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 28, 1997
Commission File Number 0-16852
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1704 Automation Parkway, San Jose, California 95131
Telephone: (408) 576-2000
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 28, 1997, 52,488,107 shares of the Registrant's common stock, $0.01
par value, were issued and outstanding.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $129,694 $131,533 $472,057 $436,580
Cost of sales 129,492 99,948 396,879 277,550
--------- --------- --------- ---------
GROSS PROFIT 202 31,585 75,178 159,030
--------- --------- --------- ---------
Operating expenses:
Research, development and engineering 13,118 7,849 36,457 21,508
Selling, general and administrative 3,913 6,789 21,663 28,863
Restructuring charge 52,157 -- 52,157 --
--------- --------- --------- ---------
69,188 14,638 110,277 50,371
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (68,986) 16,947 (35,099) 108,659
--------- --------- --------- ---------
Other income (expense):
Interest income 1,159 1,388 3,773 5,526
Interest expense (2,541) (112) (6,513) (327)
Other, net 1,077 1,594 1,681 1,511
--------- --------- --------- ---------
(305) 2,870 (1,059) 6,710
--------- --------- --------- ---------
Income (loss) before income taxes,
minority interest, and equity in
joint venture income (loss) (69,291) 19,817 (36,158) 115,369
Provision (benefit) for income taxes (20,411) 3,961 (14,778) 23,074
--------- --------- --------- ---------
Income (loss) before minority interest
and equity in joint venture income
(loss) (48,880) 15,856 (21,380) 92,295
Minority interest in net income
(loss) of consolidated subsidiary (6) 148 363 450
Equity in net income (loss) of
unconsolidated joint venture (3,874) 790 (1,529) 9,717
--------- --------- --------- ---------
NET INCOME (LOSS) ($52,748) $16,498 ($23,272) $101,562
========= ========= ========= =========
Net income (loss) per share ($1.01) $0.31 ($0.45) $1.91
========= ========= ========= =========
Number of shares used in per
share computation 52,399 53,035 52,101 53,165
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 28, December 29,
1997 1996
------------- -------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $45,308 $90,741
Short-term investments 24,400 2,500
Accounts receivable less allowances of
$3,104 in 1997 and $3,087 in 1996 60,177 55,676
Accounts receivable from related parties 6,345 8,449
Inventories:
Raw materials 35,402 33,734
Work-in-process 17,554 21,774
Finished goods 21,648 6,452
------------- -------------
Total inventories 74,604 61,960
Prepaid expenses and deposits 4,620 2,866
Income taxes receivable 13,387 13,326
Deferred income taxes 15,579 15,579
------------- -------------
Total current assets 244,420 251,097
Investment in Unconsolidated Joint Venture 36,376 39,754
Property, Plant and Equipment
Land 9,368 9,367
Building 114,060 110,991
Equipment 792,844 673,210
Furniture 12,012 7,754
Leasehold improvements 149,350 131,737
------------- -------------
1,077,634 933,059
Less allowances for depreciation and
amortization (403,204) (289,353)
------------- -------------
Net property, plant and equipment 674,430 643,706
Deposits and Other Assets 3,688 3,800
------------- -------------
$958,914 $938,357
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $28,335 $80,089
Accounts payable to related parties 3,297 3,294
Accrued compensation and benefits 16,812 21,835
Other liabilities 3,957 1,913
Income taxes payable 44 1,824
Restructuring liability 16,521 --
------------- -------------
Total current liabilities 68,966 108,955
Long-term Debt 145,000 70,000
Deferred Income Taxes 57,806 57,806
Other Long-term Liabilities 860 497
Minority Interest in Consolidated Subsidiary 3,522 3,159
Stockholders' Equity
Preferred stock -- --
Common stock 525 517
Additional paid-in capital 396,702 388,305
Retained earnings 280,307 303,579
Accumulated foreign currency translation
adjustments 5,226 5,539
------------- -------------
Total stockholders' equity 682,760 697,940
------------- -------------
$958,914 $938,357
============= =============
<FN>
Note: The balance sheet at December 29, 1996 has been derived from the
audited financial statements at that date.
