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 October 3, 1999
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 October 3, 1999, 65,448,887 shares of the Registrant's common stock,
$0.01 par value, were issued and outstanding.
<PAGE>
<TABLE>
<CAPTION>
INDEX
KOMAG, INCORPORATED
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated statements of operations--Three and nine
months ended October 3, 1999 and September 27, 1998.. . . . .3
Consolidated balance sheets--October 3, 1999
and January 3, 1999 . . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows--Nine months
ended October 3, 1999 and September 27, 1998. . . . . . . . 5
Notes to consolidated financial statements--
October 3, 1999 . . . . . . . . . . . . . . . . . . . . ..6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . .13-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders . . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------
Oct 3 Sept 27 Oct 3 Sept 27
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales to unrelated parties $ 13,402 $ 81,314 $ 127,328 $ 236,179
Net sales to related party 66,496 -- 135,809 --
--------- --------- --------- ---------
NET SALES 79,898 81,314 263,137 236,179
Cost of sales 97,504 84,117 284,627 306,214
--------- --------- --------- ---------
GROSS PROFIT (LOSS) (17,606) (2,803) (21,490) (70,035)
Operating expenses:
Research, development and engineering 11,531 14,312 35,697 47,341
Selling, general and administrative 4,240 4,854 15,330 14,407
Amortization of intangibles 7,174 -- 14,533 --
Restructuring/impairment charges 183,644 -- 187,965 187,768
--------- --------- --------- ---------
206,589 19,166 253,525 249,516
--------- --------- --------- ---------
OPERATING LOSS (224,195) (21,969) (275,015) (319,551)
Other income (expense):
Interest income 1,211 1,888 4,172 6,821
Interest expense (6,199) (4,763) (17,138) (14,072)
Other, net 169 943 1,699 4,857
--------- --------- --------- ---------
(4,819) (1,932) (11,267) (2,394)
--------- --------- --------- ---------
Loss before income taxes, minority interest,
and equity in joint venture loss (229,014) (23,901) (286,282) (321,945)
Provision for income taxes 350 256 1,100 959
--------- --------- --------- ---------
Loss before minority interest and equity in
joint venture loss (229,364) (24,157) (287,382) (322,904)
Minority interest in net income (loss) of consolidated subsidiary (198) (38) 142 459
Equity in net loss of unconsolidated joint venture -- (3,330) (1,402) (24,128)
--------- --------- --------- ---------
NET LOSS ($229,166) ($ 27,449) ($288,926) ($347,491)
========= ========= ========= =========
Basic loss per share ($ 3.50) ($ 0.51) ($ 4.72) ($ 6.56)
========= ========= ========= =========
Diluted loss per share ($ 3.50) ($ 0.51) ($ 4.72) ($ 6.56)
========= ========= ========= =========
Number of shares used in basic computation 65,449 53,444 61,204 53,003
========= ========= ========= =========
Number of shares used in diluted computation 65,449 53,444 61,204 53,003
========= ========= ========= =========
<FN>
</FN>
</TABLE>
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<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
Oct 3 Jan 3
1999 1999
--------- ---------
<S> <C> <C>
ASSETS (unaudited) (note)
Current Assets
Cash and cash equivalents $ 27,984 $ 64,467
Short-term investments 55,815 63,350
Accounts receivable (including $30,520 and
$512 due from related parties in 1999
and 1998, respectively) less allowances
of $2,370 in 1999 and $2,847 in 1998 36,642 43,434
Inventories:
Raw materials 5,617 8,434
Work-in-process 8,351 10,672
Finished goods 12,897 14,534
--------- ---------
Total inventories 26,865 33,640
Prepaid expenses and deposits 5,853 4,348
Income taxes receivable 2,175 2,216
Deferred income taxes 7,883 7,883
--------- ---------
Total current assets 163,217 219,338
Investment in Unconsolidated Joint Venture -- 1,399
Property, Plant and Equipment
Land 7,785 7,785
Building 129,755 128,359
Equipment 682,419 686,169
Furniture 10,924 10,911
Leasehold improvements 86,905 86,565
--------- ---------
917,788 919,789
Less allowances for depreciation and amortization (586,300) (449,772)
--------- ---------
Net property, plant and equipment 331,488 470,017
Net Intangible Assets 25,736 --
Deposits and Other Assets 2,607 3,341
--------- ---------
$ 523,048 $ 694,095
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 260,000 $ 260,000
Trade accounts payable 25,154 27,274
Accounts payable to related parties 1,735 1,848
Accrued compensation and benefits 12,569 15,544
Other liabilities 21,026 3,254
Income taxes payable 177 134
Restructuring Liability 37,910 4,128
--------- ---------
Total current liabilities 358,571 312,182
Note Payable to Related Party 21,186 --
Deferred Income Taxes 52,564 52,564
Other Long-term Liabilities 14,737 1,403
Minority Interest in Consolidated Subsidiary 4,281 4,139
Stockholders' Equity
Preferred stock -- --
Common stock 654 539
Additional paid-in capital 444,262 407,549
Accumulated deficit (373,786) (84,860)
Accumulated other comprehensive income 579 579
--------- ---------
Total stockholders' equity 71,709 323,807
--------- ---------
$ 523,048 $ 694,095
========= =========
<FN>
Note: The balance sheet at January 3, 1999 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
----------------------
Oct 3 Sept 27
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($288,926) ($347,491)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 72,893 91,129
Amortization of intangibles 14,533 --
Provision for losses on accounts receivable (334) (1,019)
Equity in net loss of unconsolidated joint venture 1,402 24,129
Loss on disposal of property, plant and equipment 260 885
Impairment charge related to property, plant and equipment -- 175,000
Impairment of goodwill 44,348 --
Non-cash portion of restructuring charge related to
write-off of property, plant and equipment 98,547 --
Deferred rent (398) 325
Minority interest in net income of consolidated subsidiary 142 459
Changes in operating assets and liabilities:
Accounts receivable 37,134 34,928
Accounts receivable from related parties (30,008) 2,638
Inventories 8,924 35,956
