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 March 29, 1998
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 March 29, 1998, 52,894,878 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
-------------------
March 29, March 30,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $76,057 $167,242
Cost of sales 107,652 127,927
--------- ---------
GROSS PROFIT (LOSS) (31,595) 39,315
Operating expenses:
Research, development and engineering 14,944 12,013
Selling, general and administrative 4,611 10,145
--------- ---------
19,555 22,158
--------- ---------
OPERATING INCOME (LOSS) (51,150) 17,157
Other income (expense):
Interest income 2,552 1,185
Interest expense (4,554) (1,467)
Other, net 4,323 687
--------- ---------
2,321 405
Income (loss) before income taxes, minority interest,
and equity in joint venture income (loss) (48,829) 17,562
Provision for income taxes -- 2,986
--------- ---------
Income (loss) before minority interest
and equity in joint venture income (loss) (48,829) 14,576
Minority interest in net income (loss) of
consolidated subsidiary (95) 182
joint venture (9,424) 3,405
--------- ---------
NET INCOME (LOSS) ($58,158) $17,799
========= =========
Basic income (loss) per share ($1.10) $0.34
========= =========
Diluted income (loss) per share ($1.10) $0.33
========= =========
Number of shares used in basic computation 52,875 51,811
========= =========
Number of shares used in diluted computation 52,875 53,906
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------- -------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $96,951 $133,897
Short-term investments 76,700 32,300
Accounts receivable less allowances of
$3,835 in 1998 and $4,424 in 1997 47,892 77,792
Accounts receivable from related parties 2,086 4,106
Inventories:
Raw materials 32,043 33,730
Work-in-process 17,918 17,490
Finished goods 10,601 15,558
------------- -------------
Total inventories 60,562 66,778
Prepaid expenses and deposits 3,790 3,697
Income taxes receivable 3,469 24,524
Deferred income taxes 28,595 28,595
------------- -------------
Total current assets 320,045 371,689
Investment in Unconsolidated Joint Venture 18,775 30,126
Property, Plant and Equipment
Land 7,785 9,526
Building 123,726 126,405
Equipment 831,151 793,561
Furniture 11,784 11,791
Leasehold improvements 138,977 141,111
------------- -------------
1,113,423 1,082,394
Less allowances for depreciation and
amortization (430,286) (403,798)
------------- -------------
Net property, plant and equipment 683,137 678,596
Deposits and Other Assets 3,962 4,253
------------- -------------
$1,025,919 $1,084,664
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $26,052 $40,043
Accounts payable to related parties 2,993 7,093
Accrued compensation and benefits 16,860 13,596
Other liabilities 5,046 3,605
Restructuring liability 10,128 11,253
------------- -------------
Total current liabilities 61,079 75,590
Long-term Debt 260,000 245,000
Deferred Income Taxes 73,335 73,335
Other Long-term Liabilities 1,070 960
Minority Interest in Consolidated Subsidiary 3,500 3,595
Stockholders' Equity
Preferred stock -- --
Common stock 529 528
Additional paid-in capital 402,704 401,869
Retained earnings 223,318 281,476
Accumulated foreign currency translation
adjustments 384 2,311
------------- -------------
Total stockholders' equity 626,935 686,184
------------- -------------
$1,025,919 $1,084,664
============= =============
<FN>
Note: The balance sheet at December 28, 1997 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>
Three Months Ended
------------------------
March 29, March 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($58,158) $17,799
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 34,635 28,576
Provision for losses on accounts receivable (838) 1,034
Equity in net (income) loss of unconsolidated
joint venture 9,424 (3,405)
Gain on disposal of property, plant and equipment (2,728) (79)
Deferred rent 110 123
Minority interest in net income (loss) of
consolidated subsidiary (95) 182
Changes in operating assets and liabilities:
Accounts receivable 30,738 (18,003)
Accounts receivable from related parties 2,020 (5,164)
Inventories 6,216 328
Prepaid expenses and deposits (93) (860)
Trade accounts payable (13,991) (27,236)
Accounts payable to related parties (4,100) 1,428
Accrued compensation and benefits 3,264 (1,966)
Other liabilities 1,441 1,369
Income taxes receivable 21,055 12,194
Restructuring liability (1,125) --
----------- -----------
Net cash provided by operating
activities 27,775 6,320
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (41,378) (67,560)
Purchases of short-term investments (196,800) (14,235)
Proceeds from short-term investments at maturity 152,400 --
Proceeds from disposal of property, plant and
equipment 4,930 327
Deposits and other assets 291 (320)
Dividend distribution from unconsolidated
joint venture -- 1,535
----------- -----------
Net cash used in investing
activities (80,557) (80,253)
FINANCING ACTIVITIES
Increase in long-term obligations 15,000 75,000
Sale of Common Stock, net of issuance costs 836 1,966
----------- -----------
Net cash provided by financing
activities 15,836 76,966
Increase (decrease) in cash and cash equivalents (36,946) 3,033
Cash and cash equivalents at beginning of year 133,897 90,741
----------- -----------
Cash and cash equivalents at end of period $96,951 $93,774
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 29, 1998
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-month period ended March 29, 1998 are not necessarily
indicative of the results that may be expected for the year ending
January 3, 1999.