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 28, Sept. 29,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($23,272) $101,562
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 96,035 60,920
Provision for losses on accounts receivable 42 52
Equity in net (income) loss of unconsolidated
joint venture 1,530 (9,717)
Loss on disposal of equipment 1,260 49
Non-cash portion of restructing charge related
to write-off of property, plant and equipment 33,013 --
Deferred rent 363 (55)
Minority interest in net income of
consolidated subsidiary 363 450
Changes in operating assets and liabilities:
Accounts receivable (4,543) 11,794
Accounts receivable from related parties 2,104 (2,187)
Inventories (12,644) (30,962)
Prepaid expenses and deposits (1,754) (743)
Trade accounts payable (51,754) 13,967
Accounts payable to related parties 3 (1,639)
Accrued compensation and benefits (5,023) (8,707)
Other liabilities 2,044 210
Income taxes payable (receivable) (1,841) 8,082
Restructuring liability 16,521 --
----------- -----------
Net cash provided by operating
activities 52,447 143,076
----------- -----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (160,976) (261,199)
Purchases of short-term investments (21,900) (163)
Proceeds from short-term investments at maturity -- 137,862
Proceeds from disposal of equipment 497 1,607
Deposits and other assets (441) (420)
Dividend distribution from unconsolidated joint
venture 1,535 --
----------- -----------
Net cash used in investing
activities (181,285) (122,313)
----------- -----------
FINANCING ACTIVITIES
Increase in long-term obligations 75,000 --
Sale of Common Stock, net of issuance costs 8,405 6,483
Distribution to minority interest holder -- (279)
----------- -----------
Net cash provided by financing
activities 83,405 6,204
----------- -----------
Increase (decrease) in cash and cash equivalents (45,433) 26,967
Cash and cash equivalents at beginning of year 90,741 14,879
----------- -----------
Cash and cash equivalents at end of period $45,308 $41,846
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 28, 1997
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 28, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 28, 1997.
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 29, 1996.
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 comprised of thirteen
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. None of the Company's investments in debt
securities have maturities greater than one year. The following is a
summary of the Company's investments by major security type at amortized
cost which approximates fair value:
September 28, December 29,
1997 1996
(in thousands) ------------- -------------
Corporate debt securities $9,549 $55,618
Mortgage-backed securities 34,197 35,699
Municipal auction rate preferred stock 24,400 2,500
------------- -------------
$68,146 $93,817
============= =============
Amounts included in cash and cash equivalents $43,746 $91,317
Amounts included in short-term investments 24,400 2,500
------------- -------------
$68,146 $93,817
============= =============
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 tax provision for the first nine months of 1997 represents tax
loss carrybacks associated with the Company's U.S. operations. The
Company's wholly-owned thin-film media operation Komag USA (Malaysia)
Sdn. ("KMS") operates under an initial five-year tax holiday which
commenced in July 1993. Assuming KMS fulfills certain commitments under
its license to operate within Malaysia, this initial tax holiday may be
extended for an additional five-year period by the Malaysian government.
KMS has also been granted a ten-year tax holiday for its second and
third plant sites in Malaysia. This new tax holiday has not commenced
as of September 28, 1997.
NOTE 4 - TERM DEBT AND LINES OF CREDIT
In June 1997, the Company amended an existing line of credit
facility. The amended agreement increased the Company's total credit
facilities to $345,000,000. At September 28, 1997, a total of
$200,000,000 was available for additional borrowings under these credit
facilities. Loan availability is subject to compliance with certain
financial covenants, including limitations on the number of sequential
quarterly losses.
NOTE 5 - RESTRUCTURING CHARGE
During the third quarter of 1997 the Company undertook an
evaluation of the size and location of its existing production capacity
relative to the short-term market demand outlook. Based upon this
evaluation the Company implemented a restructuring plan in August 1997.
Under the restructuring plan, the Company will consolidate its U.S.
manufacturing operations onto its new campus in San Jose, California and
close two older factories in Milpitas, California. The smaller of the
two Milpitas factories was closed at the end of the third quarter of
1997 and the second factory is scheduled to close by the end of the
second quarter of 1998. Over time the Company expects that its Malaysian
manufacturing operations will account for an increasing portion of the
Company's production output. By the end of 1998 the Company anticipates
that approximately three-quarters of its disk output will be produced at
the Malaysian manufacturing facilities, up from approximately 50%
currently. These facilities are closer to customers' disk drive
assembly plants in Southeast Asia and enjoy certain cost and tax
advantages over the Company's U.S. manufacturing facilities.
The planned restructuring actions resulted in a charge of $52.2
million and included reducing headcount, vacating leased facilities,
consolidating operations and disposing of assets. The restructuring
charge included $3.9 million for severance costs associated with
terminated employees, $33.0 million for the write-off of the net book
value of equipment and leasehold improvements, $10.1 million related to
equipment order cancellations and other equipment related costs and $5.2
million for facility closure costs. Non-cash items included in the
restructuring charge totaled approximately $33.0 million. At September
29, 1997, $16.5 million related to the restructuring activities remained
in current liabilities.
The restructuring provisions were established and approved by the
Company's executive management and its Board of Directors. Actual
restructuring costs are recognized as reductions in the restructuring
liability in the period incurred.
NOTE 6 - EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (FAS 128), "Earnings per Share", which the Company is
required to adopt for its fiscal year ending December 28, 1997. At that
time, the Company will be required to change the method currently used
to compute earnings (loss) per share and to restate all prior periods.
Under the new requirements for calculating primary earnings (loss) per
share, the dilutive effect of stock options will be excluded.