Prepaid expenses and deposits (1,508) (1,732)
Trade accounts payable (2,120) (13,403)
Accounts payable to related parties (113) (6,464)
Accrued compensation and benefits (2,975) 2,130
Other liabilities (4,032) 1,158
Deferred income taxes receivable/payable -- (47)
Income taxes receivable/payable 84 22,233
Restructuring liability 33,782 (1,201)
--------- ---------
Net cash provided by (used in) operating activities (18,365) 19,613
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (28,765) (83,958)
Purchases of short-term investments (5,180) (27,650)
Proceeds from short-term investments at maturity 12,715 --
Proceeds from disposal of property, plant and equipment 860 5,449
Deposits and other assets (3) 732
--------- ---------
Net cash used in investing activities (20,373) (105,427)
FINANCING ACTIVITIES
Increase in long-term obligations -- 15,000
Sale of Common Stock, net of issuance costs 2,255 3,585
--------- ---------
Net cash provided by financing activities 2,255 18,585
--------- ---------
Decrease in cash and cash equivalents (36,483) (67,229)
Cash and cash equivalents at beginning of year 64,467 133,897
--------- ---------
Cash and cash equivalents at end of period $ 27,984 $ 66,668
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 3, 1999
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 considered
necessary for a fair presentation have been included. Operating results for the
three- and nine-month periods ended October 3, 1999 are not necessarily
indicative of the results that may be expected for the year ending January 2,
2000.
The financial statements have been prepared on a going concern basis. The
Report of Independent Auditors on the Company's financial statements for the
year ended January 3, 1999 included in the Company's Annual Report on Form 10-K
contained an explanatory paragraph which indicated substantial doubt about the
Company's ability to continue as a going concern because of recent operating
losses and lack of compliance with certain covenants of its various bank
agreements. Such non-compliance constitutes an event of default under the
agreements. The Company has not been in payment default under these credit
facilities and has continued to pay all interest charges and other fees
associated with these facilities on their scheduled due dates. Amounts
outstanding under these unsecured credit agreements at October 3, 1999 amounted
to $260 million. To date, the Company's lenders have not accelerated any
principal payments under these facilities. The Company is currently negotiating
with its lenders for amendments to its existing credit facilities. There can be
no assurance that the Company will be able to obtain such amendments to its
credit facilities on commercially reasonable terms. In the event that the
Company does not successfully amend its credit facilities or restructure its
debt obligations, the Company could be required to significantly reduce or
possibly suspend its operations, and/or sell additional securities on terms that
would be highly dilutive to current stockholders of the Company. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of assets and liabilities that may result from the outcome of
this uncertainty.
-6-
<PAGE>
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 January 3, 1999.
The Company uses a 52-53 week fiscal year ending on the Sunday closest to
December 31. The three- and nine-month reporting periods 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:
Oct 3 Jan 3
(in thousands) 1999 1999
-------- --------
Municipal auction rate preferred stock $ 52,600 $ 63,350
Corporate debt securities 12,943 33,765
Mortgage-backed securities 17,102 34,060
-------- --------
$ 82,645 $131,175
======== ========
Amounts included in cash and cash equivalents $ 26,830 $ 67,825
Amounts included in short-term investments 55,815 63,350
-------- --------
$ 82,645 $131,175
======== ========
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 provisions of approximately $0.4 million and
$1.1 million for the three- and nine-month periods ended October 3, 1999
primarily represent foreign withholding taxes. The Company's wholly-owned
thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS") received an
extension of its initial five-year tax holiday for an additional five years
commencing July 1998. KMS was granted a ten-year tax holiday for its second and
third plant sites in Malaysia. The government determined in the third quarter of
1999 that earnings from the second and third plant sites will be tax free
through 2001. The remaining period of the ten-year tax holiday will be
reassessed in 2001 based on achieving certain investment criteria.
-7-
<PAGE>
NOTE 4 - COMPREHENSIVE LOSS
The following are the components of comprehensive loss:
Three Months Ended Nine Months Ended
------------------------------------------------
Oct 3 Sept 27 Oct 3 Sept 27
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands)
Net loss ($229,166) ($ 27,449) ($288,926) ($347,491)
Foreign currency translation
adjustments -- -- -- (2,560)
--------- --------- --------- ---------
Comprehensive loss ($229,166) ($ 27,449) ($288,926) ($350,051)
========= ========= ========= =========
Accumulated other comprehensive loss at October 3, 1999 and January 3, 1999 in
the accompanying Consolidated Balance Sheets consists entirely of accumulated
foreign currency translation adjustments.
NOTE 5 - RESTRUCTURING CHARGES
During the third quarter of 1999, 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 and long-term market
demand outlook. Under the 1999 restructuring plan, the Company decided to close
its U.S. manufacturing operations in San Jose, California. The restructuring
actions resulted in a charge of $139.3 million and included $98.5 million for
leasehold improvements and equipment write-offs, $17.7 million for future
liabilities under non-cancelable equipment leases associated with equipment no
longer being used, $15.6 million for severance pay associated with approximately
980 terminated employees, and $7.5 million in plant closure costs. Non-cash
items included in the restructuring charge totaled approximately $98.5 million.