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 28, 1997.
The Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The three-month reporting periods for the
comparable years included in this report are each comprised of
thirteen weeks.
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:
March 29, December 28,
1998 1997
(in thousands) ------------- -------------
Corporate debt securities $27,763 $56,837
Mortgage-backed securities 72,620 79,419
Municipal auction rate preferred stock 76,700 32,300
------------- -------------
$177,083 $168,556
============= =============
Amounts included in cash and cash equivalents $100,383 $136,256
Amounts included in short-term investments 76,700 32,300
------------- -------------
$177,083 $168,556
============= =============
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 Company has not recorded an income tax provision or benefit
in the first quarter of 1998 due to a projected 1998 pre-tax loss at
its U.S. operations and various tax holidays in effect at its
Malaysian operations. In the first quarter of 1997, the Company
recorded a 17% estimated tax rate. The estimated tax rate at the end
of the first quarter of 1997 anticipated taxable income in fiscal
year 1997 for the Company's U.S. operations and the effect of tax
holidays at the Company's Malaysian operations. In the third quarter
of 1997, the Company revised its tax rate estimate in anticipation of
a loss for fiscal year 1997 and recorded a tax benefit representing
the utilization of available loss carrybacks associated with its U.S.
operations. No additional utilization of loss carrybacks is
available for the 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.
The commencement date for this new tax holiday has not been
determined as of March 29, 1998.
NOTE 4 - TERM DEBT AND LINES OF CREDIT
The Company's credit facilities total $345,000,000 and are
comprised of five agreements: a five-year term loan that expires in
2002, two separate revolving line of credit agreements that expire in
2002 and two separate four-year revolving line of credit agreements
that expire in 1999 and 2000. These agreements may be extended,
subject to bank approvals, annually for an additional year, thus
perpetuating their multiyear tenors. In January 1998, the Company
borrowed an additional $15,000,000 under its unsecured credit
facilities. At March 29, 1998, $85,000,000 remained available under
these unsecured credit facilities. The availability of funds under
these lines of credit is subject to compliance with certain financial
covenants, including limitations on the number and size of
consecutive quarterly losses and maintenance of minimum tangible net
worth balances. The Company anticipates that it may need to amend
certain covenants before the end of the year to avoid being out of
compliance. There can be no assurance that these funds will remain
available should the Company violate its existing loan covenants or
be unable to favorably amend such covenants at any future date.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
As of the beginning of fiscal year 1998, the Company has adopted
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." SFAS 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the
Company's net income (loss) or stockholders' equity. SFAS 130
requires the Company's foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders'
equity, be included in other comprehensive income (loss).
The following are the components of comprehensive income (loss):
Three Months Ended
---------------------------
March 29, March 30,
1998 1997
(in thousands) ------------- -------------
Net income (loss) ($58,158) $17,799
Foreign currency translation adjustments (1,927) (1,556)
------------- -------------
Comprehensive income (loss) ($60,085) $16,243
============= =============
Accumulated foreign currency translation adjustments on the
accompanying Consolidated Balance Sheets account for all of the
Company's accumulated other comprehensive income at March 29, 1998
and December 28, 1997.
NOTE 6 - RESTRUCTURING LIABILITY
During the third quarter of 1997, the Company implemented a
restructuring plan based on an evaluation of the size and location of
its existing production capacity relative to the short-term market
demand outlook. Under the restructuring plan, the Company
consolidated its U.S. manufacturing operations onto its new campus in
San Jose, California and closed two older factories in Milpitas,
California. The first of the two Milpitas factories was closed at
the end of the third quarter of 1997 and the second factory was
closed in January 1998. Over time the Company expects that its
Malaysian manufacturing operations will account for an increasing
portion of the Company's production output. 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
approximately 330 terminated employees, $33.0 million for the write-
down 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 March 29, 1998, $10.1 million
related to the restructuring activities remained in current
liabilities. The Company has made cash payments totaling
approximately $9.1 million primarily for severance and equipment-
related costs. The majority of the remaining restructuring liability,
primarily related to equipment order cancellations and facility
closure costs, is expected to be settled in 1998.
NOTE 7 - EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement No. 128 (FAS 128), "Earnings per Share", which the Company
adopted for its fiscal year ending December 28, 1997. FAS 128
replaced the calculation for primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported primary
earnings per share. Earnings per share amounts for all periods
presented have been restated to conform to FAS 128 requirements.
