670) (43,728) 315 (15,805) (8,218) Loss from discontinued operations................. -- -- (25,422) (2,479) (1,802) Net loss.................... (52,670) (43,728) (25,107) (18,284) (10,020) Net income (loss) per share: Net income (loss) from continuing operations.... $ (2.39) $ (2.17) $ 0.02 $ (0.97) $ (0.51) Loss from discontinued operations............... -- -- (1.53) (0.15) (0.11) Net loss.................. $ (2.39) $ (2.17) $ (1.51) $ (1.12) $ (0.62) Weighted average common and dilutive equivalent shares outstanding: 22,082 20,156 16,604 16,294 16,038 Order backlog............... $ 64,781 $ 77,126 $ 96,104 $113,794 $166,575 Year-end employment......... 5,531 7,259 7,407 9,183 10,868 BALANCE SHEET Working capital............. $(36,443) $ 33,920 $ 17,823 $ 17,677 $ 71,778 Total assets................ 220,556 278,516 263,319 299,811 326,893 Total debt.................. 67,151 57,183 71,224 74,850 92,267 Shareholders' investment.... 98,433 151,095 124,399 150,078 166,833
Note: Balance Sheet data for 1990 and 1991 have not been restated for discontinued operations. LETTER TO SHAREHOLDERS 1994 was a very difficult and trying year for Applied Magnetics. We entered the year after having announced a restructuring charge of approximately $50.0 million for the fiscal year ended September 30, 1993 and our expectations that the Company would not return to profitability until the latter half of fiscal 1994. Regrettably, the Company has not yet returned to profitability. For the year ended September 30, 1994, sales were $275.9 million down 17.9% from the preceding fiscal year's revenues of $335.9 million. Our net loss for 1994 was $52.7 million or $2.39 per share as compared to a net gain of $5.2 million or $0.26 per share, excluding restructuring charges, for the preceding year. During 1994, the Company began to make volume production shipments for a number of new disk drive programs some of which utilize thin-film nanoslider (50%) disk head products. We also achieved some successes in obtaining "design-in" positions on new programs and made important progress in the design and development of new products. However, we also experienced manufacturing difficulties and production yield problems and difficulties in implementing a cost effective transition of some programs from the developmental stage to the volume production level. These problems and difficulties resulted in significant operating losses, negative cash flows and a deteriorating financial condition. In response to these developments your Board of Directors took a number of actions. Qualified investment bankers were engaged to assist in exploring various strategic alliance options to maximize shareholder value. Significant cost reductions and cost controls were implemented including substantial reductions in the employment force, salary reductions and curtailment of capital expenditures. Substantial changes in the executive management team have been made and, in August, an experienced crisis management firm was retained to provide turnaround assistance and to assist in efforts designed to maintain Applied Magnetics' viability and ultimately return the Company to profitability. Aggressive cash management practices have improved the Company's cash position. Production yields have improved. In addition, the Company recently concluded the sale of its Tape Head business unit to Seagate Technology, Inc. for $21.5 million cash of which $6.5 million will be held in escrow pending completion by the Company of certain performance requirements under its contractual arrangements with the Tape Head unit. Most of these performance requirements are scheduled for completion within twelve (12) months following the sale of this business unit. An additional $1.0 million is being held in escrow as a standard hold-back to cover potential claims of the buyer under certain representations and warranties made by the Company in connection with the sale. Many of the steps were painful but necessary in order to assure the Company's continued viability. Moreover, positive developments have resulted. The Company believes that it has made substantial achievements in certain technology areas, particularly in the implementation of integrated slider fabrication and air bearing surface processes, and that it continues to be a leading contender for the supply of MR disk heads. We expect fiscal 1995 will be a rebuilding process for Applied Magnetics. We will continue to manage cash and working capital resources, control costs, work towards improvement of our manufacturing processes and production yields and reduce cycle times throughout the product-development-to-volume-production process. Market shifts and product mix changes will continue. Overall, we continue to expect that sales of ferrite disk heads will decline. However, on a case-by- case basis there will be some demand for these products, as an alternative to thin film disk heads, for selective disk drive applications. The Company will continue to evaluate these opportunities on the basis of, among other things, its capabilities, resources and profitability objectives. Technological challenges relating to new generations of designs for thin- film disk heads and the continued development of MR disk heads will continue to arise. However, the Company believes that its expertise, capabilities and resources and, in the case of MR, its substantial investment in this technology, will enable it to respond to these developments. 2 Despite these achievements and the other steps we have taken, the turnaround is not yet complete. The Company's successful return to profitability depends on its ability to show continuous improvement in its manufacturing processes and sustained increases in thin film disk head production volumes. The accomplishments that have been made over the last year reflect the confidence and support of our customers and suppliers and the dedication and commitment of many hard working employees under difficult circumstances. It is our belief that these accomplishments, the continued dedication of loyal and competent employees and the support of our shareholders, customers and suppliers will continue to make Applied Magnetics an acknowledged leader in customer service, quality, technology and cost. Dedication and loyalty are qualities that have been demonstrated by many Company employees and representatives, including William E. Terry who served as a member of your Board of Directors for over twenty years before resigning on December 28, 1994. He informed the Board that, as a retired director and executive officer of Hewlett-Packard Co., he continues to have certain obligations to his former employer which recently announced the formation of a joint venture to pursue development of MR disk heads. Because Applied Magnetics is also engaged in the development of these products, Mr. Terry felt that it was appropriate for him to withdraw from the Company's Board. Mr. Terry's resignation was understandable but nevertheless accepted with regret. While he will be missed, we are grateful for the many years of loyal and dedicated service, valuable counsel and guidance that he has provided to the Company. Craig D. Crisman President and Chief Executive Officer 3 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED -------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ 1994 Net sales...................... $71,244 $69,834 $ 70,289 $ 64,560 Gross profit (loss)............ 3,747 3,342 (1,263) (6,689) 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 1993 Net sales...................... $74,556 $86,871 $ 97,351 $ 77,120 Gross profit................... 14,020 17,138 19,548 5,614 Net income (loss).............. 2,133 3,614 7,310 (56,785)(a) Net income (loss) per share: Primary...................... 0.13 0.18 0.33 (2.57) Fully diluted................ 0.12 0.17 0.31 (2.57) Weighted average common and dilutive equivalent shares outstanding: Primary...................... 17,003 20,623 22,486 22,059 Fully diluted................ 17,472 21,488 23,365 22,059