At October 3, 1999, $35.6 million related to the 1999 restructuring
activities remained in current liabilities. During the third quarter of 1999,
the Company made cash payments totaling $3.2 million primarily for severance pay
and $2.0 million for leases included in the restructuring charge. Cash outflows
of approximately $19.9 million associated with severance pay and closure costs
will occur primarily during the fourth quarter of 1999 and the first quarter of
2000. Cash payments of approximately $15.7 million under the equipment leases
will be made monthly through mid-2002.
The Company recorded restructuring charges of $4.3 million in the second
quarter of 1999 and $187.8 million in the second quarter of 1998. The second
quarter 1999 restructuring charge primarily related to severance pay associated
with 400 terminated
-8-
<PAGE>
employees. The entire $4.3 million was paid out to the employees during the
second and third quarter of 1999.
The 1998 restructuring charge consisted primarily of a $175.0 million
non-cash asset impairment charge. The cash component of the 1998 charge was
$12.8 million for employee severance costs, equipment order cancellations costs,
and facility closure costs. The Company has made cash payments in connection
with the 1998 restructuring charge totaling $12.2 million as of October 3, 1999.
NOTE 6 - LOSS PER SHARE
<TABLE>
The net loss per share was computed using only the weighted average
number of shares of common stock outstanding during the period. The following
table sets forth the computation of net loss per share.
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Oct 3 Sept 27 Oct 3 Sept 27
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Numerator: Net loss ($229,166) ($ 27,449) ($288,926) ($347,491)
--------- --------- --------- ---------
Denominator for basic
loss per share -
weighted-average shares 65,449 53,444 61,204 53,003
--------- --------- --------- ---------
Effect of dilutive securities:
Employee stock options -- -- -- --
Denominator for diluted --------- --------- --------- ---------
loss per share 65,449 53,444 61,204 53,003
--------- --------- --------- ---------
Basic loss per share ($ 3.50) ($ 0.51) ($ 4.72) ($ 6.56)
========= ========= ========= =========
Diluted loss per share ($ 3.50) ($ 0.51) ($ 4.72) ($ 6.56)
========= ========= ========= =========
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 28,009
and 14,176 for the three months ended October 3, 1999 and September 27, 1998,
respectively, and 421,659 and 936,863 for the nine months ended October 3, 1999
and September 27, 1998, respectively, were not included in the net loss per
share computation because the effect would be antidilutive.
-9-
<PAGE>
NOTE 7 - 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.
NOTE 8 - PURCHASE OF WESTERN DIGITAL CORPORATION'S MEDIA OPERATIONS
In April 1999, the Company purchased the assets of Western Digital
Corporation's ("WDC's") media operations through the issuance of approximately
10.8 million shares of the Company's Common Stock and a note in the principal
amount of $30.1 million. The shares issued in the transaction, which represented
16.7% of the Company's outstanding shares on a post-issuance basis, are
unregistered and subject to trading restrictions. WDC may resell these shares in
specified increments over a three and one-half year period under registration
rights granted by the Company or under SEC rules after expiration of the
required holding periods. Principal and interest accrued on the note are due in
three years and the note is subordinated to the Company's senior credit
facilities. In the event WDC realizes a return on its Komag equity holdings in
excess of a targeted amount within three years, the excess amount will reduce
the balance due under the note. The Company discounted the principal amount of
the subordinated note payable to $21.2 million based on the Company's estimated
incremental borrowing rate at the time of the acquisition of 18% for this class
of financial instrument.
Additionally, the Company and WDC signed a volume purchase agreement
under which the Company agreed to supply a substantial portion of WDC's media
needs over the next three years. Under the volume purchase agreement WDC began
to purchase substantially all of its media requirements from the Company after
the closing date. The Company initially expected that second quarter 1999 unit
sales from the combined operations would grow sequentially in the range of
20-35% compared to the Company's first quarter of 1999 results. Actual unit
shipments for the second quarter fell considerably short of these expectations
as customer order reductions (including those from WDC) and lower-than-expected
volumes on certain new product programs restricted sequential unit sales growth
to approximately 10%. In response to competitive market conditions the Company's
customers reduced the number of disks per drive to support the delivery of lower
priced disk drives to the rapidly expanding, low-cost segment of the PC market.
These customer actions, the continuing imbalance between the supply and demand
for disk products, and the lack of new data-intensive applications continue to
depress the Company's financial performance. Due to this weak unit demand the
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<PAGE>
Company closed the former WDC media operation at the end of June 1999, nearly
fifteen months ahead of the Company's original transition plan.
The Company's acquisition of WDC's media operation was recorded in the
second quarter of 1999 as a business combination using the purchase method of
accounting. Under this method the Company recorded the following (in millions):
Purchase Price Paid:
Common Stock $ 34.6
Note Payable 21.2
-------
Direct Costs $ 55.8
=======
Assets Acquired:
Goodwill $ 79.2
Volume Purchase Agreement 4.7
Equipment 5.3
Inventory 2.1
Liabilties Assumed:
Remaining Lease Obligations
for Equipment Removed
from Service (26.5)
Facility Closure Costs (5.6)
Purchase Order Cancellation
Liabilities (2.6)
Other Liabilities (0.8)
-------
Net Assets Acquired $ 55.8
=======
The Company recognized goodwill and other intangibles in connection
with the acquisition of the WDC media operation in the amount of $83.9 million.