Application of FAS 128 is expected to have no impact on primary
earnings (loss) per share for the three- and nine-month periods ended
September 28, 1997 nor for the three-month period ended September 29,
1996. Earnings per share for the nine-month period ended September 29,
1996 will increase by $0.08 per share. The calculation of diluted
earnings per share does not differ materially from the Company's
reported primary earnings per share.
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: industry supply-demand
relationship and related pricing for high-end desktop and enterprise
disk products; successful product qualification of next-generation
products; utilization of manufacturing facilities; rate of improvement
in manufacturing efficiencies on magnetoresistive ("MR") products;
extensibility of process equipment to meet more stringent future product
requirements; availability of sufficient cash resources; vertical
integration and consolidation within the Company's limited customer
base; increased competition; availability of certain sole-sourced raw
material supplies; and the risk factors listed in the Company's Form 10-
K filed in March 1997. 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.
Overview
Results for the first nine-months of 1997 were dramatically lower
than the first nine-months of 1996. Entering 1996 the Company was
producing mature product offerings at high yields with full utilization
of its capacity and strong demand for these products. Gross margins
exceeding 40% in both the first and second quarters of 1996 were at
near-record levels for the Company. In the third quarter of 1996, the
Company began a rapid transition to MR and proximity-inductive thin-film
media products. Manufacturing yields for these products were
substantially below the high yields achieved during the first half of
1996. Additionally, the Company devoted significant portions of its
manufacturing capacity to development efforts for the new products. As a
result of these low yield and equipment utilization rates, the Company's
sales in the second half of 1996 were production constrained and
declined from the levels during the first half of the year.
Furthermore, an increasing mix of the low yielding new products led to
a sequential decline in gross margin percentages in the second half of
1996. The gross margin percentage for the third and fourth quarters
of 1996 were 24.0% and 11.7%, respectively.
Net sales increased sequentially during the first two quarters of
1997, primarily due to manufacturing capacity additions, but fell
sharply in the third quarter of 1997 as an excess supply of enterprise-
class disk drives caused drive manufacturers to reduce their build plans
for this class of drives. The Company's net sales and gross margin
decreased sharply to $129.7 million and 0.2%, respectively, in the third
quarter of 1997, down sequentially from $175.1 million and 20.4%,
respectively. Lower unit production volumes in the third quarter of
1997, coupled with the high fixed cost structure of the Company's
business, increased unit production costs. Additionally, write-downs
for excess supplies of certain inventories further depressed the third
quarter's gross margin percentage.
During the third quarter of 1997 the Company undertook an
evaluation of the size and location of its existing production capacity
relative to the short-term market demand outlook. Based upon this
evaluation the Company implemented a restructuring plan in August 1997.
Under the restructuring plan, the Company will consolidate its U.S.
manufacturing operations onto its new campus in San Jose, California and
close two older factories in Milpitas, California. The smaller of the
two Milpitas factories was closed at the end of the third quarter of
1997 and the second factory is scheduled to close by the end of the
second quarter of 1998. Over time the Company expects that its Malaysian
manufacturing operations will account for an increasing portion of the
Company's production output. By the end of 1998 the Company anticipates
that approximately three-quarters of its disk output will be produced at
the Malaysian manufacturing facilities, up from approximately 50%
currently. These facilities are closer to customers' disk drive
assembly plants in Southeast Asia and enjoy certain cost and tax
advantages over the Company's U.S. manufacturing facilities.
The Company anticipates that net sales for the fourth quarter of
1997 will rebound substantially relative to the third quarter of 1997
due in large measure to increased order volume for desktop media
products. Disk sales into the enterprise market during the fourth
quarter will remain well below the Company's historical levels due to
the anticipated slow recovery of this segment. During the third quarter
several customers qualified the Company's latest advanced disk offerings
that permit recording densities of 1.5 gigabits ("Gb") per square inch
and above, the equivalent of 2 gigabytes ("GB") of information on a 3
1/2 inch disk platter. These drive programs entered volume production
late in the third quarter. The Company is in the process of qualifying
this class of disk products into other disk drive programs. Such
additional qualifications, if successful, could positively influence
fourth quarter results but will more likely affect results in the
first two quarters of 1998.
Revenue
Net sales decreased 1% in the third quarter of 1997 relative to
the third quarter of 1996. The decrease was primarily due to a decrease
in unit volume. The overall average unit selling price was relatively
unchanged between the comparable three-month periods. The overall
average selling price typically strengthens only as the result of
product transitions to higher-priced, more technologically advanced
product offerings. Price reductions for individual product offerings
are characteristic of the thin-film media industry. Sales of the new MR
and proximity-inductive products, which began in the last half of 1996,
increased rapidly and accounted for nearly all unit sales in the third
quarter of 1997. The effect of the sales mix shift to these new higher-
priced, next-generation products more than offset the effect of price
reductions on individual product offerings and resulted in the flat
overall average selling price. Net sales in the third quarter of 1997
and third quarter of 1996 included $1.8 million and $1.5 million of
substrate sales, respectively. The Company periodically sells substrate
products but does not currently anticipate that such sales will become a
significant portion of its revenue.
