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 27, 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 September 27, 1998, 53,444,282 shares of the Registrant's
common stock, $0.01 par value, were issued and outstanding.
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
Sept 27, Sept 28, Sept 27, Sept 28,
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $81,314 $129,694 $236,179 $472,057
Cost of sales 84,117 129,492 306,214 396,879
--------- --------- --------- --------
GROSS PROFIT (LOSS) (2,803) 202 (70,035) 75,178
Operating expenses:
Research, development and engineering 14,312 13,118 47,341 36,457
Selling, general and administrative 4,854 3,913 14,407 21,663
Restructuring charge - 52,157 187,768 52,157
--------- --------- --------- --------
19,166 69,188 249,516 110,277
--------- --------- --------- --------
OPERATING LOSS (21,969) (68,986) (319,551) (35,099)
Other income (expense):
Interest income 1,888 1,159 6,821 3,773
Interest expense (4,763) (2,541) (14,072) (6,513)
Other, net 943 1,077 4,857 1,681
--------- --------- --------- --------
(1,932) (305) (2,394) (1,059)
Loss before income taxes,
minority interest, and equity in --------- --------- --------- --------
joint venture loss (23,901) (69,291) (321,945) (36,158)
Provision (benefit) for income taxes 256 (20,411) 959 (14,778)
--------- --------- --------- --------
Loss before minority interest
and equity in joint venture loss (24,157) (48,880) (322,904) (21,380)
Minority interest in net income (loss) of
consolidated subsidiary (38) (6) 459 363
Equity in net loss of
unconsolidated joint venture (3,330) (3,874) (24,128) (1,529)
--------- --------- --------- --------
NET LOSS ($27,449) ($52,748) ($347,491)($23,272)
========= ========= ========= ========
Basic loss per share ($0.51) ($1.01) ($6.56) ($0.45)
========= ========= ========= ========
Diluted loss per share ($0.51) ($1.01) ($6.56) ($0.45)
========= ========= ========= ========
Number of shares used in basic
computation 53,444 52,399 53,003 52,101
========= ========= ========= ========
Number of shares used in
diluted computation 53,444 52,399 53,003 52,101
========= ========= ========= ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Sept 27, December 28,
1998 1997
--------- ---------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $66,668 $133,897
Short-term investments 59,950 32,300
Accounts receivable less allowances of
$2,899 in 1998 and $4,424 in 1997 43,883 77,792
Accounts receivable from related parties 1,468 4,106
Inventories:
Raw materials 12,260 33,730
Work-in-process 13,982 17,490
Finished goods 4,580 15,558
--------- ---------
Total inventories 30,822 66,778
Prepaid expenses and deposits 5,422 3,697
Income taxes receivable 2,350 24,524
Deferred income taxes 28,796 28,595
--------- ---------
Total current assets 239,359 371,689
Investment in Unconsolidated Joint Venture 3,444 30,126
Property, Plant and Equipment
Land 7,785 9,526
Building 127,705 126,405
Equipment 688,064 793,561
Furniture 10,747 11,791
Leasehold improvements 85,024 141,111
--------- ---------
919,325 1,082,394
Less allowances for depreciation and
amortization (429,234) (403,798)
--------- ---------
Net property, plant and equipment 490,091 678,596
Deposits and Other Assets 3,521 4,253
--------- ---------
$736,415 $1,084,664
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $260,000 $ -
Trade accounts payable 26,640 40,043
Accounts payable to related parties 629 7,093
Accrued compensation and benefits 15,726 13,596
Other liabilities 4,822 3,605
Restructuring liability 10,052 11,253
--------- ---------
Total current liabilities 317,869 75,590
Long-term Debt, Less Current Portion - 245,000
Deferred Income Taxes 73,489 73,335
Other Long-term Liabilities 1,285 960
Minority Interest in Consolidated Subsidiary 4,054 3,595
Stockholders' Equity
Preferred stock - -
Common stock 534 528
Additional paid-in capital 405,448 401,869
Retained earnings (deficit) (66,015) 281,476
Accumulated foreign currency translation
adjustments (249) 2,311
--------- ---------
Total stockholders' equity 339,718 686,184
--------- ---------
$736,415 $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>
Nine Months Ended
----------------------
Sept 27, Sept 28,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($347,491) ($23,272)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 91,129 96,035
Provision for losses on accounts receivable (1,019) 42
Equity in net loss of unconsolidated
joint venture 24,129 1,530
Loss on disposal of property,
plant and equipment 885 1,260
Impairment charge related to property,
plant and equipment 175,000 -
Non-cash portion of restructuring charge related to
write-off of property, plant and equipment - 33,013
Deferred rent 325 363
Minority interest in net income of
consolidated subsidiary 459 363
Changes in operating assets and liabilities:
Accounts receivable 34,928 (4,543)
Accounts receivable from related parties 2,638 2,104
Inventories 35,956 (12,644)
Prepaid expenses and deposits (1,732) (1,754)
Trade accounts payable (13,403) (51,754)
Accounts payable to related parties (6,464) 3
Accrued compensation and benefits 2,130 (5,023)
Other liabilities 1,158 2,044
Deferred income taxes receivable/payable (47) -
Income taxes receivable/payable 22,233 (1,841)
Restructuring liability (1,201) 16,521
--------- ---------
Net cash provided by operating activities 19,613 52,447
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (83,958) (160,976)