Goodwill typically reflects the difference between the fair value of the assets
acquired and consideration paid. Under purchase accounting rules the Company
also recorded liabilities that increased the amount of goodwill recognized.
These liabilities included estimated costs for the closure of the former WDC
media operation as well as costs related to the remaining lease obligations for
equipment taken out of service due to the closure.
During the second and third quarter of 1999 the Company paid a total of
approximately $9.0 million against liabilities arising from this transaction
including equipment lease obligations ($5.1 million), property taxes ($1.1
million) and other liabilities ($2.8 million). Equipment lease obligations are
expected to be paid monthly through mid-2002. At October 3, 1999, the current
portion of the equipment lease
-11-
<PAGE>
obligations was approximately $10.2 million. The majority of the facility
closure costs, purchase order cancellation costs and other liabilities
associated with the WDC transaction are expected to be paid by mid-2000.
Based on reduced cash flow expectations influenced by continuing
difficult market conditions through the end of the third quarter of 1999, the
company recorded an impairment charge of approximately $44.3 million against
this goodwill balance. The fair value of the goodwill as of the end of the third
quarter of 1999 was determined based on the discounted cash flows resulting from
expected sales volumes to WDC through the remaining period of the volume
purchase agreement. This charge, combined with the goodwill amortization for the
second and third quarters, reduced the goodwill balance to approximately $25.7
million at October 3, 1999. The remaining balance will be amortized over the
remaining ten-quarter term of the Company's volume purchase agreement with
Western Digital.
-12-
<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.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans," and similar expressions. While this
discussion 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. In particular, the
actions taken to restructure its U.S. operations might disrupt the Company's
ability to execute against customer obligations and operational improvement
plans. Such failures to execute would jeopardize the anticipated improvements in
the Company's financial performance outlined below. Due to the volume purchase
agreement with Western Digital Corporation ("WDC"), the Company's results
continue to remain highly dependent on the relative success of WDC in the data
storage market. Other factors that could cause actual results to differ include
the following: disk consumption per drive based on the relative growth rates of
areal density and overall storage usage; pricing levels determined by the
continuing imbalance between supply and demand for disk products; growth rate of
the merchant disk market as influenced by the level of captive disk production;
structural changes within the disk media industry created by combinations,
failures, and joint venture arrangements; unit volumes derived from new product
qualifications; changes in manufacturing efficiencies, in particular product
yields and material input costs; factory utilization levels; and capital
expenditure levels required to maintain or acquire process equipment with
capabilities to meet more stringent future product requirements. Moreover, the
Company must maintain sufficient cash resources to operate efficiently. The
Company's ability to raise additional funding, will be dependent upon
improvement in the Company's financial performance and the status of the
Company's credit facilities. Improvement in the Company's financial performance
remains highly dependent on macro industry fundamentals. Other risk factors that
may affect the Company's financial performance are listed in the Company's
various SEC filings, including its Form 10-K for the fiscal year ended January
3, 1999 which was filed on April 2, 1999. 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:
Adverse market conditions, which began in mid-1997, continued to impact
the thin-film media market throughout 1998 and the first three quarters of 1999.
Demand for
-13-
<PAGE>
disk drives grew rapidly during the mid-1990s and industry forecasts were for
continued strong growth. The Company and a majority of its competitors (both
independent disk manufacturers and captive disk manufacturers owned by
vertically integrated disk drive customers) committed to expansion programs in
1996 and substantially increased their media manufacturing capacity in 1997. In
1997, the rate of growth in demand for disk drives fell. Disk drive
manufacturers abruptly reduced orders for media from independent suppliers and
relied more heavily on internal capacity to supply a larger proportion of their
media requirements. The media industry's capacity expansion, coupled with the
decrease in the rate of demand growth, has resulted in excess media production
capacity. This excess media production capacity caused sharp declines in average
selling prices for disk products as independent suppliers struggled to utilize
their capacity.
In addition to adversities caused by the excess supply of media, 1998
was a year of tremendous transition for the Company and the disk drive industry.
Disk drive programs utilizing newer, more advanced, magnetoresistive ("MR")
media and recording heads replaced older generation programs utilizing inductive
media and heads. By the end of 1998 most disk drives were manufactured with MR
components. The transition to MR disk drives has led to significant,
unprecedented increases in areal density and, therefore, the amount of data that
can be stored on a single disk platter. In the first and second quarters of 1999
the majority of the Company's 3 1/2-inch disks were capable of storing at least
4.3 gigabytes (GB) per platter. This represented a 34% increase in disk capacity
relative to a product mix of predominately 3.2 GB platters in the fourth quarter
of 1998. In the third quarter of 1999 50% of the Company's 3 1/2-inch disks were
capable of storing at least 6.8 GB per platter, which represents a 58% increase
in disk capacity relative to the first half of 1999. The Company expects the 6.8
GB and 9.1 GB per platter disk capacities will account for the majority of the
Company's unit shipments during the fourth quarter of 1999. Increased disk
storage capacity per disk allows drive manufacturers to offer lower-priced disk
drives at given capacity points, especially in the price-sensitive desktop
segment, through the incorporation of fewer components into their disk drives.
The rapid advancement in storage capacity per disk platter has further slowed
disk demand throughout the industry. According to industry market analysts, this
resulting reduction in the average number of disks per drive will likely result
in flat to declining media demand for the remainder of 1999 and into the first
half of 2000. The significant amount of captive capacity employed by certain
disk drive manufacturers also continues to reduce the market opportunities for
independent disk suppliers such as the Company.