Net sales increased 8% in the first nine-months of 1997 relative
to the first nine-months of 1996 primarily due to an increase in unit
sales volume. Excluding substrate disk sales of $3.7 million in the
first nine months of 1997 and $6.8 million in the first nine months of
1996, net sales of thin-film media increased approximately 9%. The
increase was almost entirely due to a higher unit sales volume in the
first three quarters of 1997. The overall average selling price
increased less than 1% between the periods. The sales mix shift to
higher-priced MR and proximity-inductive products described in the
quarterly comparison more than offset the effect of price reductions on
individual product offerings and resulted in the slight increase in the
overall average selling price.
In addition to sales of internally produced disk products, the
Company has historically resold 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 both the third
quarter of 1997 and third quarter of 1996. Distribution sales of thin-
film media manufactured by AKCL were $4.5 million in the first nine
months of 1997 compared to $3.8 million in the first nine months of
1996. The Company expects that distribution sales of AKCL product will
remain at a relatively low level throughout 1997.
During the third quarter of 1997 three customers accounted for
nearly 90% of consolidated net sales: Western Digital Corporation (50%),
Maxtor Corporation (25%), and International Business Machines ("IBM")
(14%). 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. The Company's customer
mix shifted dramatically in the third quarter of 1997 as a result of the
reduction in enterprise-class disk drive production by the Company's
customers. In the third quarter of 1997 Quantum Corporation, together
with its Japanese contract manufacturing partner, Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE") and Seagate Technology, Inc.
collectively accounted for less than ten percent of the Company's net
sales. The Company's disk sales to these customers were primarily
incorporated into enterprise-class disk drives. These two customers
collectively accounted for 35% of net sales in the second quarter of
1997.
Unit production increased 22% in the third quarter of 1997
relative to the third quarter of 1996. 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). In the third quarter of
1997 relative to the third quarter of 1996, the increased unit
production volume was primarily due to the addition of physical
capacity. Higher production throughput achieved through shorter process
cycle times was largely offset by lower equipment utilization rates.
The Company operated below capacity in the third quarter of 1997 as a
result of weak market demand for enterprise-class disk products.
Manufacturing yields improved slightly between the comparable three-
month periods.
Unit production volume increased approximately 11% in the first
nine months of 1997 compared to the first nine months of 1996. The net
effect of a 21% increase in unit production capacity, coupled with an
improvement in process cycle times, outpaced decreases in manufacturing
yield and utilization rates during the comparable nine-month periods.
Lower manufacturing yields occurred as a result of the product
transition to MR and advanced proximity-inductive media. Product
transition issues and the third quarter 1997 weakness in market demand
for enterprise-class disk products were the primary contributors to the
lower utilization rates.
The Company expects to exit 1998 with a production capacity of 20
million disks per quarter after closure of the Company's two Milpitas,
California plants. When fully equipped, the Company currently believes
that its remaining manufacturing facilities in the U.S. and Malaysia
will have the capacity to manufacture approximately 115 million disks
per year. The Company's U.S. and Malaysian factories produced
approximately 49 million disks in 1996 and 41 million disks during the
first three quarters of 1997.
Gross Margin
The gross margin percentage for the third quarter of 1997 was
0.2%, compared to 24.0% for the third quarter of 1996. The gross margin
percentage for the first nine months of 1997 was 15.9%, down from 36.4%
for the first nine months of 1996. The substantial decreases in the
gross margin percentages between the comparable nine-month periods were
primarily attributable to a combination of lower manufacturing yields,
reduced equipment utilization rates and inherently higher product
material and processing costs for MR and advanced proximity disks.
Additionally, the Company incurred inventory write-downs of $10.8
million and $18.5 million in the third quarter and first nine months of
1997, respectively. Inventory write-downs were not significant in the
third quarter and first nine months of 1996.
The Company expects that gross margins should improve but will
likely remain under pressure during the fourth quarter of 1997 and
throughout the first half of 1998 until the Company's restructuring plan
becomes fully implemented in the second half of 1998.
Operating Expenses
Research and development ("R&D") expenses increased 67% ($5.3
million) and 70% ($14.9 million) in the three- and nine-month periods of
1997 relative to the comparable periods of 1996. The Company occupied a
newly constructed 188,000 square-foot R&D facility in the first quarter
of 1997. Costs for the new facility and increased R&D staffing accounted
for the increases between the three- and nine-month periods of 1997 and
the comparable periods of 1996. The Company expects to increase R&D
spending by 70% to approximately $50 million in 1997 from $29 million in
1996 primarily due to additional facility, equipment and staffing costs.