Purchases of short-term investments (27,650) (21,900)
Proceeds from disposal of property, plant and
equipment 5,449 497
Deposits and other assets 732 (441)
Dividend distribution from unconsolidated
joint venture - 1,535
--------- ---------
Net cash used in investing activities (105,427) (181,285)
FINANCING ACTIVITIES
Increase in long-term obligations 15,000 75,000
Sale of Common Stock, net of issuance costs 3,585 8,405
--------- ---------
Net cash provided by financing activities 18,585 83,405
Decrease in cash and cash equivalents (67,229) (45,433)
Cash and cash equivalents at beginning of year 133,897 90,741
--------- ---------
Cash and cash equivalents at end of period $66,668 $45,308
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 27, 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 and the writedown of long-
lived assets to reflect the impairment of those assets) considered
necessary for a fair presentation have been included. Operating
results for the three- and nine-month periods ended September 27,
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- 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:
Sept 27, December 28,
1998 1997
(in thousands) --------- ----------
Corporate debt securities $21,918 $56,837
Mortgage-backed securities 43,405 79,419
Municipal auction rate preferred stock 59,150 32,300
--------- ----------
$124,473 $168,556
========= ==========
Amounts included in cash and cash equivalents $64,523 $136,256
Amounts included in short-term investments 59,950 32,300
--------- ----------
$124,473 $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's income tax provision of $1.0 million for the first
nine months of 1998 represents income taxes on certain transactions
not covered by the various tax holidays in effect at the Company's
Malaysian operations. No additional income tax provision or benefit
has been recorded in the first nine months of 1998 due to a projected
1998 pre-tax loss at the Company's U.S. operations and the effect of
the tax holidays and investment allowances at the Malaysian
operations. The Company's income tax benefit for the first nine
months of 1997 represented 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
as of September 27, 1998.
The Company's wholly-owned thin-film media operation, Komag USA
(Malaysia) Sdn. ("KMS"), has operated under an initial five-year tax
holiday for its first plant site. This five-year tax holiday expired
in July 1998 and is currently under application for extension for an
additional five-year period by the Malaysian government. The
commencement date for this new tax holiday has not been determined as
of October 26, 1998. KMS has also been granted a ten-year tax holiday
for its second and third plant sites in Malaysia.
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. None of these credit facilities is
secured by any of the assets of the Company. The size of the
Company's second quarter 1998 net loss resulted in a default under
certain financial covenants contained in the Company's various bank
credit facilities. The Company is not in payment default under any
of these facilities nor have principal or interest payments been
accelerated as a result of the technical default. The Company
currently has $260,000,000 of bank borrowings outstanding. The
remaining $85,000,000 of unutilized credit is currently unavailable
due to the technical default. The Company's borrowing capacity is
subject to the successful re-negotiation of the terms of these
agreements and/or the negotiation of new financing arrangements.
As a result of the technical default, the $260,000,000
outstanding under the Company's credit facilities has been
reclassified to current liabilities on the accompanying consolidated
balance sheet.
NOTE 5 - COMPREHENSIVE 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 loss or stockholders' equity. SFAS 130 requires the
Company's foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity, to be
included in other comprehensive loss.
The following are the components of comprehensive loss:
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept 27, Sept 28, Sept 27, Sept 28,
1998 1997 1998 1997
(in thousands) --------- --------- --------- ---------
Net loss ($27,449) ($52,748) ($347,491) ($23,272)
Foreign currency translation
adjustments - (1,263) (2,560) (313)
--------- --------- --------- ---------
Comprehensive loss ($27,449) ($54,011) ($350,051) ($23,585)
========= ========= ========= =========
Accumulated foreign currency translation adjustments on the
accompanying Consolidated Balance Sheets account for all of the
Company's accumulated other comprehensive loss at September 27, 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 1997 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. The 1997 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.
In the second quarter of 1998 several customers reduced orders for
the Company's products in response to downward adjustments in their
disk drive production build schedules. In light of the order
reductions and the Company's expectation that the media industry's
supply/demand imbalance will extend into 1999, the Company adjusted
its expectations for the utilization of its installed production
capacity. As a result of this evaluation, the Company implemented a
restructuring plan in June 1998 and recorded a charge of $187.8
million. This one-time charge included an asset impairment charge and
provisions for facility closure expenses and severance-related costs.
