<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 1, 1995
OR
/ / 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 NUMBER 0-16852
KOMAG, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2914864
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
275 SOUTH HILLVIEW DRIVE, MILPITAS, CALIFORNIA 95035
(Address of Principal Executive Offices, including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 946-2300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. / /
[COVER PAGE 1 OF 2 PAGES]
<PAGE> 2
The aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 24, 1995 was approximately $372,553,000 (based
upon the closing sale price for shares of the Registrant's Common Stock as
reported by the Nasdaq National Market for the last trading date prior to that
date). Shares of Common Stock held by each officer, director and holder of 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On February 24, 1995 approximately 23,012,655 shares of the
Registrant's Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K/A where indicated:
Komag, Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 1995, Part III.
2
<PAGE> 3
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Overview
The Company's business is both capital intensive and volume sensitive,
making capacity planning and efficient capacity use imperative. Physical
capacity, utilization of this physical capacity, yields and average unit sales
price constitute the key determinants of the Company's profitability. Of these
key determinants, price and utilization are the most sensitive to changes in
product demand. If capacity and product price are fixed at a given level and
demand is sufficient to support a higher level of output, then increased output
attained through improved utilization rates and higher manufacturing yields
will translate directly into increased sales and improved gross margins.
Alternatively, if demand for the Company's products decreases, falling average
selling prices and lower capacity utilization could adversely effect the
results of the Company's operations.
Comparisons of 1994, 1993 and 1992 Results of Operations
The Company's consolidated results of operations for 1994 represent
the Company's thin-film media operations exclusively. In contrast, results of
operations for 1993 and 1992 consolidate the operating results of the Company's
thin-film media operations and Dastek, Inc., the Company's thin-film head joint
venture with Asahi Glass America, Inc. ("Asahi America"). In the fourth
quarter of 1993, the Company recorded a $39.0 million restructuring charge
related to the cessation of Dastek's inductive thin-film head operations.
Approximately one-half of the restructuring charge provided for estimates of
losses to be incurred during the 1994 wind down of Dastek's operations. The
remaining charge primarily represented reductions of assets and liabilities to
their estimated net realizable value. Dastek ceased all production activities,
sold all of its assets at various public auctions, concluded settlements with
its creditors, and was dissolved in 1994. Based upon results of these actual
shutdown activities, no significant adjustment was required to the aggregate
restructuring charge recorded in 1993. Actual operating losses incurred in
1994 were approximately one-third higher than estimated in the 1993
restructuring charge. However, net losses from the sale of Dastek's assets and
the settlement of its liabilities were lower by a comparable amount.
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Excluding Dastek's results of operations and the related restructuring
charge, income statements for the Company were as follows in the 1994, 1993 and
1992 periods:
<TABLE>
<CAPTION>
(in thousands) Fiscal Year Ended
---------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 392,391 $ 334,542 $ 279,544
Cost of sales 267,005 225,086 201,315
--------- --------- ---------
Gross profit 125,386 109,456 78,229
Research, development and engineering 21,340 17,867 13,263
Selling, general and administrative 27,101 24,488 17,659
--------- --------- ---------
Operating income 76,945 67,101 47,307
Interest income 3,306 2,674 3,486
Interest expense (2,933) (4,038) (1,815)
Other income, net 48 606 1,851
--------- --------- ---------
Income before taxes, minority
interest and equity in joint
venture income 77,366 66,343 50,829
Provision for income taxes 23,210 24,825 18,375
Minority interest in net income
of consolidated subsidiary 1,091 499 712
Equity in income of
unconsolidated joint venture 5,457 4,860 3,172
--------- --------- ---------
Net income $ 58,522 $ 45,879 $ 34,914
========= ========= =========
</TABLE>
The following discussion compares the 1994, 1993 and 1992 results of
operations, excluding the results of Dastek, as presented above.
1994 vs. 1993
Net Sales
Unit sales of thin-film media increased nearly 40% in 1994 relative to
1993. The effect on thin-film media revenue from this substantial increase in
unit sales volume was reduced by a 16% decrease in the overall average unit
selling price between the years. Declining prices are characteristic of the hard
disk drive industry and maintenance of the overall average selling price
generally occurs only as the result of product mix shifts to higher-priced, more
technologically advanced products. In 1994, the Company began a transition to
more advanced 1800 Oe product offerings. The transition to this high performance
disk was more challenging and required more time than previous product
transitions. Shipments for qualification of these products began in the third
quarter of 1994 and the Company exited the year with unit sales of these
higher-priced, higher-density products accounting for approximately 14% of unit
sales volume. As a result of the more lengthy product transition time, the
effects of traditionally declining prices for individual product offerings
reduced the overall average selling price between the years. In addition to the
slow transition to 1800 Oe disks, a portion of the decrease in the overall
average selling price was attributable to sales price reductions made in the
first quarter of 1994 in conjunction with the Company's long-term strategy to
increase market share. Industry demand for high performance 1800 Oe disks
currently exceeds industry supply. The Company plans to aggressively ramp its
production of this product class in 1995 at both its U.S. and Malaysian
facilities, exiting the year with over 80% of unit shipments in this product
class. Successful execution of this product transition should mitigate the
decline in the overall average selling price in 1995.
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Distribution sales of product manufactured by Asahi Komag Co., Ltd.
("AKCL"), the Company's Japanese thin-film media joint venture with Asahi Glass
Co., Ltd., decreased to $9.4 million in 1994 from $17.1 million in 1993. The
Company purchased smaller quantities of product from AKCL in 1994 as demand
within the Japanese thin-film media market absorbed more of AKCL's capacity. The
Company anticipates that distribution sales of AKCL product in 1995 will be
minimal.
The increase in unit production volume required to support the increase
in unit sales volume for 1994 relative to 1993 was primarily achieved through a
combination of increased capacity and improved production yields and utilization
rates. Approximately 80% of the increase in unit production volume in 1994
relative to 1993 was provided through increases in effective production
capacity. Improvements in yields and utilization rates accounted for the
remaining increase in unit production volume. Historically, the Company has
increased effective production capacity through the addition of new production
lines and implementation of process improvement programs designed to improve
unit output of existing production lines. Successful process improvement
programs provide capacity increases at a significantly lower cost than the
addition of physical capacity. Shortened sputtering cycle times and other
process improvements provided approximately 40% of the 80% increase in effective
production capacity in 1994 relative to 1993. The addition of the Company's
eleventh, twelfth and thirteenth sputtering lines in October 1993, January 1994
and August 1994, respectively, provided the remainder of the increase in
production capacity between the years.
During the fourth quarter of 1994, the Company began a series of
process improvements designed to support production of future advanced disk
products. These improvements should enhance product performance and should
enable increased unit output through reduced process cycle times. As part of
this program the Company removed one of its thirteen sputtering machines from
production in early November in order to retrofit the machine. Lost unit output
from the removal of this line, coupled with increased unit output from reduced
sputtering cycle times on certain of the Company's existing lines and the full
use of a new sputtering line installed in the third quarter of 1994, resulted in
a small sequential decrease in unit output in the fourth quarter relative to the
third quarter of 1994.
In 1995 the Company expects to commence production on its fourteenth
and fifteenth production sputtering lines during the first and third quarters,
respectively. The Company plans to begin production on the first retrofitted
machine in the first quarter of 1995 but will sequentially convert three
additional sputtering lines during the year. As such, the return to production
of the retrofitted sputtering line will not increase the number of machines
available for production in 1995 relative to the fourth quarter of 1994.
Continued focus on process improvement programs, including further reductions in
sputtering cycle times, is expected to increase unit output beyond the
incremental output gains from the two new production lines.
Gross Margin
The thin-film media gross margin percentage decreased to 32.0% for 1994
from 32.7% for 1993. Excluding distribution sales of product manufactured by
AKCL for resale to the Company's customers, the gross margin percentage
decreased to 32.7% from 34.1% between the years. The substantial decrease in the
overall average selling price outpaced solid improvements in the average unit
production cost and resulted in the lower gross margin percentage for 1994.
Manufacturing efficiencies, such as reduced cycle times and yield and
utilization improvements, were the primary drivers in reducing the average unit
production cost.
The Company exited 1994 with net sales of $98.7 million, a 31.4% gross
margin and net income of $14.1 million in the fourth quarter. The Company
expects a slightly lower gross margin percentage on increased sales in the first
quarter of 1995 compared to the fourth quarter of 1994. A higher overall average
selling price is expected in the first quarter of 1995 due to a higher mix of
1800 Oe product. Unit
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output is also expected to increase in the first quarter of 1995 relative to the
fourth quarter of 1994. However, start-up costs to accelerate production of 1800
Oe products at the Company's Malaysian manufacturing facility during the first
quarter will most likely lead to a higher average unit cost of production.
Similar start-up costs were incurred during the fourth quarter of 1994 at the
Company's U.S. facilities. In addition, equipment transition issues will
continue to constrain U.S. production of 1800 Oe products for a portion of the
first quarter of 1995, thus increasing the cost of production. As a result of
the anticipated lower gross margin in the first quarter of 1995, the Company's
earnings may be relatively flat compared to the fourth quarter of 1994. The
Company anticipates that margin expansion and sequential earnings growth could
begin as early as the second quarter of 1995 with further acceleration during
the second half of 1995. Increased sales and earnings in 1995 will depend on
general industry conditions and the Company's ability to reduce cycle times,
successfully implement a series of equipment transitions, and cost-effectively
attain high volume production of 1800 Oe thin-film media.