Selling, general and administrative ("SG&A") expenses decreased
approximately 42% ($2.9 million) in the third quarter of 1997 relative
to the third quarter of 1996. Lower provisions for bonus and profit
sharing programs (decrease of $2.9 million) and lower provisions for bad
debt (decrease of $0.4 million) resulted in the overall decrease in SG&A
expenses between the quarters. Excluding provisions for bonus and
profit sharing programs and provisions for bad debt, SG&A expenses
increased $0.4 million. The higher spending was primarily due to
increased payroll-related costs. SG&A expenses decreased 25% ($7.2
million) in the first nine months of 1997 compared to the first nine
months of 1996 primarily due to a $9.3 million reduction in bonus and
profit sharing provisions. Provisions for bad debt increased $0.2
million in the first nine months of 1997 compared to the first nine
months of 1996. Excluding provisions for bonus and profit sharing
programs and provisions for bad debt, SG&A expenses increased $2.0
million due mainly to higher payroll and facility-related costs. The
Company occupied a newly constructed administration facility in March
1997.
The Company implemented a restructuring plan for its U.S.
manufacturing operations in the third quarter of 1997 and recorded a
restructuring charge of $52.2 million. The restructuring charge
included $3.9 million for severance costs associated with terminated
employees, $33.0 million for the write-off of the net book value of
equipment and leasehold improvements, $10.1 million related to equipment
order cancellations and other equipment related costs and $5.2 million
for facility closure costs. Non-cash items included in the
restructuring charge totaled approximately $33.0 million.
Interest and Other Income/Expense
Interest income decreased $0.2 million in the third quarter of
1997 relative to the third quarter of 1996 and $1.8 million in the first
nine months of 1997 relative to the first nine months of 1996. The
decreases were due to lower average cash and short-term investment
balances in the current year periods. Interest expense increased $2.4
million in the third quarter of 1997 compared to the third quarter of
1996 and $6.2 million in the first nine months of 1997 relative to the
first nine months of 1996. The Company borrowed $145.0 million under
its credit facilities between the beginning of December 1996 and the end
of March 1997. The Company had no outstanding debt during the first
nine months of 1996.
Other income decreased $0.5 million in the third quarter of 1997
compared to the third quarter of 1996. Other income in the third quarter
of 1997 included increased gains on foreign currency transactions ($1.0
million), higher losses on the disposal of property, plant and equipment
($0.4 million), reduced royalty income from AKCL for sales made by AKCL
outside of Japan ($0.6 million) and increases in other miscellaneous
expenses ($0.5 million). Other income increased $0.2 million in the
first nine months of 1997 relative to the first nine months of 1996.
Other income in the first nine months of 1997 included increased gains
on foreign currency transactions ($1.2 million), higher losses on the
disposal of property, plant and equipment ($1.2 million), increased
royalty income from AKCL for sales made by AKCL outside of Japan ($0.7
million) and increases in other miscellaneous expenses ($0.5 million).
Income Taxes
The tax provision for the first nine months of 1997 represents tax
loss carrybacks associated with the Company's U.S. operations. The
Company's wholly-owned thin-film media operation Komag USA (Malaysia)
Sdn. ("KMS") operates under an initial five-year tax holiday which
commenced in July 1993. Assuming KMS fulfills certain commitments under
its license to operate within Malaysia, this initial tax holiday may be
extended for an additional five-year period by the Malaysian government.
KMS has also been granted a ten-year tax holiday for its second and
third plant sites in Malaysia. This new tax holiday has not commenced
as of September 28, 1997.
Minority Interest in KMT/Equity in Net Income (Loss) of AKCL
The minority interest in the net income (loss) of consolidated
subsidiary represented Kobe Steel USA Holdings Inc.'s ("Kobe USA's")
20% share of Komag Material Technology, Inc.'s ("KMT's") net income
(loss). KMT recorded a minimal net loss in the third quarter of 1997
and net income of $0.9 million in the third quarter of 1996. KMT
recorded net income of $1.8 million and $2.3 million in the first nine
months of 1997 and 1996, respectively.
The Company records 50% of AKCL's net income (loss) as equity in
net income (loss) of unconsolidated joint venture. AKCL reported a net
loss of $7.7 million in the third quarter of 1997, substantially worse
than the net income of $1.6 million incurred in the third quarter of
1996. AKCL reported a net loss of $3.1 million in the first nine months
of 1997 compared to a net income of $19.4 million in the first nine
months of 1996. Results for the first nine months of 1997 included a
$5.3 million (net of tax) gain on AKCL's March 1997 sale of its
investment in Headway Technologies, Inc. Excluding the gain, AKCL
incurred a net loss of $8.4 million in the first nine months of 1997.
AKCL was primarily producing mature inductive products with more
stable, higher yields in the third quarter and first nine months of
1996. Product transition issues related to AKCL's qualification and
production of MR products adversely affected both the third quarter and
first nine months of 1997. AKCL operated substantially under capacity
in the third quarter of 1997 and the Company anticipates that AKCL will
continue to underutilize its capacity through at least the end of 1997.