Three Months Ended
---------------------------
March 29, March 30,
1998 1997
------------- -------------
(in thousands, except per share amounts)
Numerator: Net income (loss) ($58,158) $17,799
------------- -------------
Denominator for basic
income (loss) per share
weighted-average shares 52,875 51,811
------------- -------------
Effect of dilutive securities:
Employee stock options -- 2,095
------------- -------------
Denominator for diluted
income (loss) per share 52,875 53,906
------------- -------------
Basic income (loss) per share ($1.10) $0.34
============= =============
Diluted income (loss) per share ($1.10) $0.33
============= =============
NOTE 8 - USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
extimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
<PAGE>
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 enterprise and desktop disk
products; successful product qualification of next-generation products;
successful deployment of new process technologies into manufacturing;
utilization of manufacturing facilities; rate of improvement in
manufacturing efficiencies; extensibility of process equipment to meet
more stringent future product requirements; availability of sufficient
cash resources, including continuing access to its bank credit
facilities; 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 for the fiscal year ended December 28, 1997 filed in
March 1998. 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
Operating results for the first quarter of 1998 were significantly
lower than the first quarter of 1997. Adverse market conditions, which
began late in the second quarter of 1997, intensified in the first
quarter of 1998. Late in the second quarter of 1997, demand for thin-
film media products fell abruptly as an excess supply of enterprise-
class disk drives caused drive manufacturers to reduce build plans for
this class of drives. The decrease in demand for enterprise-class media,
combined with a major expansion of media production capacity at both
independent media suppliers and captive media operations of disk drive
manufacturers, resulted in an excess supply of enterprise-class media.
Orders for the Company's enterprise-class media products were reduced in
the third quarter of 1997 as drive manufacturers reduced drive
production and relied more heavily on their own captive media
operations. Net sales decreased sharply to $129.7 million in the third
quarter of 1997, down sequentially from $175.1 million in the second
quarter of 1997. The gross margin percentage fell to 0.2% in the third
quarter of 1997, down from 20.4% in the second quarter of 1997. Net
sales and the gross margin percentage improved to $159.0 million and
11.6%, respectively, for the fourth quarter of 1997.
In December 1997, several disk drive manufacturers initiated
cutbacks in their desktop product manufacturing plans for early 1998 in
response to supply and demand imbalances within that industry segment.
Weakened demand for desktop media products, combined with the continuing
slow recovery of the enterprise-class market segment, lowered media
demand at independent media suppliers as captive media operations
supplied a larger share of the industry's media requirements. The
resulting excess supply of media heightened price competition among
independent media suppliers. Net sales in the first quarter of 1998
dropped 52% sequentially to $76.1 million as a result of both lower unit
sales volumes and a decrease of approximately 10% in the overall average
selling price for the Company's products. Low utilization of the
Company's factories during the first quarter of 1998 pushed unit
production costs up substantially as fixed costs were spread over fewer
production units. The combination of the lower overall average selling
price and significantly higher average unit production cost resulted in
a negative gross margin percentage of 41.5% for the first quarter of
1998.
Revenue
Net sales decreased 55% in the first quarter of 1998 relative to
the first quarter of 1997. The year-over-year decrease was due to a
combination of a 47% decrease in unit sales volume and a 14% decrease in
the overall average selling price. First quarter 1998 unit sales
declined to 7.2 million disks from 13.8 million disks in the first
quarter of 1997. The majority of the decrease in the overall average
selling price occurred between the fourth quarter of 1997 and the first
quarter of 1998 due to the adverse market conditions for both desktop
and enterprise-class media products discussed above. Price reductions
are common on individual product offerings in the thin-film media
industry. The Company has traditionally prevented significant reductions
in its overall average selling price through transitions to higher-
priced, more technologically advanced product offerings. Unit sales of
magnetoresistive ("MR") products increased to 73% of unit sales from 43%
of unit sales in the first quarter of 1997. In the first quarter of
1998, the effect of pricing pressures generated by the imbalance in
supply and demand for thin-film media, however, more than offset the
effect of continuing transition to MR product offerings.
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 $2.4 million in the first
quarter of 1998 compared to $2.7 million in the first quarter of 1997.
The Company expects that distribution sales of AKCL product will remain
at a similar level throughout 1998.
During the first quarter of 1998 four customers accounted for 90%
of consolidated net sales: Maxtor Corporation (33%), Western Digital
Corporation (33%), Quantum Corporation, together with its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd.
("MKE") (14%), and Seagate Technologies, Inc. (10%). 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 expects that net sales will increase sequentially in
the second quarter of 1998 to the $100-$125 million range. Higher unit
production volumes and expected yield improvements should reduce the
average unit production cost. Price competition, however, is expected
to continue into the second quarter of 1998. The Company believes that
the overall average selling price will most likely fall sequentially,
but that the rate of decline will be less than the 10% decline of the
first quarter of 1998. As a result of the continuing price pressures,
the Company expects to incur a net loss in the second quarter of 1998.
Gross Margin
The Company incurred a negative gross margin percentage of 41.5%
in the first quarter of 1998 compared to a gross margin of 23.5% in the
first quarter of 1997. The combination of the lower overall average
selling price and substantial period costs related to underutilized
capacity resulted in the negative gross margin percentage for the first
quarter of 1998.