In April 1999, the Company acquired the thin-film media operations of
Western Digital Corporation ("WDC"). As part of the acquisition the Company and
WDC also entered into a volume purchase agreement under which the Company agreed
to supply a substantial portion of WDC's thin-film media requirements. Under the
volume purchase agreement WDC began to purchase substantially all of its media
requirements from the
-14-
<PAGE>
Company after the closing date. The Company initially expected that second
quarter 1999 unit sales from the combined operations would grow sequentially in
the range of 20-35% compared to the Company's first quarter of 1999 results.
Actual unit shipments for the second quarter fell considerably short of these
expectations as customer order reductions (including those from WDC) and
lower-than-expected volumes on certain new product programs restricted
sequential unit sales growth to approximately 10%. In response to competitive
market conditions the Company's customers reduced the number of disks per drive
to support the delivery of lower priced disk drives to the rapidly expanding,
low-cost segment of the PC market. These customer actions, the continuing
imbalance between the supply and demand for disk products, and the lack of new
data-intensive applications continue to depress the Company's financial
performance. Due to this weak unit demand the Company closed the former WDC
media operation at the end of June 1999, nearly fifteen months ahead of the
Company's original transition plan.
Disk industry conditions remain very difficult. Increased storage
capacity per disk is limiting overall unit demand in the disk industry while
excess production capacity within the industry continues to push average selling
prices for disk products lower. Vertically integrated disk drive customers such
as Seagate and IBM are also supplying a larger percentage of their disk
requirements internally as a direct result of the lower disk consumption per
drive facilitated by the increased storage capacity per platter. As a result of
these negative industry trends the Company has experienced continuing
deterioration in its revenue forecasts during the course of 1999.
Following the closure of the former WDC media operation at the end of
June 1999, the Company announced in July 1999 that it would reduce the size of
its U.S. operations further in response to the poor industry conditions. Later
in August 1999, the Company indicated that it would cease volume production of
finished disks in the U.S., close two manufacturing facilities in San Jose,
California, and institute staged work force reductions that would affect 980
people by the end of 1999. These reductions, combined with the June 1999 work
force of reduction of 400 people, will lower the employment base at the
Company's U.S. operations from 1,950 people in April 1999 (subsequent to the
acquisition of WDC's media operation) to 570 people by year end. As a result of
these actions the Company expects to realize cash savings of approximately $20
million per quarter in U.S. payroll costs, a 67% reduction from the second
quarter 1999 level when total U.S. employment reached 1,950 people. The Company
employed approximately 860 people in its U.S. operations and 2,740 people in its
Malaysian manufacturing operations at the end of third quarter of 1999. The
Company recorded a restructuring charge of $139.3 million in the third quarter
for the write-off of equipment and leasehold improvements in the U.S. production
facilities scheduled for closure and for severance pay related to the
reorganization of its U.S. operations.
After completion of the phase out of volume production, the Company's
San Jose site will be solely focused on activities related to research, process
development, and
-15-
<PAGE>
product prototyping. Selling, general and administrative functions will also
remain in San Jose. The Company's highly automated substrate manufacturing in
Santa Rosa, California will continue to produce low-cost aluminum substrates and
perform advanced development work for both aluminum and glass substrates. The
Company believes that the shift of high volume production to its cost-advantaged
Malaysian manufacturing plants will improve the Company's overall cost
structure, result in lower unit production costs, and improve the Company's
ability to respond to the continuing price pressures in the disk industry.
Revenue:
Net sales decreased to $79.9 million in the third quarter of 1999, down
1.7% compared to $81.3 million in the third quarter of 1998. The year-over-year
decrease was primarily due to the net effect of a 14% increase in unit sales
volume and a 14% decrease in the overall average selling price. Net sales in
third quarters of 1999 and 1998 included $1.8 million and $0.2 million of
substrate sales, respectively. The Company periodically sells substrate products
but does not currently anticipate that such sales will become a significant
portion of its revenue. Third quarter 1999 unit sales of finished media
increased to 9.7 million disks from 8.5 million disks in the third quarter of
1998. The severe pricing pressures generated by the continuing imbalance in
supply and demand for thin-film media in the third quarter of 1999 resulted in
the year-over-year decrease in the overall average selling price. Net sales in
the first nine months of 1999 increased 11.4% relative to the first nine months
of 1998. Net sales in the first nine months of 1999 and 1998 included $7.9
million and $5.9 million of substrate sales, respectively. The increase in net
sales for the nine-month period of 1999 was primarily due to the combination of
a 31% increase in unit sales and a 15% decrease in overall average selling
price.
In addition to sales of internally produced disk products, the Company
has periodically 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 both the third quarter of 1999 and 1998.
Distribution sales of these products were negligible in the first nine months of
1999 and accounted for $2.4 million in the first nine months of 1998. The
Company expects that distribution sales of AKCL product will be minimal for the
remainder of 1999.
During the third quarter of 1999 sales to Western Digital Corporation
accounted for approximately 84% of consolidated net sales. Net sales to each of
the Company's other customers were less than 10% during the third quarter of
1999. The Company expects that it will continue to derive a substantial portion
of its sales from WDC and from a few other 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.
Additionally, as a result of the April 1999 acquisition of WDC's media operation
and related volume purchase agreement, the Company's sales remain highly
dependent upon WDC's performance in the disk drive industry.