Operating Expenses
Research, development and engineering ("R&D") expenses increased $3.5
million in 1994 compared to 1993. The increase between the years was mainly due
to development costs for advanced thin-film media, including costs associated
with the Company's thin-film media pilot production line. Selling, general and
administrative ("SG&A") expenses increased $2.6 million in 1994 relative to
1993. SG&A expenses (excluding provisions for bad debt allowances, a
nonrecurring charge incurred in 1993 to terminate a patent dispute and the
Company's bonus and profit sharing programs) increased approximately $0.2
million. The increase was the net result of higher administrative costs to
support the growth in the business and a reduction of approximately $0.8 million
in legal and consulting costs in 1994 relative to 1993. Higher legal and
consulting costs were incurred in 1993 as a result of the patent dispute and
formation of the Company's Malaysian manufacturing facility. Provisions for bad
debt allowances decreased $0.1 million in 1994 compared to 1993. Provisions for
the Company's bonus and profit sharing programs increased $3.3 million between
the years due primarily to the higher operating profitability for the Company's
thin-film media operations.
Interest Income/Expense and Other Income
Interest income increased $0.6 million in 1994 relative to 1993. The
increase was due to the combination of higher interest rates and higher average
investment balances in 1994. Interest expense decreased $1.1 million. In 1993,
the Company reversed previously capitalized interest related to the construction
of its thin-film media manufacturing facility in Malaysia, thus increasing 1993
interest expense. Excluding this reversal, interest expense decreased $0.2
million primarily due to a lower average outstanding debt balance for 1994.
Approximately $0.3 million of the decrease related to lower charges for the
Company's interest rate swap agreement. Other income,net decreased $0.6 million
in 1994 mainly due to higher losses on disposal of equipment in 1994 relative to
1993.
Income Taxes
The effective income tax rate for 1994 of 30% was lower than the 1994
combined federal and state statutory rate of 41% and the effective income tax
rate of 37% in 1993 primarily as a result of a tax holiday granted to the
Company's wholly-owned thin-film media operation in Malaysia. Komag USA
(Malaysia) Sdn. ("KMS") has been granted a five-year tax holiday by the
Malaysian government. The impact of the tax holiday was to increase net income
by approximately $6,400,000 ($0.28 per share) in 1994. Losses incurred prior to
the commencement of the tax holiday, approximately $6,237,000, are available for
carryforward to years following the expiration of the tax holiday. The Company
has generated $15,000,000 of pretax earnings for which no U.S. tax has been
provided. No U.S. tax has been provided on these earnings as the Company has no
plans to repatriate these funds to the U.S. The
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<PAGE> 7
Company anticipates that the effective income tax rate for 1995 will decrease as
KMS installs additional capacity and generates a larger percentage of the
Company's consolidated profit than in 1994.
As of January 1, 1995 a 60% owned subsidiary of the Company, Dastek Holding
Company, had a federal tax net operating loss carryforward of approximately
$96 million. The Company has fully reserved for the potential future federal
tax benefit of this net operating loss in the deferred tax asset valuation
allowance due to the fact that its utilization is limited to the subsidiary's
separately computed future taxable income and that the subsidiary has no
history of operating profits.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated
Joint
Venture
The minority interest in the net income of consolidated subsidiary
represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") 45% share of Komag
Material Technology, Inc.'s ("KMT's") net income. KMT recorded net income of
$2.4 million and $1.1 million in 1994 and 1993, respectively.
The equity in net income of unconsolidated joint venture reflected the
Company's 50% interest in AKCL's net income. AKCL reported net sales and net
income of $131.3 million and $11.0 million for 1994, up from $119.4 million and
$9.8 million for 1993. AKCL's functional currency is the Japanese yen. The
Company translates AKCL's yen-based income statements to U.S. dollars at the
average exchange rate in effect for each quarterly period. The Japanese yen
strengthened approximately 8% in 1994 relative to 1993. AKCL's net sales and net
income would have been approximately $120.4 million and $10.0 million,
respectively, in 1994 had the yen-based income statement been translated at the
average rate in effect for 1993.
AKCL invested in Headway Technologies, Inc. ("Headway") in the third
quarter of 1994 and recorded a partial writedown ($0.5 million, net of tax) of
its investment in Headway in the fourth quarter of 1994. Headway is a
development stage company and AKCL will continue such writedowns until Headway
emerges from the development stage. These partial writedowns are a function of
losses incurred at Headway. Fifty percent of this writedown is included in the
Company's equity in net income of unconsolidated subsidiary on the Consolidated
Statement of Operations for 1994.
Other
The Company operates facilities in the U.S. and Malaysia and sells
products in a variety of international locations. In order to minimize the risks
associated with foreign currency fluctuations, the Company denominates its sales
in U.S. dollars and periodically enters into foreign exchange contracts to hedge
firm purchase commitments. No such foreign exchange contracts were open as of
January 1, 1995. Gains and losses created by the remeasurement of the financial
statements of the Company's Malaysian operations into U.S. dollars from
Malaysian ringgits have not had a significant effect on the consolidated results
of operations.
The January 1995 earthquake in Kobe, Japan, has had little, if any,
effect on the Company's operations. AKCL's facilities, located approximately 370
miles northeast of the city of Kobe, were unaffected by the earthquake. Kobe
Steel Co., Ltd's manufacturing facility for aluminum substrate blanks, located
approximately 300 miles northeast of the city of Kobe, did not sustain any
quake-related damage. Other Japanese vendors in the general Kobe-Osaka area
remain in operation and are using alternative shipping methods to deliver their
products.
In 1994 the Company adopted Financial Accounting Standard No. 115
"Accounting for certain Investments in Debt and Equity Securities". The adoption
of FAS 115 did not have a material impact on the Company's financial position or
results of operations. Beginning January 2, 1995, the Company will be required
to adopt Statement of Financial Accounts Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." The
Company does not expect the adoption of SFAS No. 121 to have a material impact
on the Company's financial position or results of operations.
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<PAGE> 8
1993 vs. 1992
Net Sales
The 20% increase in thin-film media revenue for 1993 relative to 1992
was primarily due to a 21% increase in unit sales volume in 1993. The overall
average unit selling price for media decreased only slightly between the years.
In 1993, sales mix shifts into higher-density product offerings largely offset
the effect of traditionally declining prices. Distribution sales of product
manufactured by AKCL decreased to $17.1 million in 1993 from $36.4 million in
1992. Increases in sales of the Company's internally produced media more than
offset the revenue decrease resulting from the lower distribution sales.
Thin-film media unit production volume increased significantly in 1993
relative to 1992 and accounted for the majority of the increase in media unit
sales between the years. Capacity utilization and manufacturing yields were
relatively unchanged between the comparable years. The Company added its ninth
production sputtering line in April 1992 and a pilot production sputtering line
in December 1992. The availability of these lines for all of 1993 and the July
1993 addition of the Company's first sputtering line in Penang, Malaysia,
provided most of the increase in unit production output in 1993.
Gross Margin
The media gross margin percentage increased to 32.7% in 1993 from 28.0%
in 1992. Excluding distribution sales of product manufactured by AKCL for resale
to the Company's customers, the gross margin percentage increased to 34.1% from
30.4% between the years. Process improvements resulting in higher media
production efficiency accounted for most of this increase. Additionally, the
Company's Malaysian thin-film media manufacturing facility, which incurred a
negative gross margin for 1992 related to the operation's start-up, generated an
improved but slightly negative gross margin for fiscal year 1993.
Operating Expenses
Research, development and engineering expenses increased $4.7 million
(35%) in 1993 relative to 1992. The addition of the Company's thin-film media
pilot production line in December 1992 and focus on the development of advanced
thin-film media accounted for the majority of the increase. Selling, general and
administrative expenses increased $6.8 million in 1993 relative to 1992.
Provisions for the Company's bonus and profit sharing programs in 1993 increased
$3.0 million due to stronger results in the thin-film media operations while
provisions for doubtful accounts were $0.9 million higher in 1993 than in 1992.
Excluding these charges, selling, general and administrative expenses increased
$2.9 million. Of this amount approximately one-third of the increase related to
costs incurred in 1993 to terminate a patent dispute. Higher administrative
costs associated with the growth of the business, including the administration
costs for the Company's new Malaysian facility, accounted for the remainder of
the increase.
Interest Income/Expense and Other Income
Interest income decreased $0.8 million in 1993 relative to 1992 due to
lower interest rates and a shift toward lower-yielding tax-exempt investments.
The average investment balance was relatively unchanged between the years.
Interest expense increased $2.2 million in 1993 relative to 1992 primarily due
to higher average outstanding debt balances and a reversal of previously
capitalized interest related to the Company's media manufacturing facility in
Malaysia. Other income in 1993 decreased $1.2 million from 1992. The decrease
was primarily due to the cessation of technology royalties from AKCL which ended
in the fourth quarter of 1992 upon reaching the contractual limit.
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Income Taxes
The Company's tax provision for 1993 of 37.4% was slightly higher than
the 36.1% recorded for 1992. The higher effective tax rate primarily reflected
an increase in the federal statutory rate in effect for 1993.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture
The minority interest in net income of consolidated subsidiary for 1993
represented Kobe USA's 45% share of KMT's net income for 1993. KMT recorded net
income of $1.1 million and $1.6 million in 1993 and 1992, respectively. The
Company's 50% share of AKCL's net income was recorded as equity in net income of
unconsolidated joint venture. AKCL reported sales and net income of $119.4
million and $9.8 million for 1993, up from $91.7 million and $6.4 million for
1992. The lower profitability in 1992 was due to AKCL operating below capacity
through the first half of the year.