Unit production decreased to 6.5 million disks in the first
quarter of 1998 from 13.6 million disks in the first quarter of 1997.
The Company operated well below capacity in order to match unit
production to the sharply lower demand for its products in the first
quarter of 1998. The Company idled its Malaysian production operations
for approximately two weeks during the first quarter of 1998 and
accelerated the closure of its second Milpitas manufacturing facility.
The Company initially planned to close this facility in June 1998. From
a capacity standpoint the Company believes it is currently staffed to
produce approximately 13 million disks per quarter and has equipment in
place to process approximately 20 million disks per quarter.
Overall manufacturing yields declined in the first quarter of 1998
relative to the first quarter of 1997. The Company is currently
deploying a new front end processing technology that generates improved
polished substrates. Internal manufacturing yields are beginning to
show improvement as these new polished substrates are introduced into
the Company's production process. The Company plans to exit the second
quarter of 1998 with approximately three-quarters of its products
manufactured using this new front end processing technology.
During the second quarter of 1998, the Company expects to begin
high volume shipments of its new higher density disks that store 2.8
gigabytes per disk platter. Initial volumes of these new disks will be
manufactured with either the Company's existing or new epitaxial
sputtering process. While the Company believes the relatively slow
deposition rate achieved in its in-line sputtering machines will provide
a competitive advantage, the Company will also purchase and use static
sputtering lines. The timely and effective deployment of the new
substrate and epitaxial sputtering process technologies into the
Company's manufacturing operations and continued success with new
product qualifications are essential to the Company's financial
performance in the second half of 1998.
Operating Expenses
Research and development ("R&D") expenses increased 24% ($2.9
million) in the three-month period of 1998 relative to the comparable
period of 1997. Increased R&D staffing, higher facility and equipment
costs, and additional operating supplies accounted for most of the year-
over-year increase. The additional R&D efforts were directed toward the
introduction of new product generations, process changes to manufacture
such products, and process improvements to increase yields of products
currently in volume production. Selling, general and administrative
("SG&A") expenses decreased approximately 55% ($5.5 million) in the
first quarter of 1998 relative to the first quarter of 1997. Lower
provisions for bonus and profit sharing programs (decrease of $3.3
million) and lower provisions for bad debt (decrease of $1.9 million)
resulted in the overall decrease in SG&A expenses between the quarters.
Due to the operating loss in the first quarter of 1998, the Company did
not record a provision for its bonus and profit sharing programs. The
decrease in the provisions for bad debt was primarily due to the lower
outstanding trade accounts receivable balance at the end to the first
quarter of 1998. Excluding provisions for bonus and profit sharing
programs and provisions for bad debt, SG&A expenses decreased $0.3
million.
In the third quarter of 1997, the Company implemented a
restructuring plan involving the consolidation of its U.S. manufacturing
operations and recorded a restructuring charge of $52.2 million. The
restructuring charge included $3.9 million for severance costs
associated with approximately 330 terminated employees, $33.0 million
for the write-down 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 March 29, 1998, $10.1 million related
to the restructuring activities remained in current liabilities. The
Company has made cash payments totaling approximately $9.1 million
primarily for severance and equipment-related costs. The majority of the
remaining restructuring liability, primarily related to equipment order
cancellations and facility closure costs, is expected to be settled in
1998.
Interest and Other Income/Expense
Interest income increased $1.4 million in the first quarter of
1998 relative to the first quarter of 1997. The increase was due to a
higher average cash and short-term investment balance in the first
quarter of 1998 relative to the first quarter of 1997. Interest expense
increased $3.1 million in the first quarter of 1998 compared to the
first quarter of 1997. The Company borrowed $190.0 million under its
credit facilities between the last week of March 1997 and early January
1998. Other income increased $3.6 million in the first quarter of 1998
compared to the first quarter of 1997. Other income in the first quarter
of 1998 included a $3.1 million gain on the sale of vacant land located
in Milpitas, California.
Income Taxes
The Company has not recorded an income tax provision or benefit
in the first quarter of 1998 due to a projected 1998 pre-tax loss at
its U.S. operations and various tax holidays in effect at its Malaysian
operations. In the first quarter of 1997, the Company recorded a 17%
estimated tax rate. The estimated tax rate at the end of the first
quarter of 1997 anticipated taxable income in fiscal year 1997 for the
Company's U.S. operations and the effect of tax holidays at the
Company's Malaysian operations. In the third quarter of 1997, the
Company revised its tax rate estimate in anticipation of a loss for
fiscal year 1997 and recorded a tax benefit representing the utilization
of available loss carrybacks associated with its U.S. operations. No
additional utilization of loss carrybacks is available for the 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. The commencement date for
this new tax holiday has not been determined as of March 29, 1998.
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 net loss of $0.5 million in the first quarter of 1998 and
net income of $0.9 million in the first quarter of 1997.
