<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 29, 1996
Commission File Number 0-16852
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
275 South Hillview Drive, Milpitas, California 95035
Telephone: (408) 946-2300
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
----- -----
On September 29, 1996, 51,404,229 shares of the Registrant's common stock,
$0.01 par value, were issued and outstanding.
<PAGE> 2
INDEX
KOMAG, INCORPORATED
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated income statements -- Three- and nine-months
ended September 29, 1996 and October 1, 1995 . . . . . . . . . . . 3
Consolidated balance sheets -- September 29, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows -- Nine months
ended September 29, 1996, and October 1, 1995 . . . . . . . . . . . 5
Notes to consolidated financial statements --
September 29, 1996 . . . . . . . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
KOMAG, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- ----------------------
SEPT 29 Oct 1 SEPT 29 Oct 1
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $131,533 $132,835 $436,580 $358,705
Cost of sales 99,948 79,513 277,550 226,596
--------- --------- --------- ---------
GROSS PROFIT 31,585 53,322 159,030 132,109
Operating expenses:
Research, development and engineering 7,849 5,863 21,508 17,875
Selling, general and administrative 6,789 12,236 28,863 30,274
--------- --------- --------- ---------
14,638 18,099 50,371 48,149
--------- --------- --------- ---------
OPERATING INCOME 16,947 35,223 108,659 83,960
Other income (expense):
Interest income 1,388 1,264 5,526 3,428
Interest expense (112) (528) (327) (1,726)
Other, net 1,594 1,539 1,511 1,983
--------- --------- --------- ---------
2,870 2,275 6,710 3,685
--------- --------- --------- ---------
Income before income taxes, minority interest,
and equity in joint venture income 19,817 37,498 115,369 87,645
Provision for income taxes 3,961 9,373 23,074 21,910
--------- --------- --------- ---------
Income before minority interest and equity in
joint venture income 15,856 28,125 92,295 65,735
Minority interest in net income of consolidated subsidiary 148 488 450 1,359
Equity in net income of unconsolidated joint venture 790 2,762 9,717 4,264
--------- --------- --------- ---------
NET INCOME $ 16,498 $30,399 $101,562 $68,640
======== ======== ======== ========
Net income per share $0.31 $0.61 $1.91 $1.41
======== ======== ======== ========
Number of shares used in per share computation 53,035 50,067 53,165 48,811
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 29 December 31
1996 1995
------------- ------------
(UNAUDITED) (note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $41,846 $14,879
Short-term investments 61,100 198,799
Accounts receivable less allowances of
$4,058 in 1996 and $4,279 in 1995 49,814 61,660
Accounts receivable from related parties 7,221 5,034
Inventories:
Raw materials 28,569 20,213
Work-in-process 22,863 7,431
Finished goods 8,551 1,377
------------- ------------
Total inventories 59,983 29,021
Prepaid expenses and deposits 4,685 5,196
Deferred income taxes 8,569 8,569
------------- ------------
Total current assets 233,218 323,158
Investment in Unconsolidated Joint Venture 39,016 30,143
Property, Plant and Equipment
Land 9,151 5,268
Building 88,881 38,357
Equipment 589,252 443,011
Furniture 7,424 6,118
Leasehold Improvements 103,266 51,088
------------- ------------
797,974 543,842
Less allowances for depreciation and amortization (269,636) (214,668)
------------- ------------
Net property, plant and equipment 528,338 329,174
Deposits and Other Assets 3,755 3,840
------------- ------------
$804,327 $686,315
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $42,684 28,717
Accounts payable to related parties 6,122 7,761
Accrued compensation and benefits 23,259 31,966
Other liabilities 2,306 2,096
Income taxes payable 7,235 400
------------- ------------
Total current liabilities 81,606 70,940
Deferred Income Taxes 37,643 37,643
Other Long-term Liabilities 419 474
Minority Interest in Consolidated Subsidiary 2,902 2,694
Stockholders' Equity
Preferred stock -- --
Common stock 514 507
Additional paid-in capital 380,875 374,399
Retained earnings 295,167 193,605
Accumulated foreign currency translation adjustments 5,201 6,053
------------- ------------
Total stockholders' equity 681,757 574,564
------------- ------------
$804,327 $686,315
============= ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
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<PAGE> 5
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
SEPT 29 Oct 1
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $101,562 $68,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60,920 45,659
Provision for losses on accounts receivable 52 554
Equity in net income of unconsolidated joint venture (9,717) (4,264)
Loss on disposal of equipment 49 524
Deferred rent (55) (55)
Minority interest in net income of consolidated subsidiary 450 1,359
Changes in operating assets and liabilities:
Accounts receivable 11,794 (20,097)
Accounts receivable from related parties (2,187) (3,334)
Inventories (30,962) (4,530)
Prepaid expenses and deposits (743) (2,629)
Trade accounts payable 13,967 9,014
Accounts payable to related parties (1,639) 1,402
Accrued compensation and benefits (8,707) 6,553
Other liabilities 210 (159)
Income taxes payable 8,082 13,528
--------- ---------
Net cash provided by operating activities 143,076 112,165
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (261,199) (105,199)
Purchases of short-term investments (163) (169,126)
Proceeds from short-term investments at maturity 137,862 40,144
Proceeds from disposal of equipment 1,607 120
Deposits and other assets (420) 222
--------- ---------
Net cash used in investing activities (122,313) (233,839)
FINANCING ACTIVITIES
Payments of long-term obligations -- (29,482)
Sale of Common Stock, net of issuance costs 6,483 130,194
Distribution to minority interest holder (279) (280)
--------- ---------
Net cash provided by financing activities 6,204 100,432
Increase (decrease) in cash and cash equivalents 26,967 (21,242)
Cash and cash equivalents at beginning of year 14,879 23,183
--------- ---------
Cash and cash equivalents at end of period $41,846 $1,941
========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 29, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of Management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three- and nine-month periods ended September 29, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 29, 1996.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
The Company uses a 52-53 week fiscal year ending on the Sunday closest
to December 31. The three- and nine-month reporting periods for the
comparable years included in this report are each comprised of thirteen
weeks and thirty-nine weeks, respectively.
NOTE 2 - INVESTMENT IN DEBT SECURITIES
The Company invests its excess cash in high-quality, short-term debt
and equity instruments. Short-term investments consist primarily of
AAA-rated, municipal auction-rate preferred stock. None of the Company's
investments have maturities greater than one year.
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<PAGE> 7
The following is a summary of the Company's investments by major
security type at amortized cost which approximates fair value:
<TABLE>
<CAPTION>
SEPT. 29 Dec. 31
(in thousands) 1996 1995
-------- -------
<S> <C> <C>
Municipal auction rate preferred stock $61,100 $198,636
Corporate debt securities 9,306 3,062
Mortgage-backed securities 18,746 19,462
------- --------
$89,152 $221,160
======= ========
Amounts included in cash and cash equivalents $28,052 $ 22,361
Amounts included in short term investments 61,100 198,799
------- --------
$89,152 $221,160
======= ========
</TABLE>
The Company utilizes zero-balance accounts and other cash management
tools to invest all available funds including bank balances in excess of
book balances.
NOTE 3 - INCOME TAXES
The estimated annual effective income tax rate for 1996 of 20% is lower
than the 1996 combined federal and state statutory rate of 41% and the
effective income tax rate for 1995 of 25%. The difference between the
effective tax rate and the combined statutory rate is primarily due to a
five-year tax holiday (commencing in July 1993) for the Company's
wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. Assuming
the Company fulfills certain commitments under its license to operate
within Malaysia, this tax holiday may be extended for an additional
five-year period by the Malaysian government. The effective income tax rate
for 1996 is lower than the rate in effect for 1995 primarily due to
anticipated growth in the percentage of consolidated income to be derived
from the Company's Malaysian operations in 1996.