- - -------- (a) The results for the three months ended September 30, 1993 reflect charges of $10.0 million taken by the Company in relation to anticipated costs of further consolidating manufacturing resources and a non-cash charge of$39.6 million to write-down manufacturing equipment to its estimated net realizable value as a result of the unexpected rapid market transition from ferrite to thin-film and from thin-film microslider ("70%") to the nanoslider ("50%") form factor. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Over the three year period ended September 30, 1994, the Company has experienced a decline in its ferrite disk head business that was more rapid and more severe than had been expected and, correspondingly, a faster and more expansive growth in demand for thin-film disk head products. During these years the Company was also confronted with a sudden and unexpected change in market demands from the thin-film microslider (70%) to nanoslider (50%) form factor. It has made substantial efforts and significant investments in its attempts to respond to these developments. During this period, the Company also attempted to develop, refine and bring to production no less than six different generations of new or advanced thin-film disk head designs and related manufacturing and production processes. It has also made significant commitments to the development of designs, processes and equipment for the production of magnetoresistive ("MR") disk heads, having invested an aggregate of approximately $33.6 million in this technology in fiscal years 1993 and 1994. Significant price erosion in the magnetic recording head segment of the market also occurred during this three year period as did oversupply conditions which resulted in major order cancellations and reschedules. The Company has made important progress and valuable technological improvements in a number of areas relating to its disk head products over this period. It has achieved volume production shipments of nanoslider thin-film disk heads. Most recently, it has achieved measurable success in being able to offer fully etched air bearing ("FEAB") and other negative air pressure bearing disk head designs that allow certain of its products to demonstrate improved performance. Although the shipment levels of thin-film disk heads in the first three quarters of fiscal 1994 were comparatively flat, increases in these shipments were reflected in the fourth quarter of 1994 and the Company expects continuing, modest revenue growth in these products in 1995. Additionally, it has shipped prototype quantities of MR disk heads. However, the Company experienced a number of difficulties over this period, including manufacturing problems, production yield and quality issues and in each of the fiscal years ended September 30, 1992, 1993 and 1994, the Company sustained significant losses. The loss in fiscal 1992 resulted from charges of $23.0 million for discontinued operations and $18.0 million for restructuring. These charges were taken in connection with a comprehensive strategic financial planning and operating plan announced in June, 1992. As part of the plan, management decided to focus the Company's business solely on the design, manufacture and sale of magnetic recording head products for disk and tape drive applications. Management committed to focus capital expenditures on thin-film disk head production and MR disk head technology. The execution of the strategic plan, completed in 1993, included the sale of non-core businesses, establishing strategic corporate relationships with Hitachi Metals, Ltd. ("HML") and Conner Peripherals, Inc. ("Conner") and a secondary public offering of common stock. The loss in fiscal 1993 resulted from a restructuring charge of $49.6 million taken in the fourth quarter in response to significant order cancellations and reschedules received in September 1993 and related product and technology transitions, particularly the unexpectedly rapid market transition from ferrite to thin-film and from the thin-film microslider ("70%") to the nanoslider ("50%") form factor. The restructuring charge included anticipated costs of further consolidating manufacturing resources and a non-cash charge of $39.6 million to write-down production assets (primarily related to ferrite and thin-film microslider production) to their estimated net realizable values. During fiscal 1994, the market demand for nanoslider products continued to increase. The Company achieved some successes in obtaining "design in" positions on a number of new programs and made important progress in the design and production of new, advanced thin-film disk heads. However, in connection with some of these programs, it also experienced manufacturing difficulties and production yield problems which impacted the Company's ability to quickly ramp production of thin-film disk heads to achieve desired levels of volume shipments of these products in response to strong market demand. These problems and difficulties resulted in operating losses and negative cash flows for fiscal 1994. 5 ANNUAL RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ---------------------------- 1994 1993 1992 -------- -------- -------- (IN THOUSANDS) Thin-Film Disk Head Products Net sales................................. $133,909 $139,553 $ 43,027 Percentage of total....................... 48.5% 41.6% 14.4% Ferrite Disk Head Products Net sales................................. 123,254 177,094 234,589 Percentage of total....................... 44.7% 52.7% 78.8% Tape Head Products Net sales................................. 18,764 19,251 20,248 Percentage of total....................... 6.8% 5.7% 6.8% -------- -------- -------- Total Net Sales............................. $275,927 $335,898 $297,864 ======== ======== ========
NET SALES: Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of thin-film disk head products increased as a percentage of total net sales from 41.6% of net sales 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 for nanoslider products. Net sales of thin-film disk head products for the first three quarters of fiscal 1994 were $32.5 million, $30.9 million, and $32.5 million, respectively. In the fourth quarter of fiscal 1994, thin-film shipments increased to $38.0 million as a result of improved production yields. Net sales of ferrite disk head products decreased 30.4% in fiscal 1994 from the preceding year as a result of the continued maturing of the ferrite- based disk drive programs for which the Company is a supplier and the increased availability of competitively priced thin-film disk heads. Net sales of the Company's tape head products remained flat in fiscal 1994 as compared to 1993. Tape head products were produced by the Company's Tape Head business unit which was sold to Seagate Technology, Inc. ("Seagate") on December 10, 1994. Net sales increased 12.8% from fiscal 1992 to 1993. Net sales of thin-film disk head products increased 224.3% in fiscal 1993 as a result of increased market acceptance of the Company's thin-film microslider products and the Company's ability to deliver these products in volume. Net sales in ferrite disk head products decreased 24.5% from fiscal 1992 to 1993 as a result of maturing ferrite-based disk drive programs for which the Company is a supplier. Net sales of tape head products declined modestly in fiscal 1993 as compared to 1992. GROSS PROFIT: The gross margin (loss) was (0.3%) in fiscal 1994, 16.8% in fiscal 1993 and 19.0% in fiscal 1992. The gross margin decline in fiscal 1994 was primarily due to lower sales volume, lower average unit sales prices and manufacturing difficulties. The gross margin decline from fiscal 1992 to 1993 reflected the order cancellations and reschedules which occurred in September 1993 which led to a sharp decline in fourth quarter sales and related charges to inventory reserves. The gross margin for the nine months ended June 30, 1993, was 19.6%. RESEARCH AND DEVELOPMENT: Research and development expenses, net of cost offsets recognized from development funding received under various joint development agreements, increased by $7.2 million from fiscal 1993 to 1994. The Company continues to invest in advanced technology products and processes. The joint development agreements include a License and Technology Development Agreement with Hitachi Metals, Ltd. ("HML") (the "HML Agreement") for the advancement of the Company's inductive thin-film technology and the development and commercialization of MR disk head products and joint product development agreements with certain major disk drive manufacturers for MR disk head development. Under these agreements, the Company recognized $14.1 million and $15.1 million in fiscal years 1994 and 1993, respectively, as offsets to research and development expenses. The development effort under two of the Company's agreements with disk drive companies was completed or substantially completed by the end of fiscal 1994; development efforts are continuing under one agreement and have been indefinitely suspended under another agreement. The Company does not anticipate receiving any significant amount of development funding from customers and strategic partners in fiscal 1995. However, the Company may enter into additional 6 collaborative development programs in the future. Research and development expenses decreased by $6.6 million from fiscal 1992 to 1993. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses decreased in absolute dollars by 15.4% to $22.5 million in fiscal 1994, while increasing slightly as a percentage of sales to 8.1% from 7.9%, reflecting the lower net sales in fiscal 1994. The decrease in dollar amount was primarily as a result of staff and salary reductions and cost controls initiated in response to lower sales volume. Selling, general and administrative expenses increased in dollar amount by 4.2% to $26.6 million from fiscal 1992 to 1993, primarily as a result of higher general and administrative costs incurred to support the Company's growth in offshore production operations. SPECIAL CHARGES: There were no special charges taken in fiscal 1994. Results for fiscal 1993 include a restructuring charge of $49.6 million which included $10.0 million related to anticipated costs of further consolidating manufacturing resources and $39.6 million related to the write-down of manufacturing 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. Results for fiscal 1992 include a charge for discontinued operations of $23.0 million and a restructuring charge of $18.0 million related to costs associated with continued consolidation and streamlining of the Company's continuing operations and write-offs of certain equipment and tooling. The Company also recognized a recovery of $7.7 million in 1992 related to bad debt provisions taken in prior years. The primary source of the recovery was proceeds from the sale of approximately 499,000 shares of Maxtor Corporation common stock which were received as part of a debt settlement agreement with Maxtor. Maxtor acquired the assets of MiniScribe Corporation, a former trade debtor of the Company that filed for bankruptcy protection in 1990. In addition, the Company recognized income from the licensing of technology to HML in the amount of $10.0 million. See Note 6 of Notes to Consolidated Financial Statements for further discussion on restructuring charges, provisions for customer bankruptcies and related recoveries. See Note 2 of Notes to Consolidated Financial Statements for segment of business information which allocated non-recurring items between foreign and domestic operations, on the basis of the location in which the original sale was recorded for customer bankruptcy charges and in the respective locations in which restructuring costs were incurred. INTEREST INCOME AND EXPENSE: Interest income remained unchanged in fiscal 1994 from 1993, primarily due to similar average cash balances in both years. Interest income increased $0.6 million in fiscal 1993 from fiscal 1992, primarily as a result of investment of a portion of the proceeds from the public offering of common stock in February 1993. Interest expense decreased $1.4 million in fiscal 1994 from fiscal 1993 which included the write-off of certain loan origination expenses related to repayment of debt from the proceeds of the Company's equity offering in February, 1993. Interest expense decreased $0.3 million in fiscal 1993 from 1992 primarily as a result of lower average debt outstanding during fiscal 1993. OTHER INCOME (EXPENSE): Other income (expense) primarily consisted of foreign exchange translation and transaction gains and losses. PROVISION FOR INCOME TAXES: For each of fiscal years 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. 7 LIQUIDITY AND CAPITAL RESOURCES The manufacture of recording heads, particularly thin-film and MR disk heads, is capital intensive. In fiscal 1994, revenues fell below 1993 volumes, and the Company experienced manufacturing difficulties and production yield problems. These factors combined to reduce the Company's cash balance from $49.4 million at September 30, 1993, to $20.8 million at September 30, 1994. In addition, as a result of significant operating losses and capital expenditures during fiscal 1994, at September 30, 1994 the Company had a negative working capital of $36.4 million as compared to a positive working capital of $33.9 million at September 30, 1993. As a result, the Company's ability to make major capital investments in equipment, tooling and facilities to support improvements and investments in its thin-film disk head products and technology has been constrained. The Company has, however, successfully managed its working capital to make selected capital expenditures during this period. In response to these developments, and in connection with the management changes implemented in the fourth quarter of fiscal 1994, the Company implemented cost and cash expenditure controls that included staff reductions and aggressive cash management practices. The Company has also negotiated accelerated payment terms with some of its key customers and is pursuing other financing alternatives, including new loan and credit facilities, extensions or renewals of existing facilities, lease financing opportunities and other cash and working capital sources. During fiscal 1994, the Company experienced a net use of cash in the amount of $12.9 million for operating activities which included receipt of $15.9 million of joint development funding received under the HML and other development agreements, and decreases in accounts receivable and inventory of $19.1 million and $10.9 million, respectively. During fiscal 1994, net cash from financing activities was $9.0 million, primarily from utilization of the Company's unsecured credit facility with a Malaysian bank. During this period, the Company made capital expenditures of $31.5 million, primarily related to increasing thin-film disk head production capacity and to development of MR disk head technology. Additionally, the Company entered into $12.0 million of operating leases with terms of up to three (3) years. At September 30, 1994, total debt, including notes payable, was $67.2 million, an increase of $10.0 million from the balance outstanding at September 30, 1993. The Company had fully drawn down its unsecured Malaysian credit facility to $46.1 million, which has no stated maturity but is callable on demand from a bank in Malaysia where the Company has substantial manufacturing operations. The Company also had outstanding $10.0 million under a revolving credit facility with a commercial bank. The credit facility provides for up to $10.0 million in aggregate commitments, is supported by a letter of credit issued for the account of HML, subject to reimbursement by the Company and the interest rate under this credit facility was 5.4% for the year ended September 30, 1994. This credit facility was amended to extend the maturity to March 15, 1995. All other terms of the facility remain unchanged. The Company also had outstanding a $10.0 million note with Conner, pursuant to a Note Purchase Agreement, which is secured by accounts receivable arising from sales to Conner and by certain capital equipment. The underlying loan, which matures December 31, 1994, is convertible, at Conner's election at any time, into shares of the Company's Common Stock at a conversion price of $10.25 per share. Interest expense on the underlying loan was prepaid at issuance, resulting in net proceeds to the Company of approximately $8.6 million. On December 21, 1994, in connection with the contemplated credit agreement between the Company and The CIT Group/Business Credit, Inc. ("CIT"), described below, the Company and Conner entered into an agreement to extend the maturity date of the Note Purchase Agreement to the earlier of January 10, 1995, or the closing date of the CIT credit agreement. See Note 5 of Notes to Consolidated Financial Statements. In 1995, the Company plans approximately $49.0 million in capital expenditures relating primarily to improving thin-film production processes, increasing thin film production capacity and development of MR technologies. During the next twelve months, the Company believes that additional sources of capital will be required in order to fund the planned production ramp-up of thin-film and MR disk heads and to maintain planned levels of research and development and capital expenditure levels required for these disk head technologies. The Company has implemented an operating and cash management plan, the objective of which is to provide sufficient cash flows from operations to meet its operating 8 and capital expenditure requirements consistent with management's intentions to return the Company to profitability by the end of fiscal 1995. Management believes that it will be able to reduce its funding requirements for planned but not committed capital expenditures if market demand for those products does not materialize or declines. However, if the Company is unable to increase sales and maintain production yields at acceptable levels in order to permit it to execute customer orders for the new drive programs in a manner consistent with management's intentions to return to profitability by the end of fiscal 1995, there could be a significant adverse impact on liquidity, which would require the Company to obtain additional capital from external sources. There are no assurances that such sources of capital will be available or that the terms associated with external funding sources will be satisfactory to the Company. If the Company is unable to obtain sufficient capital, it would need to curtail its capital, research and development and working capital expenditures which would adversely affect the Company's future years' operations and competitive position. The Company's accounts receivable and inventory balances are heavily concentrated with a small number of customers. Sales to Conner, Maxtor, Quantum and IBM accounted for 53%, 13%, 10% and 10%, respectively, of the Company's sales in 1994. If any large customer of the Company became unable to pay its debts to the Company, liquidity would be adversely affected. Further, while management has not been informed of any facts or circumstances suggesting that the Malaysian bank intends, during fiscal 1995, to cease making the Malaysian Credit Facility available, should the bank decide, for any reason, to make all or any significant portion unavailable in fiscal 1995, the Company would need to pursue alternative financing sources. Moreover, the Company has reached informal agreements and understandings with some of its customers to make payments on accelerated terms. Generally, these arrangements may be canceled at any time and the customers could revert to payments in accordance with usual and customary terms. Should one or more of these customers determine that all or a significant portion of the Company's trade accounts which are currently being paid on accelerated terms should revert to standard terms, there could be a significant impact on liquidity unless the Company has been able to obtain additional or supplementary sources of capital. However, this liquidity risk may be partially ameliorated by the credit available under the contemplated CIT Credit Facility under which available loan proceeds could generally increase as the Company's trade accounts receivable increase. See "Recent Developments". 