The restructuring plan contemplated reducing the Company's U.S. and
Malaysian workforce by approximately 10% and ceasing operations at
its oldest San Jose, California plant. The restructuring charge
included $4.1 million for severance costs (approximately 170
employees, primarily in the U.S.), $5.8 million related to equipment
order cancellations and other equipment related costs, and $2.9
million for facility closure costs. The asset impairment component of
the charge was $175.0 million and effectively reduced asset
valuations to reflect the economic effect of recent industry price
erosion for disk media and the projected underutilization of the
Company's production equipment and facilities. Production equipment
and leasehold improvements at the Company's U.S. and Malaysian
facilities with a net book value of $562.8 million were written down
to their fair value as a result of the impairment. The fair value of
these assets was determined based upon the estimated future cash
flows to be generated by the assets, discounted at a market rate of
interest. Non-cash items in the restructuring/impairment charge
totaled $175.0 million.
The Company incurred lower facility closure costs than
anticipated in the restructuring charges. The oldest Milpitas plant
was sublet sooner than anticipated and the Company terminated its
lease on the second Milpitas plant in the third quarter of 1998
avoiding expected future rent payments and the cost of renovating the
facility to its original lease condition. Additionally, the
Company determined that it would not close its oldest San Jose,
California facility at the expiration of its lease. The Company
plans to use the front-end operations in this facility for both
production and new process development. Back-end operations in this
facility are expected to cease in the fourth quarter of 1998. Space
currently occupied by the back-end operations will most likely be
used for future process development work related to glass substrates.
As a result the Company will not incur costs to restore the facility
to its original lease condition as contemplated in the restructuring
charge. Higher than expected costs for equipment order cancellations
offset the lower facility closure costs.
At September 27, 1998, $10.1 million related to the
restructuring activities remained in current liabilities. The
Company has made cash payments totaling approximately $21.8 million
primarily for severance, equipment order cancellations and facility
closure costs. The majority of the remaining liability, primarily
for equipment order cancellations is expected to be settled by the
end of the first quarter of 1999.
As a result of these restructuring activities, the Company
expects that over time 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 advantages over the
Company's U.S. manufacturing facilities.
NOTE 7 - STOCKHOLDERS' EQUITY
In July 1998, the Company's stockholders approved an amendment
to the Company's Restated Certificate of Incorporation. The
amendment increased the amount of Common Stock that the Company is
authorized to issue from 85,000,000 to 150,000,000 shares.
The Company's stockholders also authorized the Company to sell
and issue up to $350,000,000 of Common Stock in equity or equity-
linked private transactions from time to time through July 22, 1999
at a price below book value but at or above the then current market
value of the Company's Common Stock.
NOTE 8 - STOCK OPTION PLANS AND STOCK PURCHASE PLAN
In May 1998, the Company's shareholders approved a 1,300,000
share increase in the total number of shares that may be issued under
the Employee Stock Purchase Plan.
In June 1998, the Company's Board of Directors authorized the
repricing of outstanding stock options held by all employees,
including executive officers, to the then-current market price of the
Common Stock. Options held by nonemployee directors were not
repriced. Immediately prior to the repricing, the Company's
employees, including executive officers, held options to purchase
approximately 8.5 million shares of Common Stock at exercise prices
ranging from $7.06 to $34.13 per share. The weighted average
exercise price of these options was approximately $15.19 per share.
Approximately 7.7 million shares were repriced to $5.35 per share on
July 1, 1998.
NOTE 9 - 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. Loss per share amounts for all periods presented
have been restated to conform to FAS 128 requirements.
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept 27, Sept 28, Sept 27, Sept 28,
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands, except per share amounts)
Numerator: Net loss ($27,449) ($52,748) ($347,491) ($23,272)
--------- --------- --------- ---------
Denominator for basic
loss per share-
weighted-average shares 53,444 52,399 53,003 52,101
--------- --------- --------- ---------
Effect of dilutive securities:
Employee stock options - - - -
--------- --------- --------- ---------
Denominator for diluted
loss per share 53,444 52,399 53,003 52,101
--------- --------- --------- ---------
Basic loss per share ($0.51) ($1.01) ($6.56) ($0.45)
--------- --------- --------- ---------
Diluted loss per share ($0.51) ($1.01) ($6.56) ($0.45)
========= ========= ========= =========
NOTE 10 - USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates 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: availability of sufficient cash
resources; changes in the industry supply-demand relationship and
related pricing for enterprise and desktop disk products; timely and
successful product qualification of next-generation products; timely and
successful deployment of new process technologies into manufacturing;
utilization of manufacturing facilities; changes in manufacturing
efficiencies, in particular product yields and material input costs;
extensibility of process equipment to meet more stringent future product
requirements; vertical integration and consolidation within the
Company's limited customer base; increased competition; structural
changes within the disk media industry such as combinations, failures,
and joint venture arrangements; availability of certain sole-sourced raw
material supplies; and the risk factors listed in the Company's other
SEC filings, including its 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 nine months of 1998 were
significantly lower than the first nine months of 1997. Adverse market
conditions, which began late in the second quarter of 1997, intensified
in the first nine months 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. The Company's net sales in the first quarter of 1998 dropped
52% sequentially to $76.1 million as a result of both a lower unit sales
volume 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
The second quarter of 1998 was negatively impacted by the
continuation of weak merchant market demand for disk media. Net sales
in the second quarter of 1998 increased slightly on a sequential basis
to $78.8 million, the net effect of an 9% increase in unit sales volume
and a 5% decrease in the overall average selling price. The
combination of the lower overall average selling price, increased
inventory writedowns and continued low production volumes resulted in a
negative gross margin percentage of 45.2% in the second quarter of 1998.