AKCL's equity contribution is expected to remain negative but could show
some improvement over the third quarter's result. AKCL is currently in
the process of qualifying MR products with customers. Assuming AKCL
successfully qualifies for new drive programs, volume production and
shipments into those programs are not expected to begin until at least
the first quarter of 1998.
Liquidity and Capital Resources:
Cash and short-term investments of $69.7 million at the end of the
third quarter of 1997 decreased $23.5 million from the end of the prior
fiscal year. Consolidated operating activities generated $52.4 million
in cash during the first nine months of 1997. The Company borrowed
$75.0 million under its credit facilities and spent $161.0 million on
capital requirements during the first nine months of 1997. Sales of
Common Stock under the Company's stock option and employee stock
purchase programs generated $8.4 million. Additionally, the Company
received a $1.5 million cash dividend from AKCL.
Total capital expenditures for 1997 were previously planned at
approximately $290 million, and included expenditures for additional
production capacity, equipment upgrades, facility expansions, and R&D
equipment. The Company has reevaluated its capital plan. Based on this
review the Company currently expects capital expenditures to approximate
$200 million to $220 million for 1997. The Company will focus
expenditures primarily on projects that improve process capabilities and
support an increasing MR product mix.
Current noncancellable capital commitments total approximately $95
million. The Company currently has $200 million available under its
$345 million unsecured, multi-year bank lines of credit. The
availability of funds under these lines of credit is subject to
compliance with certain financial covenants, including limitations on
the number of sequential quarterly losses. The Company believes that
the reduction in capital spending and the completion of the Company's
restructuring plan are necessary to ensure that the Company maintains
adequate cash reserves through 1998.
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) Exhibit 10.24-First Amendment to Amended and
Restated Credit Agreement dated October 9,
1997 Among Komag, Incorporated and
BankBoston, N.A. as Agent.
Exhibit 27-Financial Data Schedule
(b) Not Applicable
<PAGE>
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 7, 1997 BY: /s/ William L. Potts, Jr.
----------------- --------------------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: November 7, 1997 BY: /s/ Stephen C. Johnson
----------------- --------------------------------------
Stephen C. Johnson
President and
Chief Executive Officer
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT (this "Amendment") is entered into as of October 9, 1997, by and
among KOMAG, INCORPORATED, a Delaware corporation ("Borrower"), the
banks from time to time party thereto, together with their respective
successors and assigns (each a "Bank" and collectively the "Banks"), and
BANKBOSTON, N.A., a national banking association ("BankBoston"), as agent
for the Banks (in such capacity, the "Agent"), with reference to the
following facts:
A. The Borrower, the Banks, and the Agent are parties to that
certain Amended and Restated Credit Agreement dated as of June 20, 1997,
by and among the Borrower, the Banks, and the Agent (the "Credit
Agreement"). The Credit Agreement and all related and supporting
documents collectively are referred to in this Amendment as the "Loan
Documents."
B. The parties desire to amend certain provisions contained in
the Credit Agreement as set forth below.
NOW, THEREFORE, in consideration of the promises and the
agreements, provisions and covenants herein contained, the parties hereto
agree as follows:
1. Defined Terms. Capitalized terms not otherwise defined
herein shall have the same meanings as set forth in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is
hereby amended as follows:
(a) The following defined term shall be added to
Section 1.1 in its proper alphabetical order:
"'Net Profit Margin': Net income for any fiscal month of
Borrower, divided by net sales for such fiscal month, excluding equity in
net income or loss of Asahi Komag Co., Ltd."
(b) Section 2.1(c) is hereby amended to read as follows
from and after the effective date of this Amendment:
"Facility Fee. Borrower agrees to pay to the Agent, for
the pro rata benefit of the Banks in accordance with their respective
Commitment Percentages, a facility fee based on the Aggregate Commitment
at the following rates, each of which shall be calculated on the basis of
a 360-day year for the actual days elapsed beginning on the Closing Date,
payable in arrears at the end of each calendar quarter following the
Closing Date. Said rates shall be calculated quarterly based on
Borrower's performance for the immediately preceding quarter for which
Borrower has provided information to the Agent regarding the calculation
of the rate and shall be effective five (5) Business Days following the
Agent's receipt of such financial statements and the officer's certificate
required to be delivered in connection therewith pursuant to Section
6.1(a); provided that if Borrower shall not have timely delivered its
financial statements in accordance with Section 6.1(a) (after giving
effect to any grace period set forth in Section 7.1(c)), then commencing
on the date upon which such financial statements should have been delivered
and continuing until such financial statements are actually delivered, it
shall be assumed for purposes of determining said rates that Borrower's
Consolidated Funded Debt to Consolidated Capital is equal to or greater
than .25 to 1.0.