The Company records 50% of AKCL's net income (loss) as equity in
net income (loss) of unconsolidated joint venture. The Company recorded
$9.4 million as its equity in AKCL's net loss for the first quarter of
1998, compared to the equity in AKCL's net income of $3.4 million
recorded in the first quarter of 1997. AKCL's results for the first
quarter of 1997 included a $5.3 million net of tax gain on AKCL's March
1997 sale of its investment in Headway Technologies, Inc. The Company's
equity in this gain was $2.6 million. Excluding the gain, the Company
reported $0.8 million as its equity in AKCL's net income in the first
quarter of 1997. Manufacturing yield, equipment utilization, and
customer qualification issues adversely affected AKCL's financial
results for the first quarter of 1998. Additionally, AKCL wrote down
certain underutilized equipment, including two of its five in-line
sputtering systems. The Company's share of these write-downs was $2.8
million. AKCL recorded no tax benefit for the first quarter of 1998. The
tax rate in effect for the first quarter of 1997 was 53%. The Company
anticipates that AKCL will likely continue to incur losses through at
least the third quarter of 1998.
AKCL plans to use a combination of static and in-line sputtering
machines to manufacture its disk products. AKCL believes that the
products produced by a static sputtering process will be technically
similar to those produced by other Japanese media suppliers, thus
improving AKCL's ability to meet specific requirements of certain
Japanese customers on a timely basis. AKCL may also implement the new
epitaxial process on certain of AKCL's in-line sputtering equipment.
However, as a result of Japanese customer preference toward static
sputtering equipment, AKCL may convert the majority of its capacity to
static equipment. The relative mix of in-line and static sputtering
machines will depend on the Japanese market acceptance of products
manufactured using in-line equipment and AKCL's ability to implement the
epitaxial process on its in-line equipment.
AKCL's current financing arrangements may not be sufficient
in light of AKCL's expected continuing losses and capital costs to
implement the new epitaxial sputtering process. There can be no assurance
that additional financing will be available to AKCL. Failure to secure
additional financing could have a material adverse affect on AKCL's
business and financial results.
Liquidity and Capital Resources:
Cash and short-term investments of $173.7 million at the end of
the first quarter of 1998 increased $7.5 million from the end of the
prior fiscal year. Consolidated operating activities generated $27.8
million in cash during the first three months of 1998. First quarter's
operating loss of $58.2 million, net of non-cash depreciation charges of
$34.6 million and the non-cash equity loss from AKCL of $9.4 million,
consumed $14.1 million. The net change in certain working capital
accounts provided $42.0 million. Reductions in accounts receivable
($32.8 million) and inventories ($6.2 million) related to the lower
sales volume in the first quarter of 1998 offset a decrease in accounts
payable ($18.1 million) related to the lower production volume.
Additionally, the Company received $21.1 million in U.S. and California
income tax refunds during the first quarter of 1998. The Company
borrowed $15.0 million under its credit facilities and spent $41.4
million on capital requirements during the first three months of 1998.
Proceeds from sales of property, plant and equipment (primarily the sale
of vacant land in Milpitas, California) generated $4.9 million. Sales
of Common Stock under the Company's stock option programs generated $0.8
million.
Total capital expenditures for 1998 are currently planned at
approximately $120 million. Three-quarters of the capital expenditure
plan is targeted for process improvements, including costs to modify the
Company's in-line equipment for the new epitaxial sputtering process,
and productivity enhancements.
Current noncancellable capital commitments total approximately $68
million. The Company currently has $85 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 and size of
consecutive quarterly losses and maintenance of minimum tangible net
worth balances. The Company currently expects to remain in compliance
with its financial covenants through at least the first half of 1998.
There can be no assurance that these funds will remain available
should the Company violate its existing loan covenants or be
unable to favorably amend such covenants at any future date. The Company
intends to evaluate and pursue other alternative sources of funding to
supplement its current bank credit facilities. There can be no assurance
that any such additional funds will be sufficient for the Company's
needs. If the Company is unable to obtain sufficient capital, it could
be required align its operations with the available funding. Such
action could have a material adverse affect on the Company's results of
operations.
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 10.20-Second Amendment to Amended and Restated
Credit Agreement by and 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: May 1, 1998 BY: /s/ William L. Potts, Jr.
----------------- --------------------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: May 1, 1998 BY: /s/ Stephen C. Johnson
----------------- --------------------------------------
Stephen C. Johnson
President and
Chief Executive Officer
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment") is entered into as of March 23, 1998 by and among
KOMAG, INCORPORATED, a Delaware corporation ("Borrower"), the banks from
time to time party to the Credit Agreement described below, 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, as amended by that
certain First Amendment to Amended and Restated Credit Agreement dated
as of October 9, 1997, by and among the Borrower, the Banks, and the
Agent (as amended, 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 terms are added to Section 1.1
in their proper alphabetical order:
"'Consolidated Current Liabilities': At any
date of determination, the Consolidated Liabilities which
may properly be classified as current liabilities in
accordance with GAAP."