-16-
<PAGE>
Gross Margin:
The Company recorded a negative gross margin percentage of 22.0% in the
third quarter of 1999 compared to a negative gross margin of 3.4% in the third
quarter of 1998. The decline in the gross margin percentage was primarily due to
a 14% reduction in the average selling price. The Company produced 9.1 million
units in the third quarter of 1999 compared to 7.1 million units in the third
quarter of 1998. The higher unit production volume as well as higher yields
reduced the Company's unit production cost as fixed costs were spread over more
units. This positive effect, however, was only a slight offset to the affect of
the decline in the average selling price.
The gross margin improved to a negative 8.2% for the first months of
1999 from a negative 29.7% for the first nine months of 1998. Unit production
increased to 30.5 million disks in the first nine months of 1999 compared to
22.4 million disks in the first nine months of 1998. The Company operated well
below capacity in the first nine months of 1998 in order to match unit
production to the sharply lower demand for its products. Improvements in
manufacturing efficiencies, higher unit production volumes, and reductions in
fixed manufacturing costs favorably impacted the Company's gross margin in 1999.
Depreciation charges in the first nine months of 1999 were approximately 33%
lower than in the first nine months of 1998 primarily due to the asset
impairment charges recorded in June 1998. The effect of these manufacturing cost
reductions more than offset the effect of the decline in the overall average
selling price on the Company's gross margin.
Operating Expenses:
Research and development ("R&D") expenses decreased to $11.5 million in
the third quarter of 1999 from $14.3 million in the third quarter of 1998. R&D
expenses decreased to $35.7 million in the first nine months of 1999 from $47.3
million in the first nine months of 1998. Decreased R&D staffing and lower
facility and equipment costs (primarily due to the 1998 asset impairment
charges) accounted for most of the decrease in R&D expenses in both the three-
and nine-month periods of 1999. Selling, general and administrative ("SG&A")
expenses decreased to $4.2 million in the third quarter of 1999 from $4.9
million in the third quarter of 1998. SG&A expenses increased to $15.3 million
in the first nine months of 1999 from $14.4 million in the first nine months of
1998. The decrease for the three-month period of 1999 relative to the comparable
period of 1998 was primarily due to lower bad debt provisions and legal and
consulting fees, partially offset by an increase in bonus expense. The increase
for the nine-month period of 1999 was primarily due to higher bad debt
provisions and bonus expenses, partially offset by a decline in facility and
depreciation costs.
-17-
<PAGE>
Goodwill Amortization:
The Company's acquisition of WDC's media operation was recorded in the second
quarter of 1999 as a business combination using the purchase method of
accounting. Under this method the Company recorded the following (in
millions):
Purchase Price Paid:
Common Stock $ 34.6
Note Payable 21.2
-------
Direct Costs $ 55.8
=======
Assets Acquired:
Goodwill $ 79.2
Volume Purchase Agreement 4.7
Equipment 5.3
Inventory 2.1
Liabilties Assumed:
Remaining Lease Obligations
for Equipment Removed
from Service (26.5)
Facility Closure Costs (5.6)
Purchase Order Cancellation
Liabilities (2.6)
Other Liabilities (0.8)
-------
Net Assets Acquired $ 55.8
=======
The Company recognized goodwill and other intangibles in connection
with the acquisition of the WDC media operation in the amount of $83.9 million.
Goodwill typically reflects the difference between the fair value of the assets
acquired and consideration paid. Under purchase accounting rules the Company
also recorded liabilities that increased the amount of goodwill recognized.
These liabilities included estimated costs for the closure of the former WDC
media operation as well as costs related to the remaining lease obligations for
equipment taken out of service due to the closure.
During the second and third quarter of 1999 the Company paid a total of
approximately $9.0 million against liabilities arising from this transaction
including equipment lease obligations ($5.1 million), property taxes ($1.1
million) and other liabilities ($2.8 million). Equipment lease obligations are
expected to be paid monthly through mid-2002. At October 3, 1999, the current
portion of the equipment lease obligations was approximately $10.2 million. The
majority of the facility closure costs,
-18-
<PAGE>
purchase order cancellation costs and other liabilities associated with the WDC
transaction are expected to be paid by mid-2000.
Based on reduced cash flow expectations influenced by continuing
difficult market conditions through the end of the third quarter of 1999, the
company recorded an impairment charge of approximately $44.3 million against
this goodwill balance. The fair value of the goodwill as of the end of the third
quarter of 1999, was determined based on the discounted cash flows resulting
from expected sales volumes to WDC through the remaining period of the volume
purchase agreement. This charge, combined with the goodwill amortization for the
second and third quarters, reduced the goodwill balance to approximately $25.7
million at October 3, 1999. The remaining balance will be amortized over the
remaining ten-quarter term of the Company's volume purchase agreement with
Western Digital.
Restructuring Charges:
During the third quarter of 1999, 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 and long-term market
demand outlook. Under the 1999 restructuring plan, the Company decided to close
the U.S. manufacturing operations in San Jose, California. The restructuring
actions resulted in a charge of $139.3 million and included $98.5 million for
leasehold improvements and equipment write-offs, $17.7 million for future
liabilities under non-cancelable equipment leases associated with equipment no
longer being used, $15.6 million for severance pay associated with approximately
980 terminated employees, and $7.5 million in plant closure costs. Non-cash
items included in the restructuring charge totaled approximately $98.5 million.
At October 3, 1999, $35.6 million related to the 1999 restructuring
activities remained in current liabilities. During the third quarter of 1999 the
Company made cash payments totaling $3.2 million primarily for severance pay and
$2.0 million for leases included in the restructuring charge. Cash outflows of
approximately $19.9 million associated with severance pay and closure costs will
occur primarily during the fourth quarter of 1999 and the first quarter of 2000.