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the facility fee shall be 20 basis
points per annum;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the facility fee shall be 25 basis points per annum; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the facility fee shall be
30 basis points per annum;
provided, that upon Borrower's achievement of a cumulative average
Net Profit Margin for any fiscal six (6) month period commencing on or
after August 25, 1997 of at least five percent (5%), as demonstrated by
Borrower's consolidated balance sheet for itself and its Consolidated
Subsidiaries as at the end of such fiscal six (6) month period and the
related consolidated statements of income, stockholders' equity and
statement of cash flows for such fiscal six (6) month period, which
statements are certified by a duly authorized officer of Borrower as being
fairly stated in all material respects subject to year end adjustments,
the facility fee shall be reduced to the following rates:
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the facility fee shall be 17.5 basis
points per annum;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the facility fee shall be 22.5 basis points per annum; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the facility fee shall be
27.5 basis points per annum;
provided, further, that upon Borrower's achievement of a cumulative
average Net Profit Margin for any fiscal six (6) month period commencing
on or after August 25, 1997 of at least ten percent (10%), as demonstrated
by Borrower's consolidated balance sheet for itself and its Consolidated
Subsidiaries as at the end of such fiscal six (6) month period and the
related consolidated statements of income, stockholders' equity and
statement of cash flows for such fiscal six (6) month period, which
statements are certified by a duly authorized officer of Borrower as being
fairly stated in all material respects subject to year end adjustments,
the facility fee shall be further reduced to the following rates:
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the facility fee shall be 15 basis
points per annum;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the facility fee shall be 20 basis points per annum; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the facility fee shall be
25 basis points per annum.
For purposes of this Section 2.1(c), Borrower shall be required to
furnish its fiscal six (6) month financial statements only for those
periods as are necessary to demonstrate achievement of the Net Profit
Margin tests specified in this Section."
(c) Section 2.3(c) is amended to read as follows from
and after the effective date of this Amendment:
"LIBOR Rate Loans. Revolving Loans which are LIBOR
Rate Loans shall bear interest for each Interest Period with respect
thereto on the unpaid principal amount thereof at a rate per annum equal
to the LIBOR Rate determined for such Interest Period plus an amount (the
"Applicable Margin") determined in accordance with following schedule.
Said rates shall be calculated quarterly based on Borrower's performance
for the immediately preceding fiscal quarter for which Borrower has
provided information to the Agent regarding the calculation of the rate
and shall be effective five (5) Business Days following the Agent's
receipt of such financial statements and the officer's certificate
required to be delivered in connection therewith pursuant to Section
6.1(a); provided that if Borrower shall not have timely delivered its
financial statements in accordance with Section 6.1(a) (after giving
effect to any grace period set forth in Section 7.1(c)), then commencing
on the date upon which such financial statements should have been delivered
and continuing until such financial statements are actually delivered, it
shall be assumed for purposes of determining said rates that Borrower's
Consolidated Funded Debt to Consolidated Capital is equal to or greater
than .25 to 1.0 (said calculations shall apply to existing as well as new
LIBOR Rate Loans).
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the Applicable Margin shall be 85 basis
points;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the Applicable Margin shall be 92.5 basis points; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the Applicable Margin
shall be 100 basis points;
provided, that upon Borrower's achievement of a cumulative average
Net Profit Margin for any fiscal six (6) month period commencing on or
after August 25, 1997 of at least five percent (5%), as demonstrated by
Borrower's consolidated balance sheet for itself and its Consolidated
Subsidiaries as at the end of such fiscal six (6) month period and the
related consolidated statements of income, stockholders' equity and
statement of cash flows for such fiscal six (6) month period, which
statements are certified by a duly authorized officer of Borrower as being
fairly stated in all material respects subject to year end adjustments,
the Applicable Margin shall be as follows:
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the Applicable Margin shall be 60 basis
points;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the Applicable Margin shall be 67.5 basis points; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the Applicable Margin
shall be 75 basis points;
provided, further, that upon Borrower's achievement of a cumulative
average Net Profit Margin for any fiscal six (6) month period commencing
on or after August 25, 1997 of at least ten percent (10%), as demonstrated
by Borrower's consolidated balance sheet for itself and its Consolidated
Subsidiaries as at the end of such fiscal six (6) month period and the
related consolidated statements of income, stockholders' equity and
statement of cash flows for such fiscal six (6) month period, which
statements are certified by a duly authorized officer of Borrower as being
fairly stated in all material respects subject to year end adjustments,
the Applicable Margin shall be as follows:
If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the Applicable Margin shall be 35 basis
points;
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0:
the Applicable Margin shall be 42.5 basis points; and
If Borrower's Consolidated Funded Debt to Consolidated
Capital is equal to or greater than .25 to 1.0: the Applicable Margin
shall be 50 basis points.
For purposes of this Section 2.3(c), Borrower shall be required to
furnish its fiscal six (6) month period financial statements only for
those periods as are necessary to demonstrate achievement of the Net
Profit Margin tests specified in this Section."