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<PAGE> 8
KOMAG, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents the Company's current judgment
on the future direction of the business, such risks and uncertainties could
cause actual results to differ materially from any future performance
suggested herein. Factors that could cause actual results to differ include
the following: product transitions to next-generation products; the rate of
improvement in manufacturing efficiencies on newly-introduced products;
utilization of existing and soon-to-be-completed manufacturing facilities;
industry supply-demand relationship and related pricing for high- end
desktop and enterprise disk products; availability of certain sole-sourced
raw material supplies; vertical integration and company consolidation
within the Company's limited customer base, including the ability of Komag
and/or AKCL to maintain and expand business with Matsushita-Kotobuki
Electronics Industries Ltd. (MKE); execution of planned capacity additions;
and the risk factors listed in the Company's Annual Report on Form 10-K
filed in March 1996. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
Revenue
Net sales of thin-film media decreased slightly in the third quarter of
1996 relative to the third quarter of 1995. Net sales for the current
quarter included $1.5 million of substrate disk sales; no such substrate
sales occurred in 1995. The Company may periodically sell substrate
products but does not currently anticipate that such sales will become a
significant portion of its revenue. Excluding the substrate disk sales, net
sales decreased 2% in the third quarter of 1996 compared to the third
quarter of 1995. The decrease resulted from the net effect of a 9% increase
in unit sales volume and an 11% decrease in the overall average unit
selling price. Price reductions are typical for individual product
offerings in the thin-film media industry. The overall average selling
price typically only strengthens as the result of product mix shifts to
higher-priced, more technologically advanced product offerings. The Company
rapidly transitioned to 1800 Oe products throughout 1995. Sales of these
products accounted for 78% of net unit sales in the third quarter of 1995
and exceeded 90% of net unit sales from the fourth quarter of 1995 through
the second quarter of 1996. The Company is beginning a transition to
next-generation advanced proximity inductive disks and high-performance
magnetoresistive
-8-
<PAGE> 9
(MR) disks. Sales of these newer products reached 27% of net unit sales in
the third quarter of 1996. The effects of declining prices for 1800 Oe
products were only partially offset by the product mix shift to these
higher-priced, next generation products. The Company anticipates that sales
of these new products will exceed 50% of net unit sales in the fourth
quarter of 1996. This rapid shift to new products will most likely cause
the overall average selling price to increase modestly in the fourth
quarter of 1996. The continuation of this product shift will likely
moderate the rate of decline in the overall average selling price both
sequentially and year over year.
In addition to sales of internally produced disk products, the Company
resells products manufactured by its Japanese joint venture, Asahi Komag
Co., Ltd. (AKCL). Distribution sales of thin-film media manufactured by
AKCL were $1.7 million in the third quarter of 1996 compared to $0.2
million in the third quarter of 1995. The Company expects that distribution
sales of AKCL product will remain at this relatively low level throughout
the remainder of 1996.
Net sales increased 22% in the first nine months of 1996 relative to
the first nine months of 1995. Excluding substrate sales, net sales
increased 20% between the comparable nine-month periods. The increase was
due to the net effect of a 28% increase in unit sales volume and a 6%
decrease in the overall average selling price. The decrease in the overall
average selling price was primarily due to price reductions for 1800 Oe
products as discussed above. Distribution sales of AKCL manufactured
thin-film media were $3.8 million in the first nine months of 1996 compared
to $0.6 million in the first nine months of 1995.
During the third quarter of 1996 two customers individually accounted
for at least ten percent of consolidated net sales: Seagate Technology,
Inc. (58%), and Western Digital Corporation (25%). Seagate completed its
merger with Conner Peripherals, Inc. in the first quarter of 1996. The
percentage of consolidated net sales included sales to Seagate and Conner
on a combined basis. The Company expects that it will continue to derive a
substantial portion of its sales from relatively few customers. The
distribution of sales among customers may vary from quarter to quarter
based on the match of the Company's product capabilities with specific disk
drive programs of the customers.