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. Raw material purchases in yen are selectively hedged. The Malaysian debt maturities are also hedged. The Company effects these hedges primarily with forward contracts in order to reduce the effects of currency rate fluctuations on its results of operations. However, such fluctuations can have a significant effect on reported cash balances. The effect of foreign currency exchange rate changes was a $1.2 million increase in fiscal 1994, and a $1.0 million decrease in fiscal 1993 in cash and equivalents held in foreign currency. RECENT DEVELOPMENTS As a result of its deteriorating financial condition, operating losses and declining revenues, during fiscal 1994 and continuing into 1995, the Company took a number of actions intended to assure the Company's survivability, to maximize shareholder value and to set the Company on a course leading to a return to profitability. In June, 1994, the Company announced that it had retained Lehman Brothers, Inc. as financial advisors to assist in exploring strategic alliances and other opportunities to maximize shareholder value and, in August, it announced that it had engaged Grisanti, Galef & Goldress, Inc. ("GG&G") a consulting firm with considerable crisis management and turn-around experience, to assist the Company in its efforts to conserve and generate cash and working capital, reduce costs, stem operating losses and return to profitability. Further, Mr. Craig D. Crisman, a partner in GG&G, was appointed as President and Chief Executive Officer and as a member of the Board of Directors of the Company. Substantial changes in the Company's executive management team have been implemented and significant reductions in the Company's employment force have taken place. In November, 1994, the Company announced and on December 10, 1994, it completed the sale of its Tape Head business unit to Seagate for $21.5 million of which the Company has received $14.0 million. Of the remaining funds, $1.0 million is held in escrow as a standard hold-back, for one year, to indemnify the buyer for any claims relating to the representations and warranties provided by the Company in connection with the divestiture and $6.5 million is held in escrow pending the completion by the Company of certain performance milestones, most of which are scheduled for completion within twelve (12) months following 9 the sale of this business unit under the Company's agreements to provide certain tape-related goods and services to the buyer following the sale. The Company believes that all or substantially all the funds being held in escrow will eventually be distributed to it. However, if for any reason claims are made by, and resolved in favor of, the buyer to the extent that all or a significant portion of the escrowed funds are not distributed to the Company, this could have an adverse impact on the Company's liquidity. In November, 1994, the Company also announced that it had entered into a commitment letter with theCIT Group/Business Credit, Inc. ("CIT") for an asset-based credit facility of up to $35.0 million. The closing of the transaction, which is subject to preparation and execution of definitive loan documentation and certain other closing conditions, is expected to occur in early January, 1995. In November, 1994, the Company also announced that it entered into an agreement to dismiss a securities class action suit brought against it and several present and former officers in U.S. District Court for the Central District of California. No findings or admissions of liability on the part of the Company or the named defendants have been made and the Company will not have to make any cash payments to resolve the suit. Moreover, it will not have to undergo protracted and expensive litigation to defend the case. The agreement is subject to the terms of a definitive written agreement which is to be submitted to the court for preliminary approval. Under the terms of the settlement, the Company will contribute shares of its common stock having an aggregate value of $1.25 million. The Company has also implemented consolidations of manufacturing operations at several domestic and foreign facilities which have resulted in cost reductions and the sale or expected sale of excess properties and assets. Moreover, the Company has implemented aggressive cash management practices and operating plans for fiscal 1995, that are being closely managed. On the basis of these actions and other continuing management actions that are being taken to reduce costs, limit and control capital expenditures, achieve operational objectives and manage cash and working capital resources, the Company's objective is to return to profitability by the end of fiscal 1995, provided there are no significant external adverse developments including, but not limited to, market conditions similar to those experienced in fiscal 1993, major consolidation of customers or competitors, significant and unanticipated technological developments or other considerations. CLOSING SALES PRICES OF APPLIED MAGNETICS CORPORATION STOCK
1994 1993 ----------- ------------ HIGH LOW HIGH LOW ----- ----- ------ ----- First quarter.............. 6 1/2 5 1/8 11 3/8 5 3/4 Second quarter............. 7 3/8 5 1/8 14 3/4 9 7/8 Third quarter.............. 6 5/8 4 1/4 11 3/4 8 1/2 Fourth quarter............. 5 3/8 4 11 1/4 6 7/8
10 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30 ---------------------------------- 1994 1993 1992 ---------- ---------- ---------- Net sales.................................. $ 275,927 $ 335,898 $ 297,864 Cost of sales.............................. 276,790 279,578 241,296 ---------- ---------- ---------- Gross profit (loss)...................... (863) 56,320 56,568 ---------- ---------- ---------- Research and development expenses.......... (24,682) (17,504) (24,100) Selling, general and administrative expenses.................................. (22,474) (26,554) (25,489) Restructuring charge and provisions for customer bankruptcies, net of recoveries.. -- (49,600) (10,290) License fee income......................... -- -- 10,000 Interest income............................ 825 803 221 Interest expense........................... (4,216) (5,632) (5,957) Other income (expense), net................ (160) 1,244 (69) ---------- ---------- ---------- Income (Loss) from continuing operations before income taxes..................... (51,570) (40,923) 884 Provision for income taxes................. 1,100 2,805 569 ---------- ---------- ---------- Income (Loss) from continuing operations... (52,670) (43,728) 315 Discontinued operations, net of related income taxes: Loss from operations..................... -- -- (2,422) Loss on disposal......................... -- -- (23,000) ---------- ---------- ---------- Loss from discontinued operations.......... -- -- (25,422) ---------- ---------- ---------- Net loss................................... $ (52,670) $ (43,728) $ (25,107) ========== ========== ========== Net income (loss) per share: Income (Loss) from continuing operations. $ (2.39) $ (2.17) $ 0.02 Loss from discontinued operations........ -- -- (1.53) ---------- ---------- ---------- Net loss................................. $ (2.39) $ (2.17) $ (1.51) ========== ========== ========== Weighted average common and dilutive equivalent shares outstanding: 22,081,751 20,155,868 16,604,017 ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 11 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