Cash payments of approximately $15.7 million under the equipment leases will be
made monthly through mid-2002.
The Company recorded restructuring charges of $4.3 million in the second
quarter of 1999 and $187.8 million in the second quarter of 1998. The second
quarter 1999 restructuring charge primarily related to severance pay associated
with 400 terminated employees. The entire $4.3 million was paid out to the
employees during the second and third quarter of 1999.
The 1998 restructuring charge consisted primarily of a $175.0 million
non-cash asset impairment charge. The cash component of the 1998 charge was
$12.8 million for employee severance costs, equipment order cancellations costs,
and facility closure costs.
-19-
<PAGE>
The Company has made cash payments totaling $12.2 million as of October 3, 1999.
Interest and Other Income/Expense:
Interest income decreased $0.7 million in the third quarter of 1999
relative to the third quarter of 1998 and $2.6 million in the first nine months
of 1999 relative to the first nine months of 1998 due to lower average cash and
short-term investment balances in the current year periods. Interest expense
increased $1.4 million in the third quarter of 1999 compared to the third
quarter of 1998 and increased $3.1 million in the first nine months of 1999
compared to the first nine months of 1998. The increases for the three- and
nine-month periods were primarily due to an additional $1.0 million and $1.9
million, respectively in interest expense under the Company's $21.2 million note
payable to WDC in connection with the acquisition of WDC's media operation. The
note payable to WDC was discounted by the Company's estimated incremental
borrowing rate of 18% for subordinated debt instruments at the time of the
acquisition. Other income decreased $0.8 million in the third quarter of 1999
compared to the third quarter of 1998. The decrease was primarily due to a
reduction of $0.6 million in foreign currency transaction gains in the third
quarter of 1999 compared to the third quarter of 1998. Other income decreased
$3.2 million in the first nine months of 1999 relative to the first nine months
of 1998. Other income in the first nine months of 1998 included a $3.1 million
gain on the March 1998 sale of vacant land located in Milpitas, California.
Income Taxes:
The Company's income tax provision was approximately $0.4 million and
$1.1 million for the three- and nine-month periods of 1999, respectively,
compared to $0.3 million and $1.0 million for the three- and nine-month periods
of 1998, respectively. The income tax provisions for both the 1999 and 1998
periods primarily represented foreign withholding taxes. The Company's
wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"),
received an extension of its initial five-year tax holiday for an additional
five years commencing in July 1998. KMS was granted a ten-year tax holiday for
its second and third plant sites in Malaysia. The government has determined that
earnings from the second and third plant sites will be tax free through 2001.
The remaining period of the ten-year tax holiday will be reassessed in 2001
based on achieving certain investment criteria.
Minority Interest in KMT/Equity in Net Income (Loss) of AKCL:
The minority interest in the net income 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 $1.0 million and net income of $.7 million in the third quarter and first
nine months of 1999, respectively, compared to a net loss of $0.2 million and
net income of $2.3 million in the third quarter and first nine months of 1998,
respectively.
The Company owns a 50% interest in AKCL and records its share of AKCL's
net
-20-
<PAGE>
income (loss) as equity in net income (loss) of unconsolidated joint venture.
During the first three months of 1999, the Company's investment in AKCL was
reduced to zero as a result of recording a portion of the Company's share of
AKCL's losses for the first quarter of 1999. Approximately $0.6 million of the
Company's share of AKCL's first quarter loss was not recorded as it would have
reduced the net book value of the investment in AKCL below zero. AKCL recorded
net income of $0.3 million and $0.8 million for the second and third quarters of
1999, respectively. The Company has not recorded its share of this income as the
Company's cumulative unrecorded equity in AKCL is a loss of approximately $0.1
million as of October 3, 1999. Assuming AKCL reports net income in future
periods, the Company will record its share of such income only to the extent by
which the income exceeds the losses incurred subsequent to the date on which the
investment balance became zero.
Year 2000 Issue:
Many computer systems were not designed to properly handle dates beyond
the year 1999. Such systems were designed using two digits rather than four to
define the applicable year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. Disruptions may also occur if key suppliers or
customers experience disruptions in their ability to transact with the Company
due to Year 2000 issues. The Company's global operations rely heavily on the
infrastructures of the countries in which it conducts business. The Year 2000
readiness within infrastructure suppliers (utilities, government agencies such
as customs, shipping organizations) will be critical to the Company's ability to
avoid disruption of its operations. The Company is working with industry trade
associations to evaluate the Year 2000 readiness of infrastructure suppliers.
The Company has committed personnel and resources to resolve potential Year 2000
issues and is working with key suppliers and customers to ensure their Year 2000
readiness.
The Company's Year 2000 efforts are focused on three primary areas of
potential impact: internal information technology ("IT") systems, internal
non-IT systems, and the readiness of third parties with whom the Company has
critical business relationships. Testing and remediation of internal IT and
non-IT systems is complete.
The Company has developed a process for identifying and assessing Year
2000 readiness of its critical suppliers. This process generally involves the
following steps: initial supplier survey, follow-up supplier review, and
contingency planning. The Company is following up with critical suppliers that
either did not respond initially or whose responses were unsatisfactory. To
date, the Company has received responses from all of its critical suppliers, all
of whom have responded that they expect to address all of their significant Year
2000 issues on a timely basis.