"'Consolidated Liabilities': At any date of
determination, the total liabilities of the Borrower and its
Consolidated Subsidiaries on a consolidated basis determined
in accordance with GAAP (including (i) any balance sheet
liability with respect to a Pension Plan recognized pursuant
to Financial Accounting Standards Board Statements 87 or 88
and (ii) any withdrawal liability under Section 4201 of
ERISA with respect to a withdrawal from a Multiemployer
Plan, as such liability may be set forth in a notice of
withdrawal liability under Section 4219 (and as adjusted
from time to time subsequent to the date of such notice))."
"'Consolidated Quick Assets': At any date of
determination, the total cash, marketable securities and
accounts receivable of the Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with
GAAP."
"'Minimum Quick Ratio': At any date of
determination during a Quick Ratio Measurement Period, a
Quick Ratio equal to or greater than the correlative amount
indicated below:
Period
Quick Ratio
March 23, 1998 through March 29, 1998
0.70 : 1.00
March 30, 1998 through June 28, 1998
0.65 : 1.00
June 29, 1998 through September 27, 1998
0.675 : 1.00
September 28, 1998 through January 3, 1999
0.80 : 1.00
January 4, 1999 through April 4, 1999
0.90 : 1.00
April 5, 1999 and thereafter
1.00 : 1.00
Notwithstanding the foregoing, if the Quick
Ratio measurement requirement is eliminated by virtue of
Borrower's achievement of a Quick Ratio of 1.00 to 1.00 as
provided in Section 3.13, but subsequently reinstated by
virtue of Borrower's generating a fiscal quarter net loss as
provided in Section 3.13, the Minimum Quick Ratio shall
thereafter be 1.00 to 1.00."
"'New Senior Debt': At any date of
determination, the aggregate principal amount of any Debt
(excluding Revolver Balances) that is not by its terms
subordinated to other Debt of the Borrower or its
Subsidiaries, which (i) constitutes Debt acquired or assumed
on or after March 23, 1998 or (ii) constitutes replacement
or refinancing of previously existing Debt."
"'Quick Ratio': At any date of determination,
the ratio of (a) Consolidated Quick Assets to (b) the sum of
(i) Consolidated Current Liabilities plus (ii) Revolver
Balances plus (iii) New Senior Debt."
"'Quick Ratio Measurement Period': As
defined in Section 3.13."
"'Revolver Balances': At any date of
determination, the aggregate principal amount of outstanding
Revolving Loans, plus the aggregate principal amount of all
outstanding loans of Borrower or its Consolidated
Subsidiaries drawn under any other revolving line of
credit."
(b) Section 2.1(a) is amended to read as follows from and
after the effective date of this Amendment:
"(a) The Aggregate Commitment. Each of the
Banks severally agrees, on the terms and conditions
hereinafter set forth, to make loans ("Revolving Loans") to
Borrower from time to time during the period from the date
hereof to and including the Maturity Date, pro rata in
accordance with its Commitment Percentage, in the aggregate
principal amount not to exceed at any one time outstanding
its Commitment, as such amount may be reduced pursuant to
Section 2.1(d), provided, however, that the Banks shall not
be obligated on any date during a Quick Ratio Measurement
Period to make a Revolving Loan if Borrower's Quick Ratio at
the time of the requested borrowing is less than the
applicable Minimum Quick Ratio, and provided, further, that
the Banks shall not be obligated on any date during a Quick
Ratio Measurement Period to make a Revolving Loan which,
after giving effect to the requested borrowing, would cause
Borrower to have a Quick Ratio which is less than the
applicable Minimum Quick Ratio. Each borrowing under this
Section (a "Borrowing") shall be in a minimum amount of
$1,000,000 and in an integral multiple of $100,000 above
such amount for a Base Rate Loan and in a minimum amount of
$1,000,000 and in an integral multiple of $500,000 above
such amount for a LIBOR Rate Loan. Subject to the foregoing
and within the limits of each Commitment, Borrower may
borrow, repay pursuant to Section 2.2(b) and reborrow under
this Section, provided that at no time shall the aggregate
principal amount of outstanding Revolving Loans exceed the
Aggregate Commitment then in effect. Failure to satisfy the
Minimum Quick Ratio shall not be an Event of Default."
(c) Section 2.3(c) is amended to read as follows from and
after the effective date of this Amendment:
"(c) 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:
** If Borrower's Consolidated Funded Debt to Consolidated
Capital is less than .15 to 1.0: the Applicable Margin
shall be 162.5 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 175 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 187.5 basis points.
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).
Notwithstanding the foregoing, at Borrower's option
upon achievement of any of the following, in each case as
demonstrated by Borrower's consolidated balance sheet for
itself and its Consolidated Subsidiaries as at the end of
the applicable period, and the related consolidated
statements of income, stockholders' equity and statement of
cash flows for such 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 adjusted as
follows:
(i) Upon Borrower's achievement of a
cumulative average Net Profit Margin for any fiscal three
(3) month period from and after March 1, 1998 of at least
five percent (5%) but less than ten percent (10%), 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 112.5 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 125 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 137.5 basis points.