The yen strengthened approximately 10% in 1993 relative to 1992. AKCL's
net sales and net income for 1993 would have been approximately $105.6 million
and $8.8 million, respectively, had the yen-based income statement been
translated at the average rate in effect for 1992.
Comparison of Dastek's 1993 and 1992 Results of Operations
Thin-film head revenue increased to $50.9 million in 1993 from $47.3
million in 1992. The increase in revenue in 1993 was primarily due to the
addition of headstack assembly production which began in late 1992. There was
also a slight increase in 1993 in the overall average selling price from a
combination of a unit sales mix shift to newer-generation microslider products
and favorable end-of-life pricing for minislider products. The negative gross
margin from thin-film head operations increased significantly relative to 1992
due to lower manufacturing product yields on newer-generation microsliders and
sharply lower unit sales volumes in the last half of 1993. Favorable market
conditions in the disk drive industry ended abruptly in mid 1993 and supply of
recording heads surpassed demand. As a result, the Company experienced a sharp
decrease in demand and intense pricing pressure from head manufacturers with
lower priced, older technology products. Additionally, delays in customer
qualification of new smaller-sized nanoslider thin-film heads in the fourth
quarter of 1993 negatively affected operating results. These significant market
changes and the resulting significant continuing operating losses resulted in
Dastek's decision in late 1993 to exit the inductive thin-film head business.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and short-term investments of $93.9 million at the
end of 1994 increased slightly from $91.6 million at the end of 1993.
Consolidated operating activities generated $97.2 million in cash in 1994. The
winding down of Dastek's operations consumed $13.3 million in operating cash
flow during the year. Excluding Dastek's cash outflows, the Company generated
$110.5 million from its media operations and more than funded its $102.4 million
of capital spending for 1994. Sales of Common Stock under the Company's stock
option and stock purchase programs during this period generated $12.0 million,
while net repayments of short-term notes and long-term obligations used $17.5
million. Proceeds from the disposal of property, plant and equipment, primarily
related to dispositions of assets at Dastek, generated $12.1 million.
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Total capital expenditures for 1995 are currently planned at
approximately $150 million. Construction of a 230,000 square-foot manufacturing
plant on a 55 acre site in the Malaysian state of Sarawak, process improvement
programs in the U.S. and Malaysia, installation of two additional sputtering
lines and payments on an additional sputtering line (expected to be installed in
Malaysia in 1996) are the major components of the capital plan. Non-cancellable
commitments at January 1, 1995 total approximately $54.2 million.
The Company believes that existing cash balances and credit facilities,
coupled with anticipated cash flow from operations, will fund its 1995 capital
spending plans and allow maintenance of adequate cash balances. The Company has
$80.0 million available under various revolving credit agreements including a
three-year term $35.0 million facility and two one-year term lines aggregating
$45.0 million. The Company will continue to review its cash requirements and
evaluate its need for additional financing.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
KOMAG, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 12
Consolidated Statements of Operations
1994, 1993 and 1992 13
Consolidated Balance Sheets, 1994 and 1993 14-15
Consolidated Statements of Cash Flows
1994, 1993 and 1992 16-17
Consolidated Statements of Stockholders' Equity,
1994, 1993 and 1992 18
Notes to Consolidated Financial Statements 19-30
</TABLE>
11
<PAGE> 12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Komag, Incorporated
We have audited the accompanying consolidated balance sheets of Komag,
Incorporated as of January 1, 1995 and January 2, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended January 1, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Asahi Komag Co., Ltd. (a corporation in which the Company has a
50% interest) as of January 1, 1995 and January 2, 1994, and for each of the
three years in the period ended January 1, 1995. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Asahi Komag Co., Ltd. as of
January 1, 1995 and January 2, 1994, and for each of the three years in the
period ended January 1, 1995, is based solely on the report of the other
auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Komag, Incorporated at January 1, 1995
and January 2, 1994, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended January 1, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 31, 1995
12
<PAGE> 13
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net sales (see Note 11) $ 392,391 $ 385,375 $ 326,801
Cost of sales (see Notes 10 and 11) 267,005 293,936 259,036
--------- --------- ---------
Gross profit 125,386 91,439 67,765
Operating expenses:
Research, development and engineering 21,340 29,641 26,366
Selling, general and administrative 27,101 28,165 21,967
Restructuring charge -- 38,956 --
--------- --------- ---------
48,441 96,762 48,333
--------- --------- ---------
Operating income (loss) 76,945 (5,323) 19,432
Other income (expense):
Interest income 3,306 2,915 4,617
Interest expense (2,933) (5,510) (2,929)
Other, net 48 605 1,518
--------- --------- ---------
421 (1,990) 3,206
Income (loss) before income taxes, minority --------- --------- ---------
interests and equity in joint venture income 77,366 (7,313) 22,638
Provision for income taxes 23,210 26,425 18,375
Income (loss) before minority interests and equity --------- --------- ---------
in joint venture income 54,156 (33,738) 4,263
Minority interests in net income (loss) of
consolidated subsidiaries 1,091 (18,977) (9,458)
Equity in net income of unconsolidated joint venture 5,457 4,860 3,172
--------- --------- ---------
Net income (loss) $ 58,522 $ (9,901) $ 16,893
--------- --------- ---------
Net income (loss) per share $ 2.54 $ (0.46) $ 0.79
--------- --------- ---------
Number of shares used in per share computation 22,997 21,372 21,412
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
13
<PAGE> 14
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year End
-------------------------
1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 47,329 $ 27,159
Short-term investments 46,619 64,400
Accounts receivable, less allowances of $2,223 in 1994
and $3,557 in 1993 44,778 43,007
Inventories:
Raw materials 15,030 15,542
Work-in-process 5,652 6,740
Finished goods 3,419 8,800
--------- ---------
Total inventories 24,101 31,082
Prepaid expenses and deposits 1,611 2,562
Deferred income taxes 7,069 10,063
--------- ---------
Total current assets 171,507 178,273
Investment in Unconsolidated Joint Venture 22,653 14,706
Property, Plant and Equipment
Land 4,360 6,197
Building 33,322 17,753
Leasehold improvements 45,633 49,124
Furniture 4,711 5,274
Equipment 294,626 297,535
--------- ---------
382,652 375,883
Less allowances for depreciation and amortization (153,769) (188,616)
--------- ---------
Net property, plant and equipment 228,883 187,267
Deposits and Other Assets 1,052 2,051
--------- ---------
$ 424,095 $ 382,297
--------- ---------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Fiscal Year End
----------------------
1994 1993
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term note payable to banks $ -- $ 3,000
Trade accounts payable 17,842 22,765
Accounts payable to related parties 2,354 3,426
Accrued compensation and benefits 17,913 16,569
Other liabilities 1,665 2,754
Income taxes payable 271 2,102
Restructuring liability -- 15,887
Current portion of long-term debt 13,232 14,505
-------- --------
Total current liabilities 53,277 81,008
Long-term Debt, Less Current Portion 16,250 28,541
Long-term Debt to Related Party -- 941
Deferred Income Taxes 18,725 13,010
Other Long-term Liabilities 548 555
Minority Interest in Consolidated Subsidiary 4,080 2,911
Commitments
Stockholders' Equity
Preferred Stock, $.01 par value per share:
Authorized--1,000 shares in 1994
and 1993
No shares issued and outstanding -- --
Common Stock, $.01 par value per share:
Authorized--35,000 shares in 1994
and 1993
Issued and outstanding--22,901 shares
in 1994 and 21,766 shares in 1993 229 218
Additional paid-in capital 238,262 223,385
Retained earnings 86,790 28,268
Accumulated translation adjustment 5,934 3,460
-------- --------
Total stockholders' equity 331,215 255,331
-------- --------
$424,095 $382,297
-------- --------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 16
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities--
see detail on following page $ 97,237 $ 40,752 $ 46,102
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (102,435) (86,249) (108,909)
Purchases of short-term investments (72,737) (80,900) (71,643)
Proceeds from short-term investments 90,518 50,700 99,852
Proceeds from disposal of equipment 12,072 416 74
Deposits and other assets 983 (72) (94)
--------- --------- ---------
Net cash used in investing activities (71,599) (116,105) (80,720)
FINANCING ACTIVITIES
Increase in notes payable 1,500 19,000 --
Payments of notes payable (4,500) -- --
Increase in long-term obligations -- 20,000 20,000
Payments of long-term obligations (14,505) (9,488) (10,651)
Sale of Common Stock, net of issuance costs 12,037 6,826 4,257
Minority interest investments in consolidated subsidiaries -- 11,031 47,550
--------- --------- ---------
Net cash provided by (used in) financing activities (5,468) 47,369 61,156
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 20,170 (27,984) 26,538
Cash and cash equivalents at beginning of year 27,159 55,143 28,605
--------- --------- ---------
Cash and cash equivalents at end of year $ 47,329 $ 27,159 $ 55,143
--------- --------- ---------
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ 58,522 $ (9,901) $ 16,893
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 47,591 49,025 36,431
Provision for losses on accounts receivable (195) (191) (203)
Undistributed earnings of unconsolidated joint venture (5,457) (4,860) (3,172)
Loss on disposal of equipment 1,156 757 1,381
Restructuring charge -- 38,956 --
Deferred income taxes 8,709 2,030 575
Deferred rent (7) (43) (181)