Unit production volume increased approximately 2% in the third quarter
of 1996 relative to the third quarter of 1995. Increased production volume
typically occurs due to increased physical capacity (additional sputtering
lines) and/or improvements in manufacturing efficiencies (improved
production throughput from higher yields, better equipment utilization, and
shorter process cycle times). The combination of substantially lower
start-up yields for
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<PAGE> 10
new products and a reduction in equipment utilization mostly offset the
effects of a 16% increase in physical capacity and a nominal improvement in
process cycle times in the third quarter of 1996 relative to the third
quarter of 1995. Start-up yields for the new proximity inductive and MR
disk product families were substantially lower than the yield achieved on
the mature 1800 Oe products in the third quarter of 1995. The Company
typically experiences lower manufacturing yields on new products as it
ramps production of these products. The Company anticipates that
manufacturing yields will improve as additional production experience is
gained in these new products. The rate of improvement in yields, however,
remains difficult to predict. In addition to the lower start-up yields,
production output in the third quarter of 1996 was restricted by product
development time on production machines, retooling for new products,
equipment maintenance activities, and power outages in both the U.S. and
Malaysia. The Company had a total of sixteen sputtering lines in production
during the third quarter of 1996, nine of which are in the U.S. and seven
in Malaysia. Three new sputtering lines, added in September 1995, January
1996 and May 1996 increased physical capacity in the third quarter of 1996
relative to the third quarter of 1995.
Over one-third of the increase in unit production volume required to
support the unit sales and finished goods inventory growth for the first
nine months of 1996 compared to the first nine months of 1995 was achieved
through reductions in process cycle times. Physical capacity additions
accounted for the remainder of the increase. Manufacturing yields and
equipment utilization between the comparable nine-month periods decreased
slightly.
Net sales for the third quarter of 1996 decreased 14% relative to the
record $152 million level achieved in both the first and second quarters of
1996 due in large measure to the low manufacturing yields on new products.
The Company successfully achieved high-volume production of advanced
proximity inductive disks, shipping over 2.5 million units of this product
family into the high-end desktop market. To meet the needs of the
enterprise computer market, the Company began shipments of high-performance
MR disks to multiple customers at the end of the third quarter. Orders for
these new products are currently strong, but low manufacturing yields
continue to limit production output.
The Company expects to increase production output in the fourth quarter
of 1996 relative to the third quarter of 1996 through on-going efforts to
improve these new product yields and commencement of production on two
additional sputtering lines. The Company anticipates that net sales for the
fourth quarter of 1996 will exceed the sales levels achieved in the first
and second quarters of 1996. The fourth quarter 1996 financial performance
will depend, in large measure, on the rate of improvement in manufacturing
yields for the Company's new proximity inductive and MR disk product
families. Although the Company is expending considerable effort to improve
yields on these new products, there can be no assurance that the Company
will reach acceptable yield levels in a timely manner.
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<PAGE> 11
Gross Margin
The gross margin percentage for the third quarter of 1996 was 24.0%,
down significantly from the 40.1% gross margin percentage achieved for the
third quarter of 1995. The combination of a decrease in the overall average
selling price, low start-up yields for new products and a reduced equipment
utilization rate in the third quarter of 1996 relative to the third quarter
of 1995 resulted in the lower gross margin percentage in the current year
period. The gross margin percentage for the first nine months of 1996 was
36.4%, down slightly from 36.8% for the first nine months of 1995.
Reduction in the overall average unit selling price marginally outpaced
improvement in the overall average unit production cost and resulted in the
slightly lower gross margin percentage for the first nine months of 1996
relative to the comparable period of 1995.
Assuming manufacturing efficiencies improve as expected, the gross
margin percentage for the fourth quarter of 1996 is expected to increase
sequentially over the third quarter of 1996 and should move towards the
lower end of the Company's targeted gross margin percentage range of
33-38%. The Company anticipates that fourth quarter 1996 earnings will
exceed the results of the third quarter of 1996, but will be below the
earnings level reported for the fourth quarter of 1995. While financial
performance for the second half of 1996 will be below the record high level
achieved for the first half of 1996, the Company expects that fiscal 1996
results will compare favorably to those for fiscal 1995.
Operating Expenses
Research and development ("R&D") expenses increased 34% ($2.0 million)
and 20% ($3.6 million) in the three- and nine-month periods of 1996,
respectively, compared to the comparable periods of 1995. The increase
between these periods was mainly due to development costs for
next-generation proximity inductive and MR thin-film media products.
Selling, general and administrative ("SG&A") expenses decreased 45%
($5.4 million) and 5% ($1.4 million) in the three- and nine-month periods
of 1996, respectively, compared to the three- and nine-month periods of
1995. The Company's provisions for bonus and profit sharing programs
decreased $5.1 million and $3.6 million for the three- and nine-month
periods of 1996, respectively, compared to the three- and nine-month
periods of 1995. Provisions for bad debt decreased $1.0 million and $0.6
million between the comparable three- and nine-month periods, respectively.