(ii) Upon Borrower's achievement of the
cumulative average Net Profit Margin test as specified in
clause (i) above, and Borrower's achievement of a cumulative
average Net Profit Margin for any subsequent fiscal three
(3) month period of at least five percent (5%) but less than
ten percent (10%), 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 62.5 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 75 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 87.5 basis points.
(iii) Upon Borrower's achievement of the
cumulative average Net Profit Margin tests as specified in
clauses (i) and (ii) above, and Borrower's achievement of a
cumulative average Net Profit Margin for any subsequent
fiscal three (3) month period of at least five percent (5%),
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.
(iv) Upon Borrower's achievement of the
cumulative average Net Profit Margin test as specified in
clause (i) above, and Borrower's achievement of a cumulative
average Net Profit Margin for any subsequent fiscal three
(3) month period of at least ten percent (10%), 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.
(v) Upon Borrower's achievement of a
cumulative average Net Profit Margin for any fiscal three
(3) month period from and after March 1, 1998 of at least
ten percent (10%), 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 75 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 87.5 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.
(vi) Upon Borrower's achievement of the
cumulative average Net Profit Margin test as specified in
clause (v) above, and Borrower's achievement of a cumulative
average Net Profit Margin for any subsequent fiscal three
(3) month period of at least five percent (5%), 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 three (3) 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) A new Section 3.13 is added to Article III, at the end
thereof, which shall read as follows:
"SECTION 3.13 QUICK RATIO MEASUREMENT PERIOD.
Any fiscal month in which the Quick Ratio is required to be
measured pursuant to the provisions of this Section 3.13
shall be deemed to be a "Quick Ratio Measurement Period."
The Quick Ratio shall be required to be measured monthly as
of the last day of each fiscal month of Borrower from and
after March 23, 1998, except that (a) the Quick Ratio shall
not be required to be measured from and after the first date
after March 23, 1998 on which Borrower demonstrates
achievement of a Quick Ratio equal to or greater than 1.00
to 1.00, provided that if Borrower has a net loss for any
fiscal quarter period after such achievement, the Quick
Ratio shall again be required to be measured monthly as of
the last day of each fiscal month thereafter, and (b)
notwithstanding the foregoing, the Quick Ratio shall not be
required to be measured from and after Borrower's
achievement of a cumulative average Net Profit Margin for
any three (3) fiscal quarter periods from and after the
quarter ended March 31, 1998 of at least five percent (5%).
So long as the Quick Ratio is required to be measured under
this Section 3.13, at the request of the Agent, prior to,
and as a condition of, each borrowing hereunder, and in any
event within twenty-one (21) days after the last day of each
fiscal month, Borrower shall deliver to Agent a certificate
signed by the chief executive officer or chief financial
officer of Borrower, setting forth in such detail as Agent
may request the calculation of the Quick Ratio as of the
last day of the preceding fiscal month."
(e) Section 6.2(a) is amended to read as follows:
"(a) Profitability. Permit, on a consolidated
after-tax basis, (i) a net loss for the fiscal quarter
ending March 29, 1998 of more than Sixty Million Dollars
($60,000,000); or (ii) a net loss for the fiscal quarter
ending June 28, 1998 of more than Fifty Million Dollars
($50,000,000); or (iii) a net loss for the fiscal quarter
ending September 27, 1998 of more than Ten Million Dollars
($10,000,000); or (iv) commencing with the fiscal quarter
ending January 3, 1999, a net loss for any two consecutive
fiscal quarter periods; or (v) commencing with the fiscal
quarter ending January 3, 1999, a net loss for any fiscal
quarter in excess of an amount equal to ten percent (10%) of
Borrower's Consolidated Tangible Net Worth as of the last
day of such fiscal quarter."
(f) Section 6.2(b) is amended to read as follows:
"Leverage Ratio. Permit Borrower's ratio of
Consolidated Funded Debt to Consolidated Capital, on a
quarterly consolidated basis, to exceed 0.4 to 1.0."
(g) Section 6.2(c) is amended to read as follows:
"Consolidated Tangible Net Worth. Permit
Borrower's Consolidated Tangible Net Worth, on a quarterly
consolidated basis, to be less than $560,000,000, plus
(i) seventy-five percent (75%) of Borrower's future fiscal
year end consolidated net income (without deduction for any
losses), adjusted on an annual basis beginning after the end
of Borrower's 1997 fiscal year and including such fiscal
year plus (ii) one hundred percent (100%) of the net
proceeds of equity investments and issues received by
Borrower or its Consolidated Subsidiaries adjusted on a
consolidated quarterly basis in accordance with GAAP,
without duplication. For purposes hereof, the minimum
Consolidated Tangible Net Worth requirement shall not be
increased by equity issued through the exercise of employee
stock options and/or employee stock purchase plans."