Minority interests in net income (loss) of
consolidated subsidiaries 1,091 (18,977) (9,458)
Changes in operating assets and liabilities:
Accounts receivable (1,576) (7,459) (4,409)
Inventories 6,981 (10,885) 1,794
Prepaid expenses and deposits 1,419 (4) (583)
Trade accounts payable (4,923) 2,404 (172)
Accounts payable to related parties (1,072) (3,828) 2,597
Accrued compensation and benefits 1,344 1,959 3,116
Other liabilities (1,089) 1,817 (2,032)
Income taxes payable 630 (48) 3,525
Restructuring liability (15,887) -- --
-------- -------- --------
Net cash provided by operating activities $ 97,237 $ 40,752 $ 46,102
-------- -------- --------
Supplemental disclosure of cash flow information
Cash paid for interest $ 2,892 $ 3,865 $ 3,880
Cash paid for income taxes 12,937 24,310 14,053
Income tax benefit from stock
options exercised 2,851 1,703 1,300
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 18
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
----------------- Paid-in Notes Retained Translation
Shares Amount Capital Receivable Earnings Adjustment
------ ------ ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 29, 1991 20,498 $205 $179,111 $ -- $21,276 $1,485
Contribution for minority interest
in consolidated subsidiary 39,344 (22,581)
Collection of note receivable (4,620) 11,550
Common Stock returned from escrow
in merger with Dastek (225) (2) 2
Common Stock issued under stock
option and purchase plans, including
related tax benefits 751 7 5,550
Common Stock issued upon exercise
of stock warrants 57 1 (1)
Net income 16,893
Accumulated translation adjustment 518
------ --- -------- -------- ------- ------
BALANCE AT JANUARY 3, 1993 21,081 211 219,386 (11,031) 38,169 2,003
Collection of note receivable (4,412) 11,031
Common Stock issued under stock
option and purchase plans, including
related tax benefits 685 7 8,411
Net loss (9,901)
Accumulated translation adjustment 1,457
------ --- -------- -------- ------- ------
BALANCE AT JANUARY 2, 1994 21,766 218 223,385 -- 28,268 3,460
Common Stock issued under stock
option and purchase plans, including
related tax benefits 1,134 11 14,876
Common Stock issued upon exercise
of stock warrants 1 1
Net income 58,522
Accumulated translation adjustment 2,474
------ --- -------- -------- ------- ------
BALANCE AT JANUARY 1, 1995 22,901 $229 $238,262 $ -- $86,790 $5,934
------ --- -------- -------- ------- ------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company, its wholly-owned and majority-owned subsidiaries (see
Notes 9 and 10) and equity in its unconsolidated joint venture (see Note 11).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation: The functional currency of the Company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements are included as a separate
component of stockholders' equity and not included in net income. The functional
currency for the Company's Malaysian operation is the U.S. dollar. Remeasurement
gains and losses, resulting from the process of remeasuring these foreign
currency financial statements into U.S. dollars, are included in operations.
Foreign Exchange Gains and Losses: The Company enters into foreign currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process. Gains and
losses related to these contracts are included in the cost of the assets
acquired. The Company had no foreign exchange contracts outstanding at
January 1, 1995 or January 2, 1994. The Company had approximately $9 million of
unhedged Japanese yen based firm purchase commitments at January 1, 1995 and
January 2, 1994.
Cash Equivalents: The Company considers as a cash equivalent any highly liquid
investment that matures within three months of its purchase date.
Short-Term Investments: The Company invests its excess cash in high-quality,
short-term debt instruments. Short-term investments consist primarily of
AAA-rated, municipal auction rate preferred stock with maturities greater than
90 days; however, none of the Company's debt security investments have
maturities greater than one year.
In 1994 the Company adopted Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
Under FAS 115, the Company determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At January 1, 1995 all short-term investments are designated
as available for sale. Interest and dividends on the investments are included in
interest income. The adoption of FAS 115 did not have a material impact on the
Company's financial position or results of operations.
The following is a summary of the Company's investments by major security type
at amortized cost, which approximates fair value:
<TABLE>
<CAPTION>
January 1, 1995
---------------
(in thousands)
<S> <C>
State and local government securities $70,765
Corporate debt securities 2,417
Mortgage-backed securities 10,677
-------
$83,859
-------
Amounts included in cash and cash equivalents $37,240
Amounts included in short-term investments 46,619
-------
$83,859
-------
</TABLE>
There were no realized gains or losses on the Company's investments during 1994
as all investments were held to maturity during the year.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment: Property, plant and equipment, except
construction-in-process, are stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. The estimated useful life of the Company's
building is 30 years. Furniture and equipment are generally depreciated over
5 years and leasehold improvements are amortized over the shorter of the lease
term or the useful life.
Revenue Recognition: The Company records sales upon shipment and provides an
allowance for estimated returns of defective products.
Research and Development: Research and development costs are expensed as
incurred.
19
<PAGE> 20
Income Taxes: The provision for income taxes is based on pretax financial
accounting income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax and book
basis of assets and liabilities.
Income (Loss) Per Share: Income per share has been computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon the assumed exercise of options reflected under the treasury stock method.
Loss per share has been computed using the weighted average number of shares of
Common Stock outstanding during the period.
Reclassification: Certain reclassifications have been made to the 1993
Consolidated Balance Sheet, Statement of Cash Flows, and related notes to
conform to the current year presentation.
Fiscal Year: The Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The years ended January 1, 1995 and January 2, 1994 were
each comprised of 52 weeks and the year ended January 3, 1993 was comprised of
53 weeks.
NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment which is the development,
production and marketing of high-performance thin-film media for use in
Winchester disk drives. The Company sells to original equipment manufacturers in
the rigid disk drive market and computer system manufacturers that produce their
own disk drives. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
Significant customers accounted for the following percentages of net sales in
1994, 1993 and 1992:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Seagate Technology, Inc. 40% 24% 17%
Quantum Corporation 23% 15% 14%
Hewlett-Packard Company 21% 21% less than 10%
Western Digital Corporation 12% less than 10% 12%
Conner Peripherals, Inc. less than 10% 11% 22%
Micropolis Corporation less than 10% less than 10% 13%
</TABLE>
Quantum Corporation ("Quantum") acquired the disk drive operations of Digital
Equipment Corporation ("DEC") in late 1994. The percentages presented above
represent the combined sales of product to Quantum and DEC for the years
presented.
20
<PAGE> 21
Summary information for the Company's operations by geographic location is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Net Sales
To customers from U.S. operations $ 315,540 $ 369,683 $ 326,801
To customers from Far East operations 76,851 15,692 --
Intercompany from Far East operations 16,881 25,806 3,632
--------- --------- ---------
409,272 411,181 330,433
Eliminations (16,881) (25,806) (3,632)
--------- --------- ---------
Total net sales $ 392,391 $ 385,375 $ 326,801
--------- --------- ---------
Operating income (loss)
U.S operations $ 48,265 $ 7,460 $ 25,917
Far East operations 25,080 (13,458) (6,485)
--------- --------- ---------
73,345 (5,998) 19,432
Eliminations 3,600 675 --
--------- --------- ---------
Total operating income (loss) $ 76,945 $ (5,323) $ 19,432
--------- --------- ---------
Identifiable assets
U.S. operations $ 387,907 $ 342,192 $ 329,169
Far East operations 124,048 89,354 52,111
--------- --------- ---------
511,955 431,546 381,280
Eliminations (87,860) (49,249) (25,431)
--------- --------- ---------
Total identifiable assets $ 424,095 $ 382,297 $ 355,849
--------- --------- ---------
</TABLE>
Export sales by domestic operations included the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Far East (see Note 13) $199,798 $197,406 $184,490
Europe 1,258 42,570 28,427
</TABLE>
NOTE 3. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
Under the Company's stock option plan ("Plan"), options to purchase up to
6,320,000 shares of Common Stock may be granted to key employees and directors.
The Plan provides for issuing both incentive stock options, which must be
granted at fair market value at the date of grant, and non-qualified stock
options, which may be granted at not less than 85% of fair market value at the
date of grant. Outstanding options generally vest over four years and expire no
later than ten years from the date of grant. Options may be exercised in
exchange for cash or outstanding shares of the Company's Common Stock.
Approximately 5,000 shares of the Company's Common Stock were received in
exchange for option exercises in 1994. No such exchanges occurred in 1993 or
1992. At January 1, 1995
21
<PAGE> 22
approximately 880,000 options were available for grant and 3,172,000 shares of
Common Stock were reserved for future issuance under these Plans. At January 1,
1995 and January 2, 1994 approximately 641,000 and 959,000, respectively, of the
outstanding options were exercisable.
Under an option plan for employees of Dastek, Inc. ("Dastek"), a former joint
venture of the Company (see Note 9), options to purchase 1,000,000 shares of the
Company's Common Stock were authorized and reserved for issuance. At January 1,
1995, 230,000 options had been exercised and 50,000 options were exercisable
under the Dastek plan. No additional options will be granted under the Dastek
plan due to the cessation of Dastek's operations.