Excluding provisions for bad debts and bonus and profit sharing, SG&A
expenses increased approximately $0.7 million between the three-month
periods and $2.8 million between the nine-month periods. Higher
administrative costs required to support the growth in the business,
including spending at the Company's front end manufacturing facility in
Sarawak, Malaysia and higher worldwide recruiting and hiring costs,
accounted for the majority of the increase.
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<PAGE> 12
Interest and Other Income/Expense
Interest income increased $0.1 million in the third quarter of 1996
relative to the third quarter of 1995 and $2.1 million in the first nine
months of 1996 relative to the first nine months of 1995. The increases
were due to higher average cash and short-term investment balances
resulting from the $122 million of proceeds provided by a follow-on public
stock offering completed in September 1995. Interest expense decreased $0.4
million in the third quarter of 1996 relative to the third quarter of 1995
and $1.4 million in the first nine months of 1996 relative to the first
nine months of 1995. The Company used a portion of the proceeds from the
public offering to repay all the existing bank debt in September 1995.
Interest expense for the three- and nine-month periods of 1996 primarily
represented non- utilization fees for the Company's credit facilities.
Other income increased $0.1 million in the third quarter of 1996 compared
to the third quarter of 1995 and decreased $0.5 million for the first nine
months of 1996 relative to the first nine months of 1995. Other income in
the third quarter of 1996 included $0.6 million of royalty income from AKCL
for sales made outside of Japan. Other income in the third quarter of 1995
included an insurance recovery related to an electrical power disruption at
the Company's Malaysian manufacturing facility.
Income Taxes
The estimated annual effective income tax rate for 1996 of 20% is lower
than the 1996 combined federal and state statutory rate of 41% and the
effective income tax rate for 1995 of 25%. The difference between the
effective tax rate and the combined statutory rate is primarily due to a
five-year tax holiday (commencing in July 1993) for the Company's
wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. Assuming
the Company fulfills certain commitments under its license to operate
within Malaysia, this tax holiday may be extended for an additional
five-year period by the Malaysian government. The effective income tax rate
for 1996 is lower than the rate in effect for 1995 primarily due to
anticipated growth in the percentage of consolidated income to be derived
from the Company's Malaysian operations in 1996.
Minority Interest in KMT/Equity in Net Income of AKCL
The minority interest in the net income of consolidated subsidiary
represented Kobe Steel USA Holdings Inc.'s (Kobe USA's) share of Komag
Material Technology, Inc.'s (KMT's) net income. KMT was owned 55% by the
Company and 45% by Kobe USA from November 1988 to December 1995. On
December 28, 1995 the Company increased its ownership of KMT to 80% through
the purchase of KMT Common Stock directly from Kobe USA. Kobe retained a
20% minority interest investment in KMT. KMT recorded net income of $0.7
million and $2.3 million in the first three- and nine-month periods of
1996, respectively, compared to $1.1 million and $3.0 million in the three-
and nine-month periods of 1995, respectively.
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<PAGE> 13
The Company records 50% of AKCL's net income as equity in net income of
unconsolidated joint venture. AKCL reported net income of $1.6 million in
the third quarter of 1996, down from $5.5 million in the third quarter of
1995. AKCL's results for the third quarter of 1996 included a writedown of
its remaining investment in Headway Technologies, Inc. (Headway) of $4.5
million (net of tax). There was no such writedown in the third quarter of
1995. During the third quarter of 1996 Headway's major customer, Hewlett-
Packard Company (HP), announced the closure of its disk drive manufacturing
operations. The anticipated future operating losses at Headway arising from
the loss of HP's business formed the basis of AKCL's decision to write-off
its remaining Headway investment.
AKCL reported net income of $19.4 million for the first nine months of
1996 compared to $8.5 million for the first nine months of 1995. AKCL's
improved operating performance in 1996 was primarily due to the combination
of an increase in the overall average selling price of its products and a
reduction in the overall average unit production cost on a substantially
higher unit sales volume. AKCL recorded writedowns of its investment in
Headway of $4.5 million (net of tax) and $2.2 million (net of tax) in the
first nine months of 1996 and 1995, respectively.