(d) Section 6.2(a) is amended to read as follows:
"Profitability. Permit, on a consolidated
after-tax basis, (i) an aggregate net loss for the period beginning
September 29, 1997 and ending March 31, 1998 of more than Twenty Million
Dollars ($20,000,000); or (ii) a net loss in any two consecutive fiscal
quarter periods commencing after December 28, 1997."
3. Conditions to Effectiveness.
This Amendment shall become effective as of October 9, 1997
(the "Closing Date"), only upon:
(i) receipt by the Agent from the Borrower of a fee equal
to One Hundred Thousand Dollars ($100,000), to be distributed to the Banks
on a pro rata basis in accordance with the respective Commitment
Percentage of each Bank;
(ii) receipt by the Agent of the following (each of
which shall be in form and substance satisfactory to the Agent and its
counsel, with sufficient copies for each of the Banks): counterparts of
this Amendment duly executed on behalf of the Borrower, the Agent, and the
Majority Banks.
4. Representations and Warranties. In order to induce the
Banks to enter into this Amendment, the Borrower represents and warrants
to the Agent and each Bank that the following statements are true, correct
and complete as of the effective date of this Amendment:
(a) Corporate Power and Authority. The Borrower has
all requisite corporate power and authority to enter into this Amendment
and to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as amended by this Amendment (the
"Amended Agreement"). The Certificate of Incorporation and Bylaws of the
Borrower have not been amended since the copies previously delivered to
the Agent or Banks.
(b) Authorization of Agreements. The execution and
delivery of this Amendment and the performance by the Borrower of the
Amended Agreement have been duly authorized by all necessary corporate
action on the part of the Borrower.
(c) No Conflict. The execution and delivery by the
Borrower of this Amendment do not and will not contravene (i) any law or
any governmental rule or regulation applicable to the Borrower, (ii) the
Certificate of Incorporation or Bylaws of the Borrower, (iii) any order,
judgment or decree of any court or other agency of government binding on
the Borrower, or (iv) any material agreement or instrument binding on the
Borrower.
(d) Governmental Consents. The execution and delivery
by the Borrower of this Amendment and the performance by the Borrower of
the Amended Agreement do not and will not require any registration with,
consent or approval of, or notice to, or other action to, with or by, any
federal, state or other governmental authority or regulatory body.
(e) Binding Obligation. This Amendment and the Amended
Agreement have been duly executed and delivered by the Borrower and are the
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except in each case as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws and equitable principles
relating to or affecting creditors' rights.
(f) Incorporation of Representations and Warranties
From Credit Agreement. The representations and warranties contained in
Section 5.1 of the Credit Agreement are correct on and as of the effective
date of this Amendment as though made on and as of such date (except to
the extent such representations and warranties expressly refer to an
earlier date, in which case they were true and correct as of such earlier
date and except that Section 5.1(e) shall be deemed instead to refer to the
last day of the most recent fiscal year and fiscal quarter for which
financial statements have then been delivered).
(g) Absence of Default. No event has occurred and is
continuing or will result from the consummation of the transactions
contemplated by this Amendment that would constitute an Event of Default
or a Potential Event of Default.
5. Miscellaneous.
(a) Reference to and Effect on the Credit Agreement and
the Other Loan Documents.
(i) On and after the Closing Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the "Credit
Agreement," "thereunder", "thereof" or words of like import referring to
the Credit Agreement, shall mean and be a reference to the Amended
Agreement.
(ii) Except as specifically amended by this
Amendment, the Credit Agreement and the other Loan Documents shall remain
in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of
this Amendment shall not, except as expressly provided herein, constitute
a waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under the Credit Agreement or any of
the other Loan Documents.
(b) Fees and Expenses. All reasonable and documented
costs and expenses of the Agent, including, but not limited to, reasonable
and documented attorneys' fees, incurred by the Agent in the preparation
and implementation of this Amendment constitute costs and expenses in
connection with the amendment and restructuring of the Loan Documents, and
as such are payable by the Borrower in accordance with Section 9.5 of the
Credit Agreement.
(c) Headings. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall
not constitute a part of this Amendment for any other purpose or be given
any substantive effect.
(d) Applicable Law. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL
LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES.
(e) Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized, as
of the date first above written.
KOMAG, INCORPORATED
By:
Title:
BANKBOSTON, N.A.,
as the Agent and as a Bank
By:
Title:
COMERICA BANK - CALIFORNIA,
as a Bank
By:
Title:
STANDARD CHARTERED BANK,
as a Bank
By:
Title:
By:
Title:
BANQUE NATIONALE DE PARIS,
as a Bank
By:
Title:
By:
Title:
FLEET NATIONAL BANK,
as a Bank
By:
Title:
BANK OF MONTREAL, as a Bank
By:
Title:
THE BANK OF NOVA SCOTIA,
as a Bank
By:
Title:
UNION BANK OF CALIFORNIA, N.A.,
as a Bank
By:
Title:
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
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