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
Shares Exercise Price Total
------ -------------- -----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Outstanding at December 29, 1991 2,362 $ 0.97 - $21.75 $ 20,417
Granted 1,203 12.75 - 21.50 19,596
Exercised (578) 0.97 - 14.75 (2,261)
Cancelled (152) 0.97 - 18.63 (1,982)
----- --------------- --------
Outstanding at January 3, 1993 2,835 0.97 - 21.75 35,770
Granted 942 15.50 - 24.00 18,701
Exercised (421) 0.97 - 18.50 (3,787)
Cancelled (165) 0.97 - 21.75 (2,490)
----- --------------- --------
Outstanding at January 2, 1994 3,191 0.97 - 24.00 48,194
Granted 691 15.75 - 26.75 12,551
Exercised (905) 0.97 - 24.00 (9,850)
Cancelled (627) 4.34 - 24.00 (10,728)
----- --------------- --------
Outstanding at January 1, 1995 2,350 $ 5.79 - $26.75 $ 40,167
----- --------------- --------
</TABLE>
Under the terms of the Employee Stock Purchase Plan, employees may elect to
contribute up to 10% of their compensation toward the purchase of shares of the
Company's Common Stock. The purchase price per share will be the lesser of 85%
of the fair market value of the stock on the first day of enrollment in a
twenty-four month offering period or the last day of each semi-annual period
within the twenty-four month offering period. The total number of shares of
stock that may be issued under the Plan can not exceed 1,400,000 shares. Shares
issued under this plan approximated 234,000, 264,000 and 173,000 in 1994, 1993
and 1992, respectively. At January 1, 1995 approximately 414,000 shares of
Common Stock were reserved for future issuance under this Plan.
NOTE 4. BONUS AND PROFIT SHARING PLANS
The Company and its subsidiaries maintain various cash profit sharing plans.
Under the terms of the cash profit sharing plans, a percentage of semi-annual
operating profit, as defined in the plans, is allocated among all employees who
meet certain criteria. Under the terms of the Company's bonus plans, various
percentages of an operating unit's annual operating profit, as defined in the
respective bonus plans, is paid
22
<PAGE> 23
to eligible employees. The Company expensed $9,083,000, $8,084,000 and
$5,968,000 under these bonus and profit sharing plans in 1994, 1993 and 1992,
respectively.
The Company and its subsidiaries maintain savings and deferred profit sharing
plans. Employees who meet certain criteria are eligible to participate. In
addition to voluntary employee contributions to these plans, the Company
contributes four percent of semi-annual consolidated operating profit, as
defined in the plans. These contributions are allocated to all eligible
employees. Furthermore, the Company matches a portion of the employee's
contributions to the plans up to a maximum amount. The Company contributed
$4,081,000, $2,207,000 and $1,540,000 to the plans in 1994, 1993 and 1992,
respectively.
Expenses for the Company's bonus and profit sharing plans are included in
selling, general and administrative expense.
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
1994 1993 1992
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $13,482 $ 22,863 $ 15,734
Deferred 4,437 (4,515) 915
------- -------- --------
17,919 18,348 16,649
State:
Current 264 1,339 1,887
Deferred 4,272 6,580 (340)
------- -------- --------
4,536 7,919 1,547
Foreign:
Current 755 158 179
------- -------- --------
$23,210 $ 26,425 $ 18,375
------- -------- --------
</TABLE>
The foreign provision above consists entirely of withholding taxes on royalty
payments and foreign taxes of subsidiaries.
23
<PAGE> 24
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year End
-------------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Depreciation $ (8,384) $(8,437)
State income taxes (5,016) (4,573)
Deferred revenue (1,623) --
Other deferred income (3,702) --
-------- --------
Gross deferred tax liabilities (18,725) (13,010)
Inventory valuation adjustments 1,675 1,245
Accrued compensation and benefits 2,466 2,207
State Income Taxes 1,636 4,512
Other 1,292 2,099
Tax benefit of net operating losses 33,600 26,292
-------- --------
Gross deferred tax assets 40,669 36,355
Deferred tax asset valuation allowance (33,600) (26,292)
-------- -------
$(11,656) $(2,947)
-------- -------
</TABLE>
As of January 1, 1995 a 60% owned subsidiary of the Company, Dastek Holding
Company, had a federal tax net operating loss carryforward of approximately $96
million. The Company has fully reserved for the potential future federal tax
benefit of this net operating loss in the deferred tax asset valuation
allowance due to the fact that its utilization is limited to the subsidiary's
separately computed future taxable income and that the subsidiary has no
history of operating profits. The deferred tax asset valuation allowance
increased $7,308,000, $11,719,000 and $7,112,000 in fiscal years 1994, 1993 and
1992, respectively. The $96,000,000 net loss expires at various dates through
2010.
A reconciliation of the income tax provision at the federal statutory rate (35%
for 1994 and 1993; 34% for 1992) to the income tax provision at the effective
rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Income taxes computed at federal statutory rate $27,078 $(2,560) $7,697
State and foreign income taxes, net of federal tax
benefit 2,961 5,290 1,021
Tax-exempt interest income (827) (723) (762)
Permanently reinvested foreign earnings (6,473) -- --
Domestic losses unavailable for offset in
consolidated return or carryback -- 21,141 7,326
Certain foreign losses not currently utilized -- 5,429 2,184
Write-off of investments in subsidiaries -- (2,295) --
Other 471 143 909
------- ------- -------
$23,210 $26,425 $18,375
------- ------- -------
</TABLE>
24
<PAGE> 25
Foreign pretax income (loss) was $23,882,000, ($15,511,000) and ($6,424,000) in
1994, 1993 and 1992, respectively.
The Company's share of undistributed earnings of the Company's unconsolidated
joint venture (see Note 11 to Consolidated Financial Statements), for which the
Company has provided no U.S. income taxes, aggregate $16,600,000 net of Japanese
income taxes at January 1, 1995. These earnings are considered to be permanently
invested in the joint venture.
Komag USA (Malaysia) Sdn., the Company's wholly-owned thin-film media operation
in Malaysia, has been granted a tax holiday for a period of five years
commencing in July 1993. The impact of this tax holiday was to increase net
income by approximately $6,400,000 ($0.28 per share) in 1994. Losses incurred
prior to the commencement of the tax holiday, approximately $6,237,000, are
available for carryforward to years following the expiration of the tax holiday.
The Company has generated $15,000,000 of pretax earnings for which no U.S. tax
has been provided.
NOTE 6. TERM DEBT AND LINE OF CREDIT
Long-term debt is collateralized by equipment with a cost of approximately
$5,000,000 at January 1, 1995 and $19,350,000 at January 2, 1994 and consists of
the following:
<TABLE>
<CAPTION>
Fiscal Year End
------------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Notes payable to banks, variable quarterly interest and
principal installments through 1998; the notes
bear interest at various LIBOR and Eurodollar rates
plus 1.375% $ 28,541 $ 41,246
Notes payable to related party, interest payments due
semi-annually; principal and any unpaid interest due in
1994 and 1995; the notes bear interest of 9.38% to 9.57% 941 2,741
Less current portion (13,232) (14,505)
-------- --------
$ 16,250 $ 29,482
-------- --------
</TABLE>
At January 1, 1995 long-term debt matures as follows: 1995--$13,232,000;
1996--$6,250,000; 1998--$10,000,000; no maturities occur in 1997.
The Company's credit facilities total $80,000,000 and include a three-year term
$35,000,000 line of credit and two one-year term lines aggregating $45,000,000.
The three-year term line of credit agreement expires in December 1997 but may be
extended, subject to bank approval, annually for an additional year, thus
perpetuating its three-year term. The entire $80,000,000 under these unsecured
credit facilities remains available.
Certain of the notes payable require the Company to maintain certain financial
ratios and comply with covenants which include a prohibition on the payment of
dividends.
At January 2, 1994, the Company had $3,000,000 of short-term debt payable to
banks bearing interest at 4.5%.
25
<PAGE> 26
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Short-term Investments, Accounts Receivable and Certain Other
Liabilities: The carrying values on the Consolidated Balance Sheets approximate
fair value at January 1, 1995 and January 2, 1994 due to the relatively short
period to maturity of the instruments.
Debt: The carrying values on the Consolidated Balance Sheets approximate fair
value at January 1, 1995 and January 2, 1994. Rates currently available to the
Company for long-term borrowings with similar terms and remaining maturities
were used to estimate the fair value of existing borrowings as the present value
of expected cash flows.
Interest-Rate Swap Agreement: The Company uses an interest-rate swap agreement
to effectively convert a portion of its floating rate debt to a fixed rate
basis, thus reducing the impact of interest rate changes on future income.
Approximately 25% ($7,000,000) of the Company's variable rate term debt was
subject to the interest rate swap agreement at January 1, 1995. The Company
expensed $406,000, $709,000 and $812,000 under this agreement in 1994, 1993 and
1992, respectively. The fair value of the interest rate swap agreement,
estimated as the amount that the bank would receive to terminate the agreement,
was $91,000 at January 1, 1995.
NOTE 8. LEASES AND COMMITMENTS
The Company leases most of its production facilities under operating leases that
expire at various dates between 1996 and 2001. Certain of these leases include
renewal options varying from five to ten years.
At January 1, 1995 the future minimum commitments for all non-cancellable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1995 $ 4,247
1996 4,328
1997 3,701
1998 3,603
1999 3,106
Thereafter 2,033
-------
Total minimum lease payments $21,018
-------
</TABLE>
Rental expense for all operating leases amounted to $4,319,000, $5,471,000 and
$5,173,000 in 1994, 1993 and 1992, respectively.