AKCL's functional currency is the Japanese yen and the Company
translates AKCL's yen-based income statements to U.S. dollars at the
average exchange rate for the period. The yen weakened approximately 16%
and 17% between the comparable three- and nine-month periods, respectively.
AKCL's net income would have been approximately $3.4 million and $23.2
million in the third quarter and first nine months of 1996, respectively,
had the yen- based income statements been translated at the average rates
in effect for the comparable 1995 periods.
AKCL's operating performance for the fourth quarter of 1996 is expected
to be substantially below the operating performance achieved for the third
quarter of 1996. Order reductions and yield issues associated with AKCL's
transition to next-generation products are expected to cause the lower
operating performance. The Company expects that AKCL may report a loss for
the fourth quarter if orders and yields do not improve beyond current
expectations.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES:
Cash and short-term investments of $102.9 million at the end of the
third quarter of 1996 decreased $110.7 million from the end of the prior
fiscal year. Operating activities generated $143.1 million in cash during
the first nine months of 1996 and partially funded the Company's $261.2
million of capital spending during the nine-month period. Sales of Common
Stock under the Company's stock option and stock purchase programs during
this period generated $6.5 million.
Total capital expenditures for 1996 are currently estimated at
approximately $390 million. Construction and fit up of three new
manufacturing facilities are the major components of the capital plan. The
Company has completed construction of a 275,000 square foot facility for
the front end stages of its manufacturing process in Sarawak, Malaysia and
a 225,000 square foot facility for the back end stages of its manufacturing
process in San Jose, California. An additional 275,000 square foot back end
factory is currently under construction in Penang, Malaysia. The Sarawak
factory began volume production in April 1996 and the San Jose factory
plans to commence production in early November 1996. The Company plans to
begin production of finished disk products at the new Penang facility in
early 1997. Additionally, the Company is currently constructing a 178,000
square foot research and development facility and a 90,000 square foot
administration building in San Jose, California for occupancy in the first
half of 1997.
Current noncancellable commitments total approximately $206 million.
The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
additional financing for capital expenditures, working capital, and
research and development. During the two-year period of 1996 and 1997, the
Company expects to spend approximately $750 million to construct new
facilities and add production equipment at its new and existing facilities.
The Company expects to fund its 1996 and the majority of its 1997 capital
expenditures through a combination of cash flow from operations, its cash
balances, and funds available from its unutilized $140 million credit
facilities. However, new debt and/or equity financing will likely be
required to fund a portion of the 1997 capital expenditures. If the Company
is unable to obtain sufficient capital it could be required to reduce its
capital equipment and research and development expenditures which could
have a material adverse effect on the Company's results of operations.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings -- Not Applicable.
ITEM 2. Changes in Securities -- Not Applicable.
ITEM 3. Defaults Upon Senior Securities -- Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders -- Not
Applicable.
ITEM 5. Other Information -- Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- None.
(b) Not Applicable
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
KOMAG, INCORPORATED
(Registrant)
DATE: November 8, 1996 BY: /s/ William L. Potts, Jr.
-------------------- -------------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: November 8, 1996 BY: /s/ Stephen C. Johnson
--------------------- ---------------------------
Stephen C. Johnson
President and
Chief Executive Officer
-16-
<PAGE> 17
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<EXCHANGE-RATE> 1
<CASH> 41,846
<SECURITIES> 61,100
<RECEIVABLES> 61,093
<ALLOWANCES> 4,058
<INVENTORY> 59,983
<CURRENT-ASSETS> 233,218
<PP&E> 797,974
<DEPRECIATION> 269,636
<TOTAL-ASSETS> 782,835
<CURRENT-LIABILITIES> 81,606
<BONDS> 0
0
0
<COMMON> 514
<OTHER-SE> 681,243
<TOTAL-LIABILITY-AND-EQUITY> 804,327
<SALES> 131,533
<TOTAL-REVENUES> 131,533
<CGS> 99,948
<TOTAL-COSTS> 99,948
<OTHER-EXPENSES> 8,579
<LOSS-PROVISION> (419)
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 19,817
<INCOME-TAX> 3,961
<INCOME-CONTINUING> 16,498
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,498
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