Entering the second quarter of 1998, the Company had expected that
net sales for the second quarter would increase sequentially to $100-
$125 million. In the middle of the second quarter several customers
reduced orders for the Company's products in response to downward
adjustments in their disk drive production build schedules. In light of
the order reductions and the Company's expectation that the media
industry's supply/demand imbalance would extend into 1999, the Company
adjusted its expectations for the utilization of its installed
production capacity. As a result of this evaluation, the Company
implemented a restructuring plan in June 1998 and recorded a charge of
$187.8 million. This one-time charge included an asset impairment charge
and provisions for facility closure expenses and severance-related
costs. The asset impairment component of the one-time charge was $175.0
million and effectively reduced asset valuations to reflect the economic
effect of recent industry price erosion for disk media and the projected
underutilization of the Company's production equipment and facilities.
Net sales for the third quarter of 1998 increased 3% on a
sequential basis to $81.3 million as the net result of an 8% increase in
unit sales and a 4% decrease in the overall average selling price. The
gross margin percentage improved sequentially from a negative 45.2% to a
negative 3.4%. The asset impairment charge recorded in the second
quarter of 1998 lowered depreciation and amortization charges beginning
in the month of June 1998 and resulted in reduced charges in the third
quarter of 1998 compared to the second quarter of 1998. Lower payroll
costs and improved unit demand, coupled with a favorable impact of
certain non-recurring inventory adjustments, further improved the gross
margin percentage in the third quarter of 1998.
Orders for the Company's disk products began to pick up at the end
of the third quarter. The Company expects to achieve higher sales and
further improvements in operating performance during the fourth quarter
of 1998. As a result, the Company anticipates that it will narrow the
operating loss in the fourth quarter of 1998 compared to the third
quarter of 1998 and will move toward a cash-positive operating position.
Revenue:
Net sales decreased 37% in the third quarter of 1998 relative to
the third quarter of 1997. The year-over-year decrease was due to a
combination of a 23% decrease in unit sales volume and an 18% decrease
in the overall average selling price. Third quarter 1998 unit sales
declined to 8.5 million disks from 11.0 million disks in the third
quarter of 1997. The majority of the decrease in the overall average
selling price occurred over the first three quarters 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 avoided significant reductions in its overall average
selling price through transitions to higher-priced, more technologically
advanced product offerings. In the third quarter of 1998, the effect of
significant pricing pressures generated by the imbalance in supply and
demand for thin-film media more than offset the effect of transitions to
more advanced product offerings. Net sales in the first nine months of
1998 decreased 50% relative to the first nine months of 1997. The
decrease was due to the combination of a 40% decrease in unit sales and
a 17% decrease in the overall average selling price.
In addition to sales of internally produced disk products, the
Company has historically resold products manufactured by its 50%-owned
Japanese joint venture, Asahi Komag Co., Ltd. (AKCL). Distribution
sales of thin-film media manufactured by AKCL were negligible in the
third quarter of 1998 and $1.7 million in the third quarter of 1997.
Distribution sales in the first nine months of 1998 were $2.4 million
compared to $4.5 million in the first nine months of 1997. The Company
expects that distribution sales of AKCL product will be relatively low
for the remainder of 1998.
During the third quarter of 1998 three customers accounted for
approximately 91% of consolidated net sales: Western Digital Corporation
(47%), International Business Machines (25%), and Maxtor Corporation
(19%). 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 customers.
Gross Margin:
The Company incurred a negative gross margin percentage of 3.4% in
the third quarter of 1998 compared to a gross margin of 0.2% in the
third quarter of 1997. The Company incurred a negative gross margin
percentage of 29.7% in the first nine months of 1998 compared to a
positive gross margin of 15.9% in the first nine months of 1997. The
combination of the lower overall average selling price, higher unit
production costs related to underutilized capacity, and lower
manufacturing yields resulted in the negative gross margin percentages
for the third quarter and first nine months of 1998. Unit production
Unit production decreased to 7.1 million disks in the third quarter
of 1998 from 13.1 million disks in the third quarter of 1997. Unit production
decreased to 22.4 million disks in the first nine months of 1998 from
41.4 million units in the first nine months of 1997. The Company
operated well below capacity in the three- and nine-month periods
of 1998 in order to match unit production to the sharply lower demand
for its products.
Operating Expenses:
Research and development ("R&D") expenses increased 9.1% ($1.2
million) and 29.9% ($10.9 million) in the three-and nine-month periods
of 1998 relative to the comparable periods of 1997. Increased R&D
staffing, higher facility and equipment costs, and additional operating
supplies accounted for most of the increase in both the three-and nine-
month comparisons. The additional R&D efforts were directed toward the
introduction of new product generations, process changes to manufacture
such products, process improvements to increase yields of products
currently in volume production, and increased development efforts
devoted to customer qualification of new products at facilities in both
the U.S. and Malaysia.
Selling, general and administrative ("SG&A") expenses increased
approximately 24.0% ($0.9 million) in the third quarter of 1998 relative
to the third quarter of 1997. The third quarter of 1997 included a $0.8
million reversal of provisions for the Company's bonus program. No
bonus/profit sharing provision was recorded in the third quarter of
1998. Bad debt provisions increased $1.1 million in the third quarter
of 1998 compared to the third quarter of 1997. Excluding provisions for
bonus and profit sharing programs and provisions for bad debt, SG&A
expenses decreased $1.0 million. Reductions in SG&A headcount resulted
in the lower SG&A spending in the third quarter of 1998 compared to the
third quarter of 1997. SG&A expenses decreased 33.5% ($7.3 million) in
the first nine months of 1998 compared to the first nine months of 1997
primarily due to a $4.0 million reduction in bonus and profit sharing
provisions. Provisions for bad debt decreased $1.0 million in the first
nine months of 1998 compared to the first nine months of 1997. Excluding
provisions for bonus and profit sharing programs and provisions for bad
debt, SG&A expenses decreased $2.3 million due mainly to lower payroll
and other employee-related costs.
Restructuring Charges:
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 1997 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. The 1997 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.
In the second quarter of 1998 several customers reduced orders
for he Company's products in response to downward adjustments in their
disk drive production build schedules. In light of the order reductions
and the Company's expectation that the media industry's supply/demand
imbalance would extend into 1999, the Company adjusted its expectations
for the utilization of its installed production capacity. As a result of this
evaluation, the Company implemented a restructuring plan in June 1998 and
recorded a charge of $187.8 million. This one-time charge included an asset
impairment charge and provisions for facility closure expenses
expenses and severance-related costs. The restructuring plan
contemplated reducing the Company's U.S. and Malaysian workforce by
approximately 10% and ceasing operations at its oldest San Jose,
California plant. The restructuring charge included $4.1 million for
severance costs (approximately 170 employees, primarily in the U.S.),
$5.8 million related to equipment order cancellations and other
equipment related costs, and $2.9 million for facility closure costs.
The asset impairment component of the charge was $175.0 million and
effectively reduced asset valuations to reflect the economic effect of
recent industry price erosion for disk media and the projected
underutilization of the Company's production equipment and facilities.
Production equipment and leasehold improvements at the Company's U.S.
and Malaysian facilities with a net book value of $562.8 million were
written down to their fair value as a result of the impairment. The
fair value of these assets was determined based upon the estimated
future cash flows to be generated by the assets, discounted at a market
rate of interest. Non-cash items in the restructuring/impairment charge
totaled $175.0 million. The Company incurred lower facility closure
The Company incurred lower facility closure costs than anticipated
in the restructuring charges. The oldest Milpitas plant was sublet sooner
than anticipated and the Company terminated its lease on the second Mipitas
plant in the third quarter of 1998 avoiding expected future rent payments
and the cost of renovating the facility to its original lease condition.
Additionally, the Company determined that it would not close its oldest
San Jose, California facility at the expiration of its lease. The
Company plans to use the front-end operations in this facility
for both production and new process development. Back-end operations
in this facility are expected to cease in the fourth quarter of 1998.
Space currently occupied by the back-end operations will most likely
be used for future process development work related to glass substrates.
As a result the Company will not incur costs to restore the facility to
its original lease condition as contemplated in the restructuring charge.
Higher than expected costs for equipment order cancellations offset the
lower facility closure costs.
At September 27, 1998, $10.1 million related to the
restructuring activities remained in current liabilities. The Company
has made cash payments totaling approximately $21.8 million primarily
for severance, equipment order cancellations, and facility closure
costs. The majority of the remaining liability, primarily for equipment
order cancellations is expected to be settled by the end of the first
quarter of 1999.
As a result of these restructuring activities, the Company
expects that over time 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 advantages over the Company's U.S.
manufacturing facilities.
Interest and Other Income/Expense:
Interest income increased $0.7 million in the third quarter of
1998 relative to the third quarter of 1997 and $3.0 million in the first
nine months of 1998 relative to the first nine months of 1997. The
increases were due to higher average cash and short-term investment
balances in the current year periods. Interest expense increased $2.2
million in the third quarter of 1998 compared to the third quarter of
1997 and $7.6 million in the first nine months of 1998 compared to the
first nine months of 1997. The higher interest expense in the 1998
periods was due to higher outstanding debt balances. The Company
borrowed $190.0 million under its credit facilities between March 1997
and January 1998. Other income decreased $0.1 million in the third
quarter of 1998 compared to the third quarter of 1997. Other income
increased $3.2 million in the first nine months of 1998 relative to the
first nine months of 1997. This increase was primarily due to a $3.1
million gain on the sale of vacant land located in Milpitas, California.