(h) Section 6.2(i) is amended by adding the following
sentence at the end thereof:
"Notwithstanding the foregoing, Borrower shall have no
obligation to comply with this Section 6.2(i) for the fiscal
quarter ending June 28, 1998."
(i) A new subsection (k) is added to Section 6.2, by
inserting the following at the end thereof:
"(k) Until Borrower's achievement of a
cumulative average Net Profit Margin for any three (3)
fiscal quarters from and after March 1, 1998 of at least
five percent (5%), Borrower shall not make any payment in
respect of any Debt (excluding Debt owing to Standard
Chartered Bank under the $10,000,000 offshore Labuan
revolving facility) other than the Revolving Loans, unless
Borrower on the same day makes a payment on account of the
Revolving Loans, such payment on account of the Revolving
Loans to be at least pro rata in accordance with the
aggregate principal amount of the outstanding Revolving
Loans and the aggregate outstanding amount of such other
Debt to be repaid."
(j) A new subsection (l) is added to Section 6.2, by
inserting the following at the end thereof:
"(l) Replace or refinance any Debt that is not
by its terms subordinated to other Debt of the Borrower or
its Subsidiaries without the prior written consent of the
Majority Banks, which consent shall not be unreasonably
withheld, provided such replacement financing is to replace
Debt of like-kind, and provided that the material terms
(including maturity, financial covenants, and pricing) of
such replacement financing are not more burdensome to
Borrower as those under this Agreement."
(k) The second sentence of Section 7.1(c) is amended to
read as follows:
"Notwithstanding the foregoing, any failure of
Borrower to perform or observe Sections 6.1(c) and (f)
and/or 6.2(a), (b), (c), (d), (e), (f), (h), (i), (j), (k)
or (l) shall constitute an Event of Default without regard
to any lapse of time or cure period; or"
3. Conditions to Effectiveness.
This Amendment shall become effective as of March 23, 1998
(the "Closing Date"), only upon:
(i) receipt by the Agent from the Borrower of an amendment
fee equal to Two Hundred Sixty-Two Thousand Five Hundred Dollars
($262,500), 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 from the Borrower of a one-time
Agent's fee as set forth in a side letter between the Borrower and the
Agent dated on or about the Closing Date;
(iii) 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):
(a) counterparts of this Amendment duly executed on
behalf of the Borrower, the Agent, and the Majority Banks;
(b) copies of resolutions of the Board of Directors
or other authorizing documents of the Borrower, authorizing the
execution and delivery of this Amendment; and
(iv) completion of such other matters and delivery of such
other agreements, documents and certificates as any Bank through the
Agent may reasonably request.
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).
(g) Absence of Default. After giving effect to this
Amendment, 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.
[REMAINDER INTENTIONALLY LEFT BLANK]
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: /s/ William L. Potts, Jr.
Title: SVP, CFO
BANKBOSTON, N.A.,
as the Agent and as a Bank
By: /s/ Anthony Kwee
Title: Vice President
COMERICA BANK - CALIFORNIA,
as a Bank
By:
Title:
STANDARD CHARTERED BANK,
as a Bank
By: /s/ ???????
Title: AVP
By: /s/ ???????
Title: Vice President
BANQUE NATIONALE DE PARIS,
as a Bank
By: /s/ Rafael C. Lumanlan
Title: Vice President
By: /s/ Jeffrey S. Kajisa
Title: Assistant Vice President
FLEET NATIONAL BANK,
as a Bank
By:
Title:
BANK OF MONTREAL, as a Bank
By: /s/ ????????
Title: Portfolio Manager
THE BANK OF NOVA SCOTIA,
as a Bank
By: /s/ ??????????
Title: RM
UNION BANK OF CALIFORNIA, N.A.,
as a Bank
By: /s/ Patrick Clemens
Title: Assistant Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTE
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED I
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 96,951
<SECURITIES> 76,700
<RECEIVABLES> 51,727
<ALLOWANCES> 3,835
<INVENTORY> 60,562
<CURRENT-ASSETS> 320,045
<PP&E> 1,113,423
<DEPRECIATION> 430,286
<TOTAL-ASSETS> 1,025,919
<CURRENT-LIABILITIES> 61,079
<BONDS> 260,000
0
0
<COMMON> 529
<OTHER-SE> 626,406
<TOTAL-LIABILITY-AND-EQUITY> 1,025,919
<SALES> 76,057
<TOTAL-REVENUES> 76,057
<CGS> 107,652
<TOTAL-COSTS> 107,652
<OTHER-EXPENSES> 19,555
<LOSS-PROVISION> (838)
<INTEREST-EXPENSE> 4,554
<INCOME-PRETAX> (48,829)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,158)
<EPS-PRIMARY> ($1.10)
<EPS-DILUTED> ($1.10)
</TABLE>