The Company has current non-cancellable capital commitments of approximately
$54,183,000.
26
<PAGE> 27
NOTE 9. DASTEK HOLDING COMPANY
In December 1991 the Company completed a merger with Dastek, Inc. ("Dastek"), a
manufacturer of thin-film magnetic recording heads for use in Winchester disk
drives. In February 1992, the Company formed a joint venture to produce and
market thin-film magnetic recording heads with Asahi Glass America, Inc. ("Asahi
America"), a U.S. subsidiary of Asahi Glass Co., Ltd. of Japan. Under the joint
venture agreement, the Company contributed to the joint venture both the stock
of Dastek and the assets of its existing thin-film head development program.
Asahi America in turn contributed to the joint venture nearly $60,000,000 in
cash and notes. The notes were paid to the joint venture in 1992 and 1993. Based
on these contributions, the Company and Asahi America obtained interests in the
joint venture of 60% and 40%, respectively. During 1993 the Company and a
subsidiary of Asahi America loaned the Dastek joint venture an additional
$24,000,000 and $16,000,000, respectively.
These loans were revalued to their estimated settlement amounts in late 1993 as
a result of the restructuring of the thin-film head operations. In December 1993
the Company recorded a one-time charge of $38,956,000 as a result of Dastek's
decision to exit the inductive thin-film head business. The net impact of the
restructuring charge, after related minority interest and income tax
adjustments, was $35,389,000 ($1.66 loss per share for the year ended January 2,
1994). Approximately one-half of the restructuring charge related to the
reduction of assets and liabilities to net realizable value. The remaining
portion provided for estimated operating losses to be incurred during the
completion of existing customer orders and the wind down of Dastek's operations.
Dastek ceased its inductive thin-film head operations, sold its equipment at
various public auctions, settled with its creditors and was legally dissolved
prior to the end of 1994. Based upon the results of these actual shutdown
activities, no significant adjustment was required to the aggregate
restructuring charge recorded in 1993. Actual operating losses incurred in 1994
were approximately one-third higher than estimated in the 1993 restructuring
charge. However, net losses from the sale of Dastek's assets and the settlement
of its liabilities were lower by a comparable amount.
NOTE 10. KOMAG MATERIAL TECHNOLOGY, INC.
The Company's financial statements include the consolidation of the financial
results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells
aluminum disk substrate products for high-performance magnetic storage media.
KMT is owned 55% by the Company and 45% by Kobe Steel USA Holdings Inc. ("Kobe
USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe").
Under a joint venture agreement, Kobe has agreed to supply disk substrate blanks
to KMT while the Company has agreed to purchase KMT's entire output of finished
substrates. The Company also purchases finished substrates directly from Kobe or
its distributors. All parties have also agreed to conduct joint research on the
development of aluminum alloy-based blank finishing technologies.
Other transactions between Kobe or its distributors and the Company were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Accounts payable to Kobe or its distributors:
Balance at beginning of year $ 2,728 $ 2,636 $ 1,167
Purchases 34,657 33,098 22,374
Payments (35,151) (33,006) (20,905)
-------- -------- --------
Balance at end of year $ 2,234 $ 2,728 $ 2,636
-------- -------- --------
</TABLE>
27
<PAGE> 28
NOTE 11. UNCONSOLIDATED JOINT VENTURE
In 1987 the Company formed a partnership, Komag Technology Partners
("Partnership"), with the U.S. subsidiaries of two Japanese companies and
simultaneously formed a subsidiary, Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed technology in exchange for a 50% interest in the Partnership, and
the subsidiaries of the Japanese companies contributed approximately 1.5 billion
yen (approximately $11 million) in exchange for a 50% interest in the
Partnership. The Partnership then contributed all the cash and licensed the
technology to AKCL in exchange for all of its stock and a limited royalty of 5%
of product produced and sold by AKCL. The Partnership and its subsidiary (joint
venture) established a facility in Japan to manufacture and sell the Company's
thin-film media products in Japan. AKCL also sells its products to the Company
for resale outside of Japan.
The Company's share of the joint venture's net income was $5,457,000, $4,860,000
and $3,172,000 in 1994, 1993 and 1992, respectively. Additionally, the Company
recorded royalty income of $1,786,000 in 1992. Royalty income, included in other
income in the consolidated statements of operations, ceased in 1992 when the
contractual limit was reached.
In 1992 AKCL recorded a positive cumulative effect adjustment of $747,000 as a
result of a change in accounting method due to the adoption of Statement of
Financial Accounting Standard No. 109 (FAS 109) "Accounting for Income Taxes".
Other transactions between the joint venture and the Company were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Accounts receivable from joint venture:
Balance at beginning of year $ 227 $ 92 $ 730
Sales 1,375 990 1,181
Cash receipts (1,506) (855) (1,819)
-------- -------- --------
Balance at end of year $ 96 $ 227 $ 92
-------- -------- --------
Accounts payable to joint venture:
Balance at beginning of year $ 592 $ 4,572 $ 3,490
Purchases 9,752 16,259 31,883
Payments (10,298) (20,239) (30,801)
-------- -------- --------
Balance at end of year $ 46 $ 592 $ 4,572
-------- -------- --------
</TABLE>
Equipment purchases by the Company from its joint venture partners were
$11,571,000, $4,998,000 and $9,828,000 in 1994, 1993 and 1992, respectively.
28
<PAGE> 29
Summary combined financial information for the Partnership and AKCL for the
years ended December 31, 1994, 1993 and 1992, and as of December 31, 1994 and
1993 is as follows. The subsidiary's total assets, liabilities, revenues, costs
and expenses approximate 100% of the combined totals.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1994 1993 1992
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Summarized Income Statements:
Net sales $131,335 $119,447 $91,707
Costs and expenses 109,674 99,596 80,770
Provision for income taxes 10,626 10,094 5,328
Cumulative effect of change in accounting
method -- -- 747
-------- -------- -------
Net Income $ 11,035 $ 9,757 $ 6,356
-------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year End
---------------------
1994 1993
-------- -------
(in thousands)
<S> <C> <C>
Summarized Balance Sheets:
Current assets $ 32,328 $26,835
Noncurrent assets 76,124 60,700
-------- -------
Total Assets $108,452 $87,535
-------- -------
Current liabilities $ 39,677 $30,921
Long-term obligations 14,079 17,795
Partners' capital 54,696 38,819
-------- -------
Total Liabilities and Partners' Capital $108,452 $87,535
-------- -------
</TABLE>
NOTE 12. PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.
In September 1994 the Company announced its participation in Headway
Technologies, Inc. ("Headway"), a new company formed to research, develop, and
manufacture advanced magnetoresistive ("MR") heads for the data storage
industry. Hewlett-Packard Company ("HP") and AKCL (see Note 11) provided the
initial cash funding to Headway in exchange for equity interests. The Company
and Asahi America licensed to Headway MR technology developed by Dastek and
contributed certain research and production equipment in exchange for equity. As
a result of these transactions the Company holds a voting interest (direct and
indirect combined) in Headway of less than 20%. The Company has no cost basis in
its investment in Headway; consequently, anticipated initial losses at Headway
will not directly affect the Company's earnings. The Company has not guaranteed
any obligation of Headway and is not otherwise committed to provide financial
support to Headway.
AKCL invested in Headway in the third quarter of 1994 and recorded a partial
writedown of its investment in Headway in the fourth quarter of 1994. Headway is
a development stage company and AKCL will continue such writedowns until Headway
emerges from the development stage. These partial writedowns are a function of
losses incurred at Headway. AKCL's net income for 1994 included a writedown of
approximately $480,000, net of tax, of its investment in Headway.
29
<PAGE> 30
NOTE 13. QUARTERLY SUMMARIES
(in thousands except per share amounts, unaudited)
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 97,701 $ 97,774 $ 98,172 $ 98,744
Gross profit 32,888 29,897 31,570 31,031
Net income 15,444 13,954 15,015 14,109
Net income per share $ 0.68 $ 0.61 $ 0.65 $ 0.60
</TABLE>
<TABLE>
<CAPTION>
1993
--------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 93,556 $103,180 $ 97,452 $ 91,187
Gross profit 22,692 27,679 22,915 18,153
Net income (loss) 7,628 8,058 4,108 (29,695)
Net income (loss) per share $ 0.35 $ 0.37 $ 0.19 $ (1.37)
</TABLE>
The results of operations for the fourth quarter of 1993 included a $39.0
million restructuring charge for the winding down of Dastek's inductive
thin-film head operation. The net effect of the restructuring charge, after
related minority interest and tax adjustments, was $35.4 million ($1.64 loss per
share) for the fourth quarter of 1993.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS.
The following consolidated financial statements of Komag, Incorporated
are filed in Part II, Item 8 of this Report on Form 10-K/A:
Report of Ernst & Young LLP, Independent Auditors, on Financial Statements and
Financial Statement Schedule
Consolidated Statements of Operations -- Fiscal Years 1994, 1993 and 1992
Consolidated Balance Sheets -- January 1, 1995 and January 2, 1994
Consolidated Statements of Cash Flows -- Fiscal Years 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity -- Fiscal Years 1994, 1993 and
1992
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Komag, Incorporated is
filed in Part IV, Item 14(d) of this report on Form 10-K/A:
Schedule VIII-Valuation and Qualifying Accounts
Report of Other Auditor
-- Report of Chuo Audit Corporation on Asahi Komag Co., Ltd.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
31
<PAGE> 32
3. EXHIBITS.
3.1 Restated Certificate of Incorporation (incorporated by
reference from a similarly numbered exhibit filed with
Amendment No. 1 to the Registration Statement filed with the
Securities and Exchange Commission on May 26, 1987).