Income Taxes:
The Company's income tax provision of $1.0 million for the first
nine months of 1998 represents income taxes on certain transactions not
covered by the various tax holidays in effect at the Company's Malaysian
operations. No additional income tax provision or benefit has been
recorded in the first nine months of 1998 due to a projected 1998 pre-
tax loss at the Company's U.S. operations and the effect of the tax
holidays and investment allowances at the Malaysian operations. The
Company's income tax benefit for the first nine months of 1997
represented 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 as of September 27, 1998.
The Company's wholly-owned thin-film media operation, Komag USA
(Malaysia) Sdn. ("KMS"), has operated under an initial five-year tax
holiday for its first plant site. This five-year tax holiday expired in
July 1998 and is currently under application for extension for an
additional five-year period by the Malaysian government. The
commencement date for this new tax holiday has not been determined as of
October 26, 1998. KMS has also been granted a ten-year tax holiday for
its second and third plant sites in Malaysia.
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 $0.2 million in the third quarter of 1998 and
incurred a minimal loss in the third quarter of 1997. KMT recorded net
income of $2.3 million in the first nine months of 1998 compared to $1.8
million in the first nine months of 1997.
The Company owns a 50% interest in AKCL and records its share of
AKCL's net income (loss) as equity in net income (loss) of
unconsolidated joint venture. The Company recorded $3.3 million as its
equity in AKCL's net loss for the third quarter of 1998 compared to the
equity in AKCL's net loss of $3.9 million recorded in the third quarter
of 1997. Results for the third quarter of 1998 were adversely affected
by lower overall average selling prices and lower yields on current
generation products. Results for the third quarter of 1997 were
adversely affected by significantly underutilized capacity.
The Company recorded a loss of $24.1 million as its equity in
AKCL's net loss for the first nine months of 1998 compared to a net
loss of $1.5 million as its equity in AKCL's net loss for the first
nine months of 1997. AKCL's 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. The Company's equity in this
gain was $2.6 million. Excluding the gain, the Company reported a loss
of $4.1 million as its equity in AKCL's net loss in the first nine
months of 1997. Writedowns of AKCL's in-line sputtering equipment in
1998 accounted for approximately one-third of the Company's equity loss
for the first nine months of 1998. No significant writedowns occurred in
the first nine months of 1997. In addition, substantially lower average
selling prices and manufacturing yield, equipment utilization, and
customer qualification issues adversely affected AKCL's financial
results for the first nine months of 1998.
AKCL's current financing arrangements may not be sufficient in
light of AKCL's expected continuing losses. 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. Further writedowns of the Company's
investment in AKCL are limited to the book value of the investment on
the accompanying consolidated balance sheet ($3.4 million at September 27,
1998). The net book value of the Company's investment in AKCL is adjusted
each quarter to reflect the Company's share of AKCL's net income (loss) and
changes in the U.S. dollar value of the investment arising from fluctuations
in the Japanese yen to U.S. dollar exchange rate. Subsequent to the end of
the third quarter the Japanese yen strengthened significantly (from approxi-
mately 135 yen to $1 U.S. at the end of the quarter to approximately 118 yen
to $1 U.S.-as of October 23, 1998). Assuming the yen remains at this
strengthened level through the end of the fourth quarter, the book value
of the Company's investment in AKCL would increase for the exchange rate
difference before adjusting for any losses incurred by AKCL. Had the
yen to dollar exchange rate been at 118 yen to $1 U.S. at the end of the
third quarter the net book value of the Company's investment in AKCL
would have been approximately $4.5 million.
Year 2000 Issue:
Many computer systems were not designed to properly handle dates
beyond the year 1999. Additionally, these systems may not properly
handle certain dates in 1999. Failure to process dates properly could
result in failure or disruption of the Company's information systems
and/or processing equipment. To be Year 2000 ("Y2K") compliant,
computer systems must correctly process dates before and after the year
2000, recognize the year 2000 as a leap year, accept and display dates
unambiguously and correctly process dates for non-date functions such as
archiving. Disruptions to the Company's operations may also occur if
key suppliers or customers experience disruptions in their ability to
purchase, supply or transact with the Company due to Y2K issues. The
Company's global operations rely heavily on the infrastructures within
the countries in which it does business. The Y2K readiness within
infrastructure suppliers (utilities, government agencies such as
customs, and shipping organizations) will be critical to the Company's
ability to avoid disruption of its operations. The Company is
currently assessing its systems, equipment, and processes to determine
its Y2K readiness and has committed personnel and resources to resolve
potential Y2K issues. Further, the Company is working with key
suppliers and customers to ensure their Y2K readiness. The Company is
working with industry trade associations to evaluate the Y2K readiness
of infrastructure suppliers. Additionally, the Company has retained an
outside consulting firm to evaluate the effectiveness of its Y2K
readiness program. The Company plans to complete the assessment of its
Y2K readiness by the end of the first quarter of 1999.