SEPTEMBER 30 ------------------ 1994 1993 -------- -------- ASSETS Current assets: Cash and equivalents ($15,512 in 1994 and $27,110 in 1993)................................................... $ 20,761 $ 49,371 Accounts receivable, less allowances of $3,629 in 1994 and $3,242 in 1993...................................... 18,720 37,873 Inventories, at lower of cost (first-in, first-out) or market.................................................. 31,520 42,426 Prepaid expenses and other............................... 6,879 12,698 -------- -------- 77,880 142,368 -------- -------- Property, plant and equipment, at cost: Land..................................................... 3,992 4,102 Buildings................................................ 77,745 69,807 Manufacturing equipment.................................. 163,068 147,517 Other equipment and leasehold improvements............... 30,743 28,690 Construction in progress................................. 13,814 21,316 -------- -------- 289,362 271,432 Less--accumulated depreciation and amortization............ (165,046) (152,024) -------- -------- 124,316 119,408 -------- -------- Notes receivable, net...................................... 8,557 9,630 Other assets............................................... 9,803 7,110 -------- -------- $220,556 $278,516 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Current portion of long-term debt........................ $ 20,412 $ 10,435 Bank notes payable....................................... 46,062 35,198 Accounts payable......................................... 22,332 28,287 Accrued payroll and benefits............................. 9,406 12,145 Other current liabilities................................ 16,111 22,383 -------- -------- 114,323 108,448 -------- -------- Long-term debt, net........................................ 677 11,550 -------- -------- Other liabilities.......................................... 7,123 7,423 -------- -------- 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 22,161,460 shares in 1994 and 22,153,742 shares in 1993........................... 2,216 2,215 Paid-in capital.......................................... 178,481 178,533 Retained earnings (deficit).............................. (80,779) (28,109) -------- -------- 99,918 152,639 Treasury stock, at cost (92,509 in 1994 and 79,328 shares in 1993).................................................. (812) (736) Unearned restricted stock compensation..................... (673) (808) -------- -------- 98,433 151,095 -------- -------- $220,556 $278,516 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. 12 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30 ------------------------------- 1994 1993 1992 --------- --------- --------- Cash Flows from Operating Activities: Net loss...................................... $ (52,670) $ (43,728) $ (25,107) Adjustments to derive cash flows: Depreciation and amortization............... 23,643 29,866 25,714 Provision for receivable allowances and related costs.............................. 100 550 889 Estimated loss on disposal of discontinued operations................................. -- -- 23,000 Restructuring charges....................... -- 49,600 18,000 Deferred tax provision (benefit)............ -- 1,384 (858) Amortization of unearned restricted stock compensation, net.......................... (145) 1,225 839 Other assets................................ (4,167) (1,103) (384) Other liabilities........................... (300) (3,278) 667 Net assets of discontinued operations....... -- (501) (1,244) Other, net.................................. 1,123 804 1,091 Working capital changes affecting cash flows from operations: Accounts receivable........................ 19,053 (11,562) 10,756 Other receivables.......................... 5,170 10,900 (16,070) Inventories................................ 10,906 (5,827) 13,130 Prepaid expenses and other................. (305) (921) (2,189) Accounts payable........................... (5,955) (3,007) (285) Accrued payroll and benefits............... (2,739) 2,558 727 Deferred income............................ (3,383) 3,383 -- Other current liabilities.................. (3,271) (959) (14,663) --------- --------- --------- Net cash flows (used in) provided by operating activities....................... (12,940) 29,384 34,013 --------- --------- --------- Cash Flows from Investing Activities: Additions to property, plant and equipment.... (31,452) (56,652) (26,950) Proceeds from sale of businesses and assets... 3,516 15,409 575 Notes receivable.............................. 2,038 1,433 -- Net investing activities of discontinued operations................................... -- -- (2,861) --------- --------- --------- Net cash flows used in investing activities.. (25,898) (39,810) (29,236) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from debt............................ 143,231 108,452 113,470 Repayment of debt............................. (134,402) (127,127) (115,632) Proceeds from sale of common stock............ -- 66,488 -- (Purchase) Issuance of treasury stock, net.... (76) (105) 66 Proceeds from stock options exercised, including tax benefit........................ 229 1,580 321 Net financing activities of discontinued operations................................... -- -- 1,224 --------- --------- --------- Net cash flows provided by (used in) financing activities....................... 8,982 49,288 (551) --------- --------- --------- Effect of exchange rate changes on cash and equivalents.................................. 1,246 (964) 3,308 --------- --------- --------- Net (decrease) increase in cash and equivalents.................................. (28,610) 37,898 7,534 Cash and equivalents at beginning of period... 49,371 11,473 3,939 --------- --------- --------- Cash and equivalents at end of period......... $ 20,761 $ 49,371 $ 11,473 ========= ========= ========= Supplemental Cash Flow Data: Interest paid, net of amounts capitalized..... $ 4,215 $ 4,158 $ 6,622 ========= ========= ========= Income taxes paid............................. $ 1,025 $ 1,209 $ 1,843 ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 13 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ ---------------- UNEARNED RETAINED CUMULATIVE RESTRICTED NUMBER OF PAID-IN EARNINGS TRANSLATION NUMBER OF STOCK SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT SHARES AMOUNT COMPENSATION ---------- ------ -------- --------- ----------- --------- ------ ------------ Balance, September 30, 1991..... 16,456,575 $1,646 $109,919 $ 40,726 $1,798 73,119 $(697) $(3,314) Stock options exercised............ 40,048 4 317 -- -- -- -- -- Purchase of treasury stock, net........... -- -- -- -- -- (5,493) 66 -- Restricted stock issuance, net........ (52,300) (6) (673) -- -- -- -- 679 Amortization of unearned restricted stock compensation... -- -- -- -- -- -- -- 839 Translation adjustment........... -- -- -- -- (1,798) -- -- -- Net loss.............. -- -- -- (25,107) -- -- -- -- ---------- ------ -------- -------- ------ ------ ----- ------- Balance, September 30, 1992..... 16,444,323 1,644 109,563 15,619 -- 67,626 (631) (1,796) Stock options exercised............ 359,772 36 2,780 -- -- -- -- -- Stock offering........ 5,291,070 529 65,959 -- -- -- -- -- Purchase of treasury stock, net........... -- -- -- -- -- 11,702 (105) -- Restricted stock issuance, net........ 58,577 6 231 -- -- -- -- (237) Amortization of unearned restricted stock compensation... -- -- -- -- -- -- -- 1,225 Net loss.............. -- -- -- (43,728) -- -- -- -- ---------- ------ -------- -------- ------ ------ ----- ------- Balance, September 30, 1993..... 22,153,742 2,215 178,533 (28,109) -- 79,328 (736) (808) Stock options exercised............ 26,087 3 226 -- -- -- -- -- Purchase of treasury stock, net........... -- -- -- -- -- 13,181 (76) -- Restricted stock issuance, net........ (18,369) (2) (278) -- -- -- -- 280 Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- -- (145) Net loss.............. -- -- -- (52,670) -- -- -- -- ---------- ------ -------- -------- ------ ------ ----- ------- Balance, September 30, 1994..... 22,161,460 $2,216 $178,481 $(80,779) $ -- 92,509 $(812) $ (673) ========== ====== ======== ======== ====== ====== ===== =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 14 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES 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 1992 and 1993 accounts have been reclassified to conform with 1994 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 1994, gains of $0.8 million in 1993 and losses of $0.1 million in 1992 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, as are repayments of the Company's Malaysian debt denominated in ringgitts. Raw material purchases in yen are selectively hedged. The Malaysian debt maturities are also hedged. The Company effects these hedges primarily with forward contracts in order to reduce the effects of currency rate fluctuations on its results of operations. However, such fluctuations can have a significant effect on reported cash balances. Gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. The cash flow from such contracts is classified in the same category as the transaction hedged in the Consolidated Statements of Cash Flows. The market value of contracts held at September 30, 1994 was $38.1 million which approximated cost. 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 $23.6 million, $29.9 million and $25.7 million in 1994, 1993 and 1992, 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 $8.7 million, $7.1 million and $5.1 million in 1994, 1993 and 1992, 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 and $0.9 million was capitalized in 1993 and 1992, respectively. No interest was capitalized in 1994. 15 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CASH EQUIVALENTS: Cash equivalents consist primarily of money market instruments maturing within 90 days that are carried at cost, which approximates market. 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. 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. RETAINED (DEFICIT) EARNINGS: Retained (deficit) earnings are also charged for the amount paid in excess of par value for stock that is repurchased and retired. Cumulative charges to retained deficit for stock dividends and repurchases amounted to $38.3 million at September 30, 1994. 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 StandardsNo. 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. Consolidated net sales of 10% or more were made to four customers in 1994 (53%, 13%, 10% and 10%), four customers in 1993 (28%, 21%, 18% and 17%), and two customers in 1992 (34% and 27%). Two of these customers accounted for more than 10% of consolidated net sales in 1994, 1993, and 1992, and two customers accounted for more than 10% of consolidated net sales in 1994 and 1993. Net sales to the Company's ten largest customers represented approximately 99%, 98% and 96% of net sales in 1994, 1993 and 1992, respectively. The Company's trade receivables are unsecured and are primarily due from the above customers. 16 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Export sales are made by the United States operations to the following geographic locations:
1994 1993 1992 -------- -------- -------- (IN THOUSANDS) Europe......................................... $ 1,523 $ 11,533 $ 50,682 Asia........................................... 35,082 6,564 15,271 South America.................................. 67 -- 5,820 -------- -------- -------- $36,672 $18,097 $71,773 ======== ======== ========
Information regarding the Company's domestic and foreign operations is as follows:
UNITED STATES FOREIGN TOTAL ------------- -------- -------- (IN THOUSANDS) 1994 Net sales.............................. $ 98,680 $177,247 $275,927 ======== ======== ======== Loss from operations before interest, general corporate expenses and income taxes................................. $(27,242) $(18,748) $(45,990) Interest income........................ 739 86 825 Interest expense....................... (1,841) (2,375) (4,216) General corporate expenses............. (1,420) (609) (2,029) Other income (expense)................. (1,690) 1,530 (160) -------- -------- -------- Loss from operations before income taxes................................. $(31,454) $(20,116) $(51,570) ======== ======== ======== Identifiable assets.................... $141,029 $ 79,527 $220,556 ======== ======== ======== 1993 Net sales.............................. $159,854 $176,044 $335,898 ======== ======== ======== Loss from operations before interest, general corporate expenses and income taxes................................. $(31,445) $ (4,697) $(36,142) Interest income........................ 759 44 803 Interest expense....................... (2,413) (3,219) (5,632) General corporate expenses............. (597) (599) (1,196) Other income (expense)................. (707) 1,951 1,244 -------- -------- -------- Loss from operations before income taxes................................. $(34,403) $ (6,520) $(40,923) ======== ======== ======== Identifiable assets.................... $164,267 $114,249 $278,516 ======== ======== ======== 1992 Net sales.............................. $203,090 $ 94,774 $297,864 ======== ======== ======== Income from continuing operations before interest, general corporate expenses and income taxes............. $ 5,326 $ 2,812 $ 8,138 Interest income........................ 191 30 221 Interest expense....................... (3,254) (2,703) (5,957) General corporate expenses............. (847) (602) (1,449) Other income (expense)................. (975) 906 (69) -------- -------- -------- Income from continuing operations before income taxes................... $ 441 $ 443 $ 884 ======== ======== ======== Identifiable assets.................... $160,241 $103,078 $263,319 ======== ======== ========
17 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Foreign operations primarily consist of operations in the Asia-Pacific region. See Note 6 regarding charges recorded in 1993 and 1992 associated with restructuring of operations and customer bankruptcies. The segment of business information presented above reflects an allocation of such restructuring charges to the location in which restructuring costs were incurred and an allocation of the customer bankruptcy charges on the basis of the location in which the original sale was recorded. The amounts of these charges allocated between foreign and domestic operations were $30.0 million and $19.6 million, respectively, in 1993, and $11.3 million and$6.7 million, respectively, in 1992. Results of operations for United States-based operations include substantial research and development expenditures which are not allocated directly to foreign operations. Foreign operations incur relatively minor amounts of research and development expenditures, thereby causing a favorable comparison with the operating results of United States-based operations. License fee income and research and development cost offsets relating to the license and technology development agreement with Hitachi Metals, Ltd. ("HML") have been included as United States income. See Note 9. 3. INCOME TAXES The provision for income taxes for the years ended September 30, were as follows:
1994 1993 1992 ------ ------ ------ (IN THOUSANDS) Federal income taxes Current........................................... $ -- $ -- $ -- Deferred.......................................... -- 1,384 (858) State income taxes Current........................................... 211 226 44 Deferred.......................................... -- -- -- Foreign income taxes................................ 889 1,195 1,383 ------ ------ ------ $1,100 $2,805 $ 569 ====== ====== ======
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:
1994 1993 1992 -------- -------- ------ (IN THOUSANDS) Income tax at the United States Federal income tax rate..................................... $(18,050) $(13,913) $ 301 State income taxes, net of Federal income tax benefit..................................... 137 149 135 Foreign income taxed at lower rate........... (550) (1,536) (4,029) Temporary differences/net operating losses not benefitted.............................. 19,563 18,116 4,143 Other, net................................... -- (11) 19 -------- -------- ------ $ 1,100 $ 2,805 $ 569 ======== ======== ======
18 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company elected early adoption of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. The adoption of SFAS 109 did not have a material effect on the 1992 consolidated financial statements. The provision (benefit) for deferred income taxes results from temporary differences which consisted of 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, 1994 and 1993 were as follows:
1994 1993 -------- -------- (IN THOUSANDS) Deferred compensation................................. $ 1,032 $ 1,446 Inventory reserves.................................... 5,181 7,214 Restructuring & other reserves........................ 10,169 11,091 Net operating loss carryforwards...................... 24,204 19,630 Foreign tax & general business credit carryforwards... 4,763 4,051 Depreciation.......................................... (3,396) (2,340) Other, net............................................ 852 (137) -------- -------- Subtotal............................................ $ 42,805 $ 40,955 Valuation allowance................................... (42,805) (40,955) -------- -------- 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, 1994, the Company had total deferred tax liabilities of $3.4 million and total deferred tax assets of $46.2 million. The Company recorded a valuation allowance in the amount of $42.8 million against the amount by which deferred tax assets exceed deferred tax liabilities. The valuation reserve increased from $41.0 million as of September 30, 1993 primarily due to the current year temporary differences. Consolidated retained deficit at September 30, 1994 included approximately $56.9 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 $18.3 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 $64.1 million, of which $23.8 million, $24.0 million and $16.3 million will expire in 2006, 2008 and 2009, respectively. 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 plan while the 1988 plan is limited to nonstatutory options only. At September 30, 1994, the Company had reserved 744,288 shares of its $.10 par value Common Stock (Common Stock) for future issuance under these plans. 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. At September 30, 1994, options for 1,553,502 shares under these three plans were outstanding at prices from $5.00 to $13.63 per share, of which options for 812,002 shares were exercisable. During 1994, 2,625 options were exercised and options for 672,959 shares were canceled or expired under these plans. 19 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1994, no options to purchase Common Stock were available for future issuance under these two plans, and nonstatutory options of 113,781 shares were outstanding at prices from $1.30 to $10.95 per share, 87,228 shares of which were exercisable. During 1994, options for 23,162 shares were exercised at prices from $1.30 to $2.04 per share, and options for 13,297 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, 1994, 80,307 shares were available for future issuance under the 1989 plan and 76,798 shares remain subject to restrictions. During 1994, 40,000 shares were issued, 58,369 shares were canceled and restrictions were removed from 63,183 shares under the 1989 plan. Compensation expense recorded under the three plans during 1994, 1993 and 1992 was approximately$0.2 million, $1.2 million and $0.8 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 as 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, 1994, options for 15,000 shares had been granted under this plan. The Company's 1988 Directors' Stock Option Plan was suspended in 1994. 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, 1994 or September 30, 1993. 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. 20 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES 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:
1994 1993 ------- ------- (IN THOUSANDS) 7% secured note purchase agreement, due January 10, 1995. $ 9,827 $ 9,165 Unsecured revolving credit agreement due March, 1995, interest rate of 5.4% as of September 30, 1994........... 10,000 10,000 Unsecured Malaysian bank credit facility, interest rates from 4.0% to 6.6% as of September 30, 1994............... 46,062 35,198 Mortgage payable, interest rate of 8.50% as of September 30, 1994................................................ 146 1,691 Capital leases, interest rates from 9.50% to 13.30%...... 1,116 1,129 ------- ------- 67,151 57,183 Less--current portion, including bank notes payable...... 66,474 45,633 ------- ------- $ 677 $11,550 ======= =======
The aggregate principal payments of bank notes payable and long-term debt for the years subsequent to September 30, 1994 are: 1995--$66.6 million, 1996--$0.4 million, 1997--$0.1 million, 1998--$0.1 million. In December, 1992, the Company entered into a $10.0 million note purchase agreement with Conner Peripherals, Inc. ("Conner"). The agreement is secured by accounts receivable arising from purchase orders placed with the Company by Conner and by certain capital equipment. The underlying loan, which matures in December 1994, is convertible, at Conner's election at any time, into shares of the Company's $.10 par value Common Stock at a conversion price of $10.25 per share. Interest expense was prepaid at issuance, resulting in net proceeds of approximately $8.6 million. The loan does not contain financial covenants. On December 21, 1994, in connection with the contemplated credit agreement between the Company and The CIT Group/Business Credit, Inc. ("CIT"), described herein, the Company and Conner entered into an agreement to extend the maturity date of the Note Purchase Agreement to the earlier of January 10, 1995, or the closing date of the CIT credit agreement. In October, 1992 the Company obtained an extension of the maturity date on a $10.0 million revolving credit facility from a commercial bank. This credit facility provides for up to $10.0 million in aggregate commitments and is supported by a letter of credit issued for the account of HML, subject to reimbursement by the Company. The interest rate for the amounts outstanding under the credit facility was 5.4% for fiscal 1994. The credit facility was amended to extend the maturity for one year. All amounts outstanding must be repaid on March 15, 1995. The credit facility does not contain financial covenants. The Company's Malaysian subsidiary has unsecured loan facilities with a Malaysian bank which has been in place since June, 1990, is callable on demand, has no termination date, and is guaranteed by the Company. The export credit/bankers' acceptance facility is denominated in Malaysian ringgitt, the Onshore Foreign Currency Loan is denominated in U.S. dollars, and the combined facilities provide up to approximately $47 million in financing which is subject to the Company generating sufficient export volumes. The export credit facility bears interest at a rate subsidized by the Malaysian government which at September 30, 1994 was 4.0% and had an outstanding balance of approximately $19.6 million. If not subsidized, the entire facility would bear interest at market rates. The bankers' acceptance facility bears interest at current market rates for bankers' acceptances, which at September 30, 1994, ranged from 5.2% to 5.5%, and had an outstanding balance of approximately $17.9 million. The Onshore Foreign Currency Loan bears interest at Singapore interbank offered rates ("SIBOR") plus 1.25%, which at September 30, 1994, ranged from 5.8% to 6.6%, and had an outstanding balance of approximately $8.6 million. The Company anticipates continuing to qualify for 21 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the subsidy. At September 30, 1994, $46.1 million was outstanding and payable during the first and second quarters of fiscal 1995 and the subsidiary had sufficient export volumes to access the entire amount of the credit facility. The Company's practice is to repay maturities with new borrowings under the facility and anticipates that its ability to do so will continue throughout fiscal 1995. The Company classifies the debt as current due to the short-term nature of the individual maturities. 6. RESTRUCTURING CHARGE AND CUSTOMER RECEIVABLES The Company recorded restructuring charges of $18.0 million and $49.6 million in 1992 and 1993, respectively. The 1992 charge related to costs associated with continued consolidation and streamlining of the Company's business group organization and operating locations, production reorganization, training and severance which, collectively, totaled $8.0 million and the write-off of equipment and tooling of $10.0 million made obsolete primarily as a result of the Company's decision to focus on its core business of designing, manufacturing and marketing magnetic recording heads. The restructuring activity related to the 1992 charge was substantially completed by June 30, 1993. The 1993 charge included $10.0 million related to anticipated costs of further consolidating manufacturing resources and $39.6 million related to the write-down of equipment to estimated net realizable value as a result of various factors particularly 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 $13.0 million, $43.4 million and $5.1 million in 1992, 1993, and 1994, respectively. During fiscal 1994, the Company transferred manufacturing operations of its subsidiary, Applied Magnetics Singapore, Pte. ("AMS") to the Company's Malaysian facility and made AMS its primary customer support center for Southeast Asia. The Company also reduced its domestic workforce, in non- production functions, by approximately 30%. The costs associated with these actions were provided for in the fiscal 1993 restructuring charge. The balance of the 1993 restructuring charge of $6.1 million is included as a component of Other Current Liabilities in the accompanying Consolidated Balance Sheet at September 30, 1994. This amount will be used to offset restructuring costs expected to be incurred in fiscal 1995. The Company provided allowances for doubtful collections and related contingencies in the amounts of$15.5 million and $6.5 million in 1990 and 1991, respectively, and recorded recoveries related to such charges of$7.7 million in 1992. The charges related to the bankruptcy filings of several of the Company's customers. The primary source of the 1992 recoveries related to the proceeds from the sale of approximately 499,000 shares of Maxtor Corporation ("Maxtor") common stock. The Maxtor shares were received as a part of a debt settlement agreement with Maxtor, the successor to the assets of MiniScribe Corporation, which filed for protection under the Bankruptcy Code in 1990. 7. COMMITMENTS 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 five years with renewal options in certain instances. 22 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future minimum lease payments under capital and operating leases as of September 30, 1994 are as follows:
LEASES ----------------- CAPITAL OPERATING ------- --------- (IN THOUSANDS) 1995.................................................... $ 670 $ 7,104 1996.................................................... 529 6,921 1997.................................................... 115 4,672 1998.................................................... 0 1,783 1999.................................................... 0 21 ------ ------- Total minimum payments.................................. 1,314 $20,501 ======= Less imputed interest................................... 199 ------ Present value of payments under capital leases.......... $1,115 Less current portion.................................... 565 ------ Long-term lease obligations............................. $ 550 ======