-21-
<PAGE>
Remediation costs of the Year 2000 issue have not been material to the
Company's results of operations or financial position. The Company has
cumulatively incurred remediation costs of approximately $0.6 million. The
Company does not separately track the internal costs incurred for the Year 2000
project (primarily the payroll cost for its information systems group). While
the Company currently expects that the Year 2000 issue will not pose significant
operational problems, a failure to fully identify all Year 2000 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 delivery or sales of products. Therefore, the Company has
developed contingency plans for continuing operations in the event such problems
arise. These contingency plans are materially complete but may be subject to
refinement through December 1999.
During the development of the Company's contingency plans for continuing
operations, the Company identified and analyzed the most reasonably likely
worst-case scenarios where it may be affected by Year 2000 related
interruptions. These scenarios may include possible infrastructure collapse, the
failure of power and water supplies, major transportation disruptions,
unforeseen product shortages due to hoarding of material and supplies, and
failures of communications and financial systems. Any one of these scenarios
could have a major and material effect on the Company's ability to produce and
deliver products to its customers. While the Company has developed contingency
plans, which are materially complete, to address issues under its control, an
infrastructure problem outside of its control or some combination of several of
these problems could result in a delay in product shipments depending on the
nature and severity of the problems. The Company would expect that most
utilities and service providers would be able to restore service within days
although more pervasive system problems involving multiple providers could last
several weeks or longer depending on the complexity of the systems and the
effectiveness of their contingency plans.
The Company's products are not date sensitive. Additionally, disk drive
manufacturers have generally stated that disk drives as a stand alone product
are not date sensitive. The Company expects that it will have limited exposure
to product liability litigation resulting from Year 2000 related failures.
Liquidity and Capital Resources:
Cash and short-term investments of $83.8 million at the end of the third
quarter of 1999 decreased $44.0 million from the end of the prior fiscal year.
Working capital decreased $102.5 million from the end of the prior fiscal year.
Consolidated operating activities consumed $18.4 million in cash during the
first nine months of 1999. The $288.9 million operating loss for the first nine
months of 1999, net of the non-cash portion of restructuring charges of $98.5
million, non-cash depreciation and amortization
-22-
<PAGE>
charges of $87.4 million, the goodwill impairment charge of $44.3 million, the
non-cash equity loss from AKCL of $1.4 million and other non-cash/deferred
charges totaling $(0.2) million, used $57.5 million. Changes in operating assets
and liabilities provided $39.2 million. Inventory and accounts receivable
decreased $8.9 million and $7.1 million, respectively, providing a source of
cash. The net change in the restructuring liability for the first nine months of
1999 provided $33.8 million. In addition, the net change in the other various
operating assets and liabilities used $10.6 million. The Company spent $28.8
million on capital requirements during the first nine months of 1999. Sales of
Common Stock under the Company's stock programs generated $2.3 million.
Total capital expenditures for 1999 are currently planned at
approximately $35.0 million. Current noncancellable capital commitments total
approximately $4.4 million. In light of the continuing weak disk industry
conditions the Company plans to closely monitor its capital needs in order to
limit capital spending for the last quarter of 1999 and future periods. The size
of the Company's net losses have 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. No
additional borrowing capacity is available as a result of the technical default.
The Company is not in payment default under any of its credit facilities. The
Company is currently negotiating with its lenders for amendments to the existing
credit facilities. The Company's ability to successfully conclude negotiations
has been delayed during the past year as a result of changes in the Company's
business model due to the acquisition of WDC's media facility and continuing
deterioration in the disk industry. There can be no assurance that the Company
will be able to obtain amendments to its credit facilities on commercially
reasonable terms. If the Company does not successfully amend these credit
facilities, it would remain in technical default of its bank loans and the
lenders would retain their rights and remedies under the existing credit
agreements. As long as the lenders choose not to accelerate any principal
payments, the Company would continue to operate in default for the near term.
However, the Company will need to raise additional funds to restructure its debt
obligations and to operate its business for the long term.
There can be no assurance that the Company will be able to secure such
financial resources on commercially reasonable terms. If the Company is unable
to obtain adequate financing, it could be required to significantly reduce or
possibly suspend its operations, and/or to sell additional securities on terms
that would be highly dilutive to current stockholders.
-23-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings-Not Applicable.
ITEM 2. Changes in Securities-Not Applicable.
ITEM 3. Defaults Upon Senior Securities--
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. No additional
borrowing capacity is available as a result of the technical default.
The Company is not in payment default under any of its credit
facilities. The Company is currently negotiating with its lenders for
amendments to the existing credit facilities.
ITEM 4. Submission of Matters to a Vote of Security Holders-Not
Applicable.
ITEM 5. Other Information-Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27--Financial Data Schedule.
b) Reports on Form 8-K
On August 9, 1999 the Company filed Form 8-K containing the
contents of its press release dated August 5, 1999 entitled
"Komag Announces Management Changes".
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KOMAG, INCORPORATED
(Registrant)
DATE: November 12, 1999 BY: /s/ William L. Potts, Jr.
-------------------- ---------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: November 12, 1999 BY: /s/ Thian Hoo Tan
-------------------- ---------------------
Thian Hoo Tan
President and
Chief Executive Officer
-25-
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> JAN-2-2000
<PERIOD-START> JUL-5-1999
<PERIOD-END> OCT-3-1999
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<SECURITIES> 55,815
<RECEIVABLES> 34,775
<ALLOWANCES> 2,370
<INVENTORY> 26,865
<CURRENT-ASSETS> 163,217
<PP&E> 917,788
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<TOTAL-ASSETS> 523,048
<CURRENT-LIABILITIES> 358,571
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<COMMON> 654
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<TOTAL-LIABILITY-AND-EQUITY> 523,048
<SALES> 79,898
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<INCOME-PRETAX> (229,014)
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