The Company will perform remediation procedures concurrent with
its assessment planning. The Company currently believes that the
remediation costs of the Y2K issue will not be material to the Company's
results of operations or financial position. Cumulatively through
September 27, 1998 the Company has incurred remediation expenses of less
than $0.1 million. While the Company currently expects that the Y2K
issue will not pose significant operational problems, delays in
adequately addressing Y2K issues, or a failure to fully identify all Y2K
dependencies in the Company's systems and in the systems of its
suppliers, customers and financial institutions could have material
adverse consequences, including delays in the production, delivery
or sale of products. Therefore, the Company is developing contingency
plans for continuing operations in the event such problems arise.
The Company intends to complete the contingency planning phase of
its Y2K readiness in the first half of 1999.
The Company's products are not date-sensitive and the Company
expects that it will have limited exposure to product liability
litigation resulting from Y2K-related failures. Disk drive manufacturers
have generally stated that disk drives as a stand-alone product are not
date-sensitive. However, disk drives using the Company's thin-film
media products have been incorporated into computer systems which could
experience Y2K-related failures. The Company anticipates that litigation
may be brought against suppliers of all component products of systems
that are unable to properly handle Y2K issues.
Liquidity and Capital Resources:
Cash and short-term investments of $126.6 million at the end of
the third quarter of 1998 decreased $39.6 million from the end of the
prior fiscal year. Consolidated operating activities generated $19.6
million in cash during the first nine months of 1998. The $347.5
million operating loss for the first nine months of 1998, net of non-
cash depreciation charges of $91.1 million, the non-cash asset
impairment charge of $175.0 million and the non-cash equity loss from
AKCL of $24.1 million, consumed $57.3 million. Changes in operating
assets and liabilities provided $76.2 million of working capital.
Accounts receivable and inventory decreased $37.6 million and $36.0
million, respectively, during the first nine months of 1998.
Additionally, the Company received $22.2 million in income tax refunds
(net of payments). Reductions in accounts payable related to the lower
production volume and capital expenditures used $19.9 million. The
Company borrowed $15.0 million under its credit facilities and spent
$84.0 million on capital requirements during the first nine months of
1998. Proceeds from sales of property, plant and equipment (primarily
the sale of vacant land in Milpitas, California) generated $5.4 million.
Sales of Common Stock under the Company's stock programs generated $3.6
million.
Total capital expenditures for 1998 are currently planned at
approximately $100 million. Capital expenditures for 1998 are primarily
targeted for process improvements, including costs to modify the
Company's in-line equipment for the epitaxial sputtering process and
costs to implement advances in the Company's substrate process
technologies. Current noncancelable capital commitments total
approximately $27 million.
The size of the Company's second quarter of 1998 net loss has
resulted in a default under certain financial covenants contained in the
Company's various bank credit facilities. The Company currently has
$260 million of unsecured bank borrowings outstanding. The remaining
$85 million of unutilized credit under the Company's $345 million credit
facilities is currently unavailable due to the financial covenant
default. The Company is not in payment default under any of its credit
facilities. The Company's borrowing capacity is subject to the
successful re-negotiation of the terms of these agreements and/or the
negotiation of new financing arrangements. The Company is currently in
discussions with its lenders about these matters. There can be no
assurance, however, that the Company will be able to successfully re-
negotiate the terms of its existing credit agreements and/or negotiate
new financing arrangements. If the Company is unable to obtain adequate
financing, the Company will be required to further reduce its operations
and capital spending which could have a material adverse effect on the
Company's results of operations.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings-Not Applicable.
ITEM 2. Changes in Securities-
In July 1998, the Company's stockholders approved an
amendment to the Company's Restated Certificate of Incorporation.
The amendment increased the amount of Common Stock that the
Company is authorized to issue from 85,000,000 to 150,000,000
shares.
ITEM 3. Defaults Upon Senior Securities-
The Company's credit facilities total $345 million 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. None of these credit
facilities is secured by any of the assets of the Company. The
size of the Company's second quarter 1998 net loss resulted in a
default under certain financial covenants contained in the
Company's various bank credit facilities. The Company is not in
payment default under any of these facilities nor have principal
or interest payments been accelerated as a result of the technical
default. The Company currently has $260 million of bank
borrowings outstanding. The remaining $85 million of unutilized
credit is currently unavailable due to the technical default.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Stockholders was held July 22, 1998.
(b) The Special Meeting did not include the election of
Directors.
(c) Other matters voted upon at the stockholders meeting
were:
Proposal No. 1, Approval of an amendment to the
Company's Restated Certificate of Incorporation to
increase the amount of Common Stock the Company is
authorized to issue from 85 million shares to 150
million shares; and
Proposal No. 2, Approval of the sale and issuance by the
Company from time to time of up to $350 million of Common
Stock or securities convertible into Common Stock in
private transactions during the next twelve months at a
price below book value but at or above the then current
market price of the Common Stock.
Shares of Common Stock voted were as follows:
Broker
For Against Abstain Non-vote
----------- ----------- ----------- ----------
Proposal No. 1
(Amendment to Restated
Certificate of
Incorporation) 35,858,126 7,407,770 73,195 -
Proposal No. 2
(Approval of sale and
issuance of up to
$350 million of Common
Stock or securities
convertible to Common
Stock) 24,693,198 7,783,072 86,289 10,776,532
(d) Not Applicable
ITEM 5. Other Information-Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1-Amended and Restated Certificate of
Incorporation
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: October 28, 1998 BY: /s/ William L. Potts, Jr.