Manufacturing and other equipment at September 30, 1994 include assets under capitalized leases of $1.9 million with related accumulated amortization of $0.9 million. Total rental expense, net of sublease rental income, for the years ended September 30, 1994, 1993, and 1992, including items on a month-to-month basis, was approximately $3.6 million, $4.0 million and $3.4 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. Post employment benefits provided by the Company are not material. 8. DISCONTINUED OPERATIONS In June, 1992, the Company developed plans to divest its non-core businesses. Based on the estimated proceeds to be received upon completion of these divestiture plans and estimated operating losses through the expected disposition dates. The Company recorded a charge for discontinued operations of $23.0 million in fiscal 1992. All sales were completed in fiscal 1993, thereby completing the disposition of the Company's discontinued operations. The Company incurred a loss from operations from the measurement date (June 30, 1992) to September 30, 1993 of $959,000 which was charged to the reserve. During fiscal 1993, the Company completed the sale of its Magnetic Data, Inc. ("MDI") and Brumko Magnetics ("Brumko") subsidiaries to Delta Bravo, Inc., a privately owned company. The Company also sold its Optical Products Division ("OPD") to Most, Inc. ("MOST"), a majority-owned subsidiary of Nakamichi Corporation Japan. The sales proceeds for these transactions consisted of cash of $3.9 million and three promissory notes and securities which notes were recorded at their aggregate face value of $17.8 million. One of the notes bears interest at a rate of 10.0%, with accrued interest and principal due at maturity in 1996. The second note bears interest at a rate of 8.0%, with interest payable quarterly, and the principal due at maturity in 2000. The third note bears interest at a rate of 8.0%, with interest payable quarterly, and the principal payable from 1995 to 1998. Sales proceeds approximated the carrying value of the assets sold. 23 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In March, 1992, the Company sold the business and assets of its Test Systems and Instrumentation Division ("Division") and, as consideration received the buyer's promissory notes and common stock. The notes were secured by the assets sold by the Company and were valued at their estimated realizable value, $1.8 million, which approximated the carrying value of the assets sold. In 1993, the buyer defaulted under the notes and in connection with the exercise by the Company of its rights as a secured creditor, the Company transferred certain assets of the Division to Cambrian Systems, Inc., an unrelated third party, in exchange for certain royalty payment obligations. In November, 1991 the Company completed the sale of its Nortronics Company, Inc. ("Nortronics") subsidiary. Prior to the sale, Nortronics distributed to the Company, in the form of a dividend, two facilities, with a book value of $3.8 million. The Company classified the net book value of the facilities in Other Assets on the accompanying Consolidated Balance Sheet as of September 30, 1993. The sale was for $1.9 million, consisting of cash and a$1.25 million secured note receivable, bearing interest at 8.0%, and payable through 2001. Sale proceeds approximated the Company's investment in Nortronics. In September, 1994, one facility was sold for $2.5 million in cash and a$0.5 million secured note receivable, bearing interest at 8.0% and payable through October, 1999; the other facility is currently leased under a long-term lease to the current owners of Nortronics. The Company has classified the net book value of the remaining facility in Other Assets on the accompanying Consolidated Balance Sheet as of September 30, 1994. Operating results of discontinued operations for the years ended September 30, 1993 and 1992 reflected net sales of $26.7 million and $69.2 million, respectively. For fiscal year 1993, no income or loss was recognized from discontinued operations. Operating results for discontinued operations for the year ended September 30, 1992 reflected a loss of $2.4 million. 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. Under the HML Agreement, received. In addition, HML agreed to pay the Company $25.0 million, net of $1.0 million in foreign withholding taxes, and to supply 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 will have rights to manufacture products based on this technology and will have 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, 1995. 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. 10. SUBSEQUENT EVENTS SALE OF TAPE SUBSIDIARY: On November 8, 1994, the Company announced that it had entered into an agreement to sell its tape head subsidiary to Seagate Technology, Inc. ("Seagate") for $21.5 million cash, of which the Company has received $14.0 million. Of the remaining funds, $1.0 million is held in escrow as a standard hold-back, for one year, 24 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to indemnify the buyer for any claims relating to the representations and warranties provided by the Company in connection with the divestiture and $6.5 million is held in escrow pending the completion by the Company of certain performance milestones under the Company agreements to provide certain tape- related goods and services to the buyer following the sale. This transaction closed on December 10, 1994. This sale is consistent with the Company's objective of focusing its efforts and resources on its core business, ferrite, thin-film and MR disk head products. NEW CREDIT FACILITY: On November 15, 1994, the Company announced that it had entered into a commitment letter with The CIT Group/Business Credit, Inc. ("CIT"), under which the Company will be provided secured financing, in the form of a revolving line of credit, for up to $35.0 million. The amount available for borrowing at any time under the facility will be subject to certain asset ratios and other considerations. The closing of the transaction is expected to be completed by early January, 1995. SETTLEMENT OF CLASS ACTION LAWSUIT: 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 present and 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 is expected to be submitted to the court for preliminary approval during December, 1994. The settlement is ultimately subject to final court approval after notice to the class members of the terms. 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. 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 accompanying consolidated financial statements reflect a provision for the value of the common stock which will be issued by the Company. 25 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, 1994 and 1993, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended September 30, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California December 22, 1994 26 APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES BOARD OF DIRECTORS CORPORATE HEADQUARTERS Harold R. Frank Applied Magnetics Corporation Chairman of the Board 75 Robin Hill Road Goleta, California 93117 Craig D. Crisman Telephone (805) 683-5353 President, Chief Executive Officer Fax (805) 967-8227 and Chief Financial Officer Herbert M. Dwight, Jr. COMPANIES AND LOCATIONS President, Optical Coating Laboratory, Inc. Applied Magnetics Corporation Goleta, California Dr. R.C. Mercure, Jr. Professor and Director, Applied Magnetics Ireland, Ltd. Inc. Engineering Management Program, Dublin, Ireland University of Colorado at Boulder Applied Magnetics Korea, Ltd. Seoul, Korea EXECUTIVE OFFICERS Applied Magnetics (Singapore) Pte Ltd. Harold R. Frank Singapore Chairman of the Board Applied Magnetics (Malaysia) Sdn. Bhd. Craig D. Crisman Penang, Malaysia President, Chief Executive Officer and Chief Financial Officer TRANSFER AGENT AND REGISTRAR Raymond P. Le Blanc Vice President, Secretary and General First Interstate Bank of California Counsel Post Office Box 3667, Terminal Annex Los Angeles, California 90051 Peter T. Altavilla Corporate Controller AUDITORS John E. Ross General Manager, Wafer Fabrication Arthur Andersen LLP 633 West Fifth Street Los Angeles, California 90071 COMMON STOCK Symbol: APM Listed: New York Stock Exchange APPLIED MAGNETICS CORPORATION 75 Robin Hill Road Goleta, California 93117 (805) 683-5353 APPLIED MAGNETICS is a registered trademark of Applied Magnetics Corporation in the United States and other countries. EX-21 10 SUBSIDIARIES OF THE REGI FORM 10-K EXHIBIT 21 ========== SUBSIDIARIES OF THE REGISTRANT Applied Magnetics Ireland, Ltd., Inc. Applied Magnetics Korea, Ltd. Applied Magnetics (Singapore) Pte. Ltd. Applied Magnetics (Malaysia) Sdn. Bhd. EX-23 11 CONSENT OF ARTHUR ANDERS. FORM 10-K EXHIBIT 23 ========== CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference 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 and 33-58200). ARTHUR ANDERSEN LLP Los Angeles, California December 27, 1994 EX-27 12 FINANCIAL DATA SCHEDULE
5 1 YEAR SEP-30-1994 SEP-30-1994 20,761 0 18,720 0 31,520 77,880 289,362 (165,046) 220,556 114,323 0 2,216 0 0 96,217 220,556 275,927 275,927 276,790 276,790 47,156 0 4,216 (51,570) 1,100 (52,670) 0 0 0 (52,670) (2.39) (2.39)
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