3.2 Certificate of Amendment to Restated Certificate of
Incorporation dated February, 7, 1994 (incorporated by
reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
3.3 Bylaws (incorporated by reference from a similarly numbered
exhibit filed with the Company's Report on Form 10-K for the
year ended December 30, 1990).
4.2 Specimen Stock Certificate (incorporated by reference from a
similarly numbered exhibit filed with Amendment No. 1 to the
Registration Statement filed with the Securities and Exchange
Commission on May 26, 1987).
10.1.1 Lease Agreement dated May 24, 1991 between Milpitas-Hillview
and Komag, Incorporated (incorporated by reference from Exhibit
10.1.2 filed with the Company's report on Form 10-K for the
year ended December 29, 1991).
10.1.2 Lease Agreement dated May 24, 1991, between Milpitas-Hillview
II and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.3 filed with the Company's report on Form 10-K for
the year ended December 29, 1991).
10.1.3 Lease Agreement dated October 10, 1991 between Komag,
Incorporated and O'Donnell/Milpitas Industrial Associates
(incorporated by reference from Exhibit 10.1.4 filed with the
Company's report on Form 10-K for the year ended December 29,
1991).
10.1.4 Lease Agreement dated July 29, 1988 by and between Brokaw
Interests and Komag Corporation (incorporated by reference from
Exhibit 10.1.6 filed with the Company's Report on Form 10-K for
the year ended January 1, 1989).
10.1.5 Lease Agreement dated May 2, 1989 by and between Stony Point
Associates I and Komag Material Technology, Inc. (incorporated
by reference from Exhibit 10.1.6 filed with the Company's
Report on Form 10-K for the year ended December 31, 1989).
10.1.6 Lease Agreement dated May 1, 1990 by and between Guthrie
Propertie(s) PTE., Ltd. and Komag Incorporated (incorporated by
reference from Exhibit 10.1.10 filed with the Company's Report
on Form 10-K for the year ended December 30, 1990).
10.1.7 Amendment to Lease Agreement dated December 28, 1990 by and
between Milpitas-Hillview II and Komag, Incorporated
(incorporated by reference from Exhibit 10.1.11 filed with the
Company's Report on Form 10-K for the year ended December 30,
1990).
32
<PAGE> 33
10.1.8 Second Amendment to Lease dated December 28, 1990 by and
between Milpitas-Hillview and Komag, Incorporated (incorporated
by reference from Exhibit 10.1.12 filed with the Company's
Report on Form 10-K for the year ended December 30, 1990).
10.1.9 First Amendment to Lease dated November 1, 1993 by and between
Wells Fargo Bank et al and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.1.14 filed with the
Company's Report on Form 10-K for the year ended January 2,
1994).
10.1.10 First Amendment to Lease dated January 21, 1994 by and between
O'Donnell/Milpitas Industrial Associates and Komag,
Incorporated (incorporated by reference from Exhibit 10.1.15
filed with the Company's Report on Form 10-K for the year ended
January 2, 1994).
10.1.11 Lease Agreement dated May 27, 1994 by and between Hillview I
Partners and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.16 filed with the Company's Report on Form
10-Q for the quarter ended July 3, 1994).
10.9 Form of Directors' Indemnification Agreement (incorporated by
reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended December 30,
1990).
10.10.1 Joint Venture Agreement dated November 9, 1986, as amended
January 7, 1987 and January 27, 1987 (incorporated by reference
from a similarly numbered exhibit filed with the Registration
Statement on Form S-1 (File No. 33-13663) filed with the
Securities and Exchange Commission on April 22, 1987)
(confidential treatment obtained as to certain portions).
10.10.2 General Partnership Agreement dated January 7, 1987
(incorporated by reference from a similarly numbered exhibit
filed with the Registration Statement on Form S-1 (File No.
33-13663) filed with the Securities and Exchange Commission on
April 22, 1987).
10.10.3 Technology Contribution Agreement dated January 7, 1987 by and
between Komag, Incorporated and Komag Technology Partners
(incorporated by reference from a similarly numbered exhibit
filed with the Registration Statement on Form S-1 (File No.
33-13663) filed with the Securities and Exchange Commission on
April 22, 1987) (confidential treatment obtained as to certain
portions).
10.10.4 Technical Cooperation Agreement dated January 7, 1986 by and
between Asahi Glass Company, Ltd. and Komag, Incorporated
(incorporated by reference from a similarly numbered exhibit
filed with the Registration Statement on Form S-1 (File No.
33-13663) filed with the Securities and Exchange Commission on
April 22, 1987).
10.10.5 Third Amendment to Joint Venture Agreement dated March 21, 1990
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10- K for the year
ended December 31, 1989).
33
<PAGE> 34
10.10.6 Joint Venture Agreement dated March 6, 1989 by and between
Komag, Incorporated, Komag Material Technology, Inc. and Kobe
Steel USA Holdings Inc. (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on
Form 10-K for the year ended December 31, 1989) (confidential
treatment obtained as to certain portions).
10.10.7 Joint Development and Cross-License Agreement dated March 10,
1989 by and between Komag, Incorporated, Kobe Steel, Ltd., and
Komag Material Technology, Inc. (incorporated by reference from
a similarly numbered exhibit filed with the Company's Report on
Form 10-K for the year ended December 31, 1989).
10.10.8 Blank Sales Agreement dated March 10, 1989 by and between
Komag, Incorporated, Kobe Steel, Ltd., and Komag Material
Technology, Inc. (incorporated by reference from a similarly
numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1989).
10.10.9 Finished Substrate Agreement dated March 10, 1989 by and
between Komag, Incorporated, Kobe Steel, Ltd., and Komag
Material Technology, Inc. (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on
Form 10-K for the year ended December 31, 1989)
(confidential treatment obtained as to certain portions).
10.10.10 License Agreement dated January 1, 1994 by and between U.S.
Philips Corporation and Komag, Incorporated (incorporated by
reference from Exhibit 10.10.17 filed with the Company's Report
on Form 10-Q for the quarter ended July 3, 1994)
(confidential treatment obtained as to certain portions.)
10.10.11 Fourth Amendment to Joint Venture Agreement dated May 24, 1990
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.10.12 Fifth Amendment to Joint Venture Agreement dated November 4,
1994 (incorporated by reference from a similarly numbered
exhibit filed with the Company's Report on Form 10-K for the
year ended January 1, 1995).
10.11.1 Restated 1987 Stock Option Plan, effective January 23, 1992 and
forms of agreement thereunder (incorporated by reference from a
similarly numbered exhibit filed with the Company's report on
Form 10-K for the year ended December 29, 1991).
10.11.2 1988 Employee Stock Purchase Plan and forms of agreement
thereunder (incorporated by reference from Exhibit 10.11.4
filed with the Company's report on Form 10-K for the year ended
December 29, 1991).
10.11.3 Komag, Incorporated 1995 Management Bonus Plan. (incorporated
by reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
10.11.4 Komag, Incorporated 1994 Management Bonus Plan. (incorporated
by reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
10.11.5 Komag, Incorporated 1994 Cash Profit Sharing Plan.
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.11.6 1988 Employee Stock Purchase Plan Joinder Agreement dated
July 1, 1993 between Komag, Incorporated and Komag USA
(Malaysia) Sdn. (incorporated by reference from
34
<PAGE> 35
Exhibit 10.11.11 filed with the Company's Report on Form 10-K
for the year ended January 2, 1994).
10.11.7 Komag Material Technology, Inc. 1994 Management Bonus Plan
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.11.8 Komag Material Technology, Inc. 1994 Cash Profit Sharing Plan
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.11.9 Komag Savings and Deferred Profit Sharing Plan and Amendment
No. 1 to the Plan dated July 23, 1993 (incorporated by
reference from Exhibit 10.11.16 filed with the Company's Report
on Form 10-K for the year ended January 2, 1994).
10.11.10 Komag, Incorporated Deferred Compensation Plan
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.11.11 Komag Material Technology, Inc. Deferred Compensation Plan
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
10.12 Confidential Disclosure Agreement dated August 3, 1983 between
Ulvac Corp. and Komag, Incorporated (incorporated by reference
from Exhibit 10.13 filed with the Registration Statement on
Form S-1 (File No. 33-13663) filed with the Securities and
Exchange Commission on April 22, 1987).
10.13 Common Stock Purchase Agreement dated December 9, 1988 by and
between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 1 filed with the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on December 20, 1988).
10.14 Common Stock Purchase Agreement dated February 6, 1990 by and
between Komag, Incorporated and Kobe Steel USA Holdings Inc.
(incorporated by reference from Exhibit 10.17 filed with the
Company's Report on Form 10-K for the year ended December 31,
1989).
10.15 Registration Rights Agreement dated March 21, 1990 by and
between Komag, Incorporated and Kobe Steel USA Holdings Inc.
(incorporated by reference from Exhibit 10.18 filed with the
Company's Report on Form 10-K for the year ended December 31,
1989).