----------------- --------------------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: October 28, 1998 BY: /s/ Stephen C. Johnson
----------------- --------------------------------------
Stephen C. Johnson
President and
Chief Executive Officer
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF KOMAG, INCORPORATED,
A Delaware Corporation
The undersigned, Stephen C. Johnson and William L. Potts, Jr.,
hereby certify that:
FIRST: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
SECOND: The Certificate of Incorporation of said corporation was
originally filed with the Secretary of State of Delaware on
October 29, 1986 under the name Komag Delaware, Inc.
THIRD: The Certificate of Incorporation of said corporation shall
be amended and restated to read in full as follows:
ARTICLE I
The name of the corporation (herein called the "Corporation") is
KOMAG, INCORPORATED.
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in
the City of Wilmington, County of New Castle, zip code 19801. The name
of the registered agent of the Corporation at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
The Corporation shall be authorized to issue One Hundred Fifty-One
Million (151,000,000) shares of capital stock having an aggregate par
value of One Million Five Hundred Ten Thousand Dollars ($1,510,000).
This Capital Stock shall be divided into two classes, Common Stock and
Preferred Stock, both classes having a par value. The authorized Common
Stock shall be One Hundred Fifty Million shares (150,000,000) shares
having a par value of one cent ($.01) per share for an aggregate class
par value of One Million Five Hundred Thousand Dollars ($1,500,000).
The authorized Preferred Stock shall be One Million (1,000,000) shares
having a par value of one cent ($.01) per share for an aggregate class
par value of Ten Thousand Dollars ($10,000). The Board of Directors of
the corporation is hereby empowered (i) to determine the preferences,
privileges, or restrictions of such Preferred Stock, including (but not
limited to) the dividend rights and rate, conversion and voting rights,
redemption rights and the terms and prices thereof (including any
provision for a sinking fund), or liquidation preferences thereof, if
any, (ii) to divide the Preferred Stock into different series consisting
of any number of shares, each series having different rights,
provisions, or conditions from any other series and (iii) to increase or
decrease the number of shares of any series so designated, but not below
the number of shares of any such series then outstanding. The
Corporation is also authorized to issue debentures (convertible into the
Common Stock or Preferred Stock or non-convertible, either with or
without voting rights) and/or warrants or options to purchase Common
stock or Preferred Stock.
ARTICLE V
In the furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make,
alter, amend or repeal the By-Laws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from
time to time by a by-law or amendment thereof duly adopted by the Board
of Directors or by the Stockholders.
ARTICLE VII
All rights to vote and all voting power shall be vested in the
Common Stock, and any Preferred Stock with voting rights pursuant to the
terms thereof, and any such holders thereof shall be entitled at all
elections of directors to as many votes as shall equal the number of
votes which (except for this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his
shares of stock multiplied by the number of directors to be elected, and
such holder may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more
of them as he may see fit, and to vote for each share upon all other
matters.
ARTICLE VIII
Elections of directors need not be by written ballot unless the
By-laws of the Corporation shall be provided.
ARTICLE XI
Meetings of stockholders may be held within or without the State
of Delaware, as the By-laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside
the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the By-laws of the
Corporation.
ARTICLE X
A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived any improper personal benefit.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and
all rights conferred upon stockholders herein are granted subject to
this reservation.
ARTICLE XII
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate
of Incorporation, in the manner now or hereafter prescribed by statue,
and all rights conferred upon stockholders herein are granted subject to
this reservation.
ARTICLE XIII
The Corporation shall have perpetual existence.
FOURTH: The foregoing Amended and Restated Certificate of Incorporation
has been duly adopted by the Corporation's Board of Directors
and stockholders in accordance with the applicable provisions
of Sections 242 and 245 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate
on July 22, 1998.
KOMAG, INCORPORATED
By:
Stephen C. Johnson,
President
Attest:
William L. Potts, Jr., Secretary
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<ARTICLE> 5
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FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
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> JUN-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 66,668
<SECURITIES> 59,950
<RECEIVABLES> 40,964
<ALLOWANCES> 2,899
<INVENTORY> 30,822
<CURRENT-ASSETS> 239,359
<PP&E> 919,325
<DEPRECIATION> 429,234
<TOTAL-ASSETS> 736,415
<CURRENT-LIABILITIES> 317,869
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0
0
<COMMON> 534
<OTHER-SE> 339,184
<TOTAL-LIABILITY-AND-EQUITY> 736,415
<SALES> 81,314
<TOTAL-REVENUES> 81,314
<CGS> 84,117
<TOTAL-COSTS> 84,117
<OTHER-EXPENSES> 19,166
<LOSS-PROVISION> 301
<INTEREST-EXPENSE> 4,763
<INCOME-PRETAX> (23,901)
<INCOME-TAX> 256
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (27,449)
<EPS-PRIMARY> ($0.51)
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