10.16 Amendment No. 1 to Common Stock Purchase Agreement dated
March 21, 1990 by and between Komag, Incorporated and Asahi
Glass Co., Ltd. (incorporated by reference from Exhibit 10.19
filed with Amendment No. 1 to the Registration Statement filed
with the Securities and Exchange Commission on May 26, 1987).
10.17 Amended and Restated Registration Rights Agreement dated March
21, 1990 by and between Komag, Incorporated and Asahi Glass
Co., Ltd. (incorporated by reference from Exhibit 10.20 filed
with Amendment No. 1 to the Registration Statement filed with
the Securities and Exchange Commission on May 26, 1987).
10.18 Term Loan Agreement dated January 10, 1992 by and between First
Interstate Bank of California and Komag, Incorporated
(incorporated by reference from Exhibit 10.21 filed with the
Company's report on Form 10-K for the year ended December 29,
1991).
35
<PAGE> 36
10.19 Revolving Credit and Term Loan Agreement dated January 31, 1992
by and between Comerica Bank-California (Formerly Plaza Bank of
Commerce) and Komag, Incorporated (incorporated by reference
from Exhibit 10.22 filed with the Company's report on Form 10-K
for the year ended December 29, 1991).
10.20 Amendment Number One to Revolving Credit and Term Loan
Agreement dated as of January 28, 1994 by and between Comerica
Bank-California and Komag, Incorporated. (incorporated by
reference from Exhibit 10.25 filed with the Company's Report on
Form 10-K for the year ended January 2, 1994).
10.21 Supply Agreement dated June 29, 1992 between Proquip, Inc. and
Komag, Incorporated (incorporated by reference from Exhibit
10.26 filed with the Company's report on Form 10-K for the year
ended January 3, 1993) (confidential treatment obtained as to
certain portions).
10.22 Letter dated February 10, 1992 from the Malaysian Industrial
Development Authority addressed to Komag, Incorporated
approving the "Pioneer Status" of the Company's thin-film
media venture in Malaysia (incorporated by reference from
Exhibit 10.28 filed with the Company's report on Form 10-K for
the year ended January 3, 1993).
10.23 Amendment Number Two to Revolving Credit and Term Loan
Agreement dated as of February 28, 1994 by and between Comerica
Bank-California and Komag, Incorporated. (incorporated by
reference from Exhibit 10.32 filed with the Company's Report on
Form 10-K for the year ended January 2, 1994).
10.24 Credit Agreement between Komag, Incorporated and First
Interstate Bank of California -- Three Year Facility -- dated
December 15, 1994 (incorporated by reference from a similarly
numbered exhibit filed with the Company's Report on Form 10-K
for the year ended January 1, 1995).
10.25 Credit Agreement between Komag, Incorporated and First
Interstate Bank of California -- One Year Facility -- dated
December 15, 1994 (incorporated by reference from a similarly
numbered exhibit filed with the Company's Report on Form 10-K
for the year ended January 1, 1995).
10.26 Letter dated December 15, 1994 from Standard Chartered Bank
addressed to Komag USA (Malaysia) Sdn. to extend the maturity
date and modify certain terms of a revolving credit facility
(incorporated by reference from a similarly numbered exhibit
filed with the Company's Report on Form 10-K for the year
ended January 1, 1995).
11.1 Computation of Income (Loss) per Share (incorporated by
reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
22.1 List of Subsidiaries (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on
Form 10-K for the year ended January 1, 1995).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Chuo Audit Corporation.
24.1 Power of Attorney (incorporated by reference from a similarly
numbered exhibit filed with the Company's Report on Form 10-K
for the year ended January 1, 1995).
-----------------
The Company agrees to furnish to the Commission upon request a copy of any
instrument with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Company.
36
<PAGE> 37
(b) REPORTS ON FORM 8-K.
Not Applicable
UNDERTAKING
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8 identified
below, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987), 33-19851 (filed January 28, 1988), 33-25230 (filed October 28, 1988),
33-41945 (filed July 29, 1991), 33-45469 (filed February 3, 1992), 33-53432
(filed October 16, 1992) and 33-80594 (filed June 22, 1994).
37
<PAGE> 38
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MILPITAS, CALIFORNIA ON
THIS 24TH DAY OF AUGUST, 1995.
Komag, Incorporated
By /s/ William L. Potts, Jr.
---------------------------------
William L. Potts, Jr.
Vice President -- Chief Financial
Officer and Secretary
38
<PAGE> 39
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
TU CHEN* Chairman of the Board August 24, 1995
---------------------------- and Director
(Tu Chen)
STEPHEN C. JOHNSON* President, Chief Executive Officer August 24, 1995
----------------------------
(Stephen C. Johnson)
/s/ WILLIAM L. POTTS, JR. Vice President-Chief Financial August 24, 1995
---------------------------- Officer and Secretary
(William L. Potts, Jr.) (Principal Financial
and Accounting Officer)
CRAIG R. BARRETT* Director August 24, 1995
----------------------------
(Craig R. Barrett)
CHRIS A. EYRE* Director August 24, 1995
----------------------------
(Chris A. Eyre)
IRWIN FEDERMAN* Director August 24, 1995
----------------------------
(Irwin Federman)
GEORGE A. NEIL* Director August 24, 1995
----------------------------
(George A. Neil)
MAX PALEVSKY* Director August 24, 1995
----------------------------
(Max Palevsky)
ANTHONY SUN* Director August 24, 1995
----------------------------
(Anthony Sun)
MASAYOSHI TAKEBAYASHI* Director August 24, 1995
----------------------------
(Masayoshi Takebayashi)
*By /s/ WILLIAM L. POTTS, JR.
------------------------
(William L. Potts, Jr.
Attorney-in-Fact)
</TABLE>
39
<PAGE> 40
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES.
KOMAG, INCORPORATED
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended January 3, 1993
Allowance for doubtful accounts $ 3,067 $ (94) $ 1,056 $ 1,917
Allowance for sales returns 1,268 3,065(1) 2,989(2) 1,344
-------- -------- -------- --------
Sub total 4,335 2,971 4,045 3,261
Allowance for long-term notes 139 (109) 30 --
-------- -------- -------- --------
$ 4,474 $ 2,862 $ 4,075 $ 3,261
======== ======== ======== ========
Year ended January 2, 1994
Allowance for doubtful accounts $ 1,917 $ (191) $ 44 $ 1,682
Allowance for sales returns 1,344 3,163(1) 2,632(2) 1,875
-------- -------- -------- --------
Sub total 3,261 2,972 2,676 3,557
Restructuring liability (3) -- 38,956 23,069(4) 15,887
-------- -------- -------- --------
$ 3,261 $ 41,928 $ 25,745 $ 19,444
======== ======== ======== ========
Year ended January 1, 1995
Allowance for doubtful accounts $ 1,682 $ (195) $ -- $ 1,487
Allowance for sales returns 1,875 2,146(1) 3,285(2) 736
-------- -------- -------- --------
Sub total 3,557 1,951 3,285 2,223
Restructuring liability (3) 15,887 -- 15,887(5) --
-------- -------- -------- --------
$ 19,444 $ 1,951 $ 19,172 $ 2,223
======== ======== ======== ========
</TABLE>
(1) Additions to the allowance for sales returns are netted against sales.
(2) Actual sales returns of subsequently scrapped product were charged
against the allowance for sales returns. Actual sales returns of product
that was subsequently tested and shipped to another customer were netted
directly against sales.
(3) Relates to the restructuring of Dastek, Inc., the Company's thin-film
head joint venture. See Note 9 to the Consolidated Financial Statements.
(4) Primarily represents reductions of assets and liabilities to their
estimated net realizable values.
(5) Primarily represents operating losses incurred during the shutdown of
Dastek, Inc.
40
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Asahi Komag Co., Ltd.
We have audited the accompanying balance sheet of Asahi Komag Co., Ltd. as
of December 31, 1994 and 1993, and the related statements of income, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 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 did not audit the financial
statements of Headway Technologies, Inc. ("Headway"), the Company's investment
in which, recorded using the cost method, represents eight percent of the
Company's total assets as of December 31, 1994. Those statements were audited by
other auditors whose report has been provided to us and our opinion, insofar as
it relates to the amounts included for Headway, is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Asahi Komag Co., Ltd. as of December 31, 1994 and
1993, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles applicable in the United States of America.
As discussed in Note 2g to the financial statements, the Company changed
its method of accounting for income taxes in 1992.
CHUO AUDIT CORPORATION
Tokyo, Japan
January 27, 1995
41
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-80594, 33-53432, 33-45469, 33-41945, 33-25230,
33-19851 and 33-16625) pertaining to the Komag, Incorporated Employee Stock
Purchase Plan, the Komag, Incorporated Restated 1987 Stock Option Plan, the
Dastek International Stock Option Plan and the Dastek, Inc. 1992 Stock Option
Plan of our report dated January 31, 1995 with respect to the consolidated
financial statements and schedule of Komag, Incorporated included in this
Amendment No. 1 to Annual Report (Form 10-K/A) for the year ended January 1,
1995.
Ernst & Young LLP
San Jose, California
August 24, 1995
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Komag, Incorporated on Forms S-8 (File Nos. 33-53432, 33-45469, 33-41945,
33-25230, 33-19851, 33-16625 and 33-80594) of our report dated January 27,
1995, on our audits of the financial statements of Asahi Komag Co., Ltd. as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, which report is included in this Annual Report on Form
10-K/A
Chuo Audit Corporation
Tokyo, Japan
August 24, 1995
