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 1, 2000
Commission File Number 0-16852
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1710 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 1, 2000, 66,801,269 shares of the Registrant's common stock, $0.01
par value, were issued and outstanding.
<PAGE>
INDEX
KOMAG, INCORPORATED
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated statements of operations--Three-and nine-
months ended October 1, 2000 and October 3, 1999................3
Consolidated balance sheets--October 1, 2000
and January 2, 2000.............................................4
Consolidated statements of cash flows--Nine-months
ended October 1, 2000 and October 3, 1999.......................5
Notes to consolidated financial statements--
October 1, 2000.............................................6-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............16-37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................38
Item 2. Changes in Securities..........................................38
Item 3. Defaults Upon Senior Securities................................38
Item 4. Submission of Matters to a Vote of Security Holders............38
Item 5. Other Information..............................................38
Item 6. Exhibits and Reports on Form 8-K...............................39
SIGNATURES....................................................................40
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct 1 Oct 3 Oct 1 Oct 3
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales to unrelated parties $ 39,684 $ 13,402 $ 105,396 $ 127,328
Net sales to related parties 44,485 66,496 141,874 135,809
---------- ---------- ---------- ----------
NET SALES 84,169 79,898 247,270 263,137
Cost of sales 74,396 97,504 214,725 284,627
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) 9,773 (17,606) 32,545 (21,490)
Operating expenses:
Research, development and engineering 8,276 11,531 25,168 35,697
Selling, general and administrative 2,985 4,240 10,399 15,330
Amortization of intangibles 2,555 7,174 7,665 14,533
Restructuring charges - 183,644 (2,661) 187,965
---------- ---------- ---------- ----------
13,816 206,589 40,571 253,525
---------- ---------- ---------- ----------
OPERATING LOSS (4,043) (224,195) (8,026) (275,015)
Other income (expense):
Interest income 734 1,211 2,884 4,172
Interest expense (8,906) (6,199) (22,814) (17,138)
Other, net (285) 169 286 1,699
---------- ---------- ---------- ----------
(8,457) (4,819) (19,644) (11,267)
---------- ---------- ---------- ----------
Loss before income taxes, minority interest,
equity in joint venture loss and extraordinary gain (12,500) (229,014) (27,670) (286,282)
Provision for income taxes 366 350 1,192 1,100
---------- ---------- ---------- ----------
Loss before minority interest, equity in
joint venture loss and extraordinary gain (12,866) (229,364) (28,862) (287,382)
Minority interest in net income (loss) of consolidated subsidiary (291) (198) (747) 142
Equity in net loss of unconsolidated joint venture - - - (1,402)
---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY GAIN (12,575) ($229,166) (28,115) (288,926)
Extraordinary gain - - 3,772 -
---------- ---------- ---------- ----------
NET LOSS ($12,575) ($229,166) ($24,343) ($288,926)
========== ========== ========== ==========
Basic and diluted loss before extraordinary gain per share ($0.19) ($3.50) ($0.42) ($4.72)
Basic and diluted extraordinary gain per share $ - $ - $ 0.06 $ -
---------- ---------- ---------- ----------
Basic and diluted net loss per share ($0.19) ($3.50) ($0.36) ($4.72)
========== ========== ========== ==========
Number of shares used in basic and diluted computations 66,792 65,449 66,236 61,204
========== ========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
Oct 1 Jan 2
2000 2000
--------- ---------
ASSETS (unaudited) (note)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 34,815 $ 25,916
Short-term investments 19,701 43,610
Accounts receivable (including $17,827 and
$25,971 due from related parties in 2000
and 1999, respectively) less allowances
of $2,741 in 2000 and $2,180 in 1999 37,096 36,494
Inventories:
Raw materials 7,814 7,695
Work-in-process 8,357 4,820
Finished goods 6,573 10,503
--------- ---------
Total inventories 22,744 23,018
Prepaid expenses and deposits 7,490 3,254
Income taxes receivable 87 815
Deferred income taxes 3,767 3,767
--------- ---------
Total current assets 125,700 136,874
Property, Plant and Equipment
Land 7,785 7,785
Buildings 135,947 134,471
Equipment 474,787 630,221
Furniture 7,517 10,980
Leasehold improvements 31,724 36,656
--------- ---------
657,760 820,113
Less allowances for depreciation and amortization (389,928) (506,658)
--------- ---------
Net property, plant and equipment 267,832 313,455
Net Intangible Assets 15,331 22,996
Deposits and Other Assets 953 2,546
--------- ---------
$ 409,816 $ 475,871
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 224,240 $ 260,000
Trade accounts payable 26,033 21,474
Accounts payable to related parties 3,622 2,019
Accrued compensation and benefits 10,063 10,048
Other liabilities 15,957 19,615
Income taxes payable 10 109
Restructuring Liability 8,369 25,490
--------- ---------
Total current liabilities 288,294 338,755
Note Payable to Related Party 21,186 21,186
8% Convertible Subordinated Debt 9,281 --
Deferred Income Taxes 20,045 20,045
Other Long-term Liabilities 8,930 13,245
Minority Interest in Consolidated Subsidiary 3,180 3,927
Stockholders' Equity
Preferred stock -- --
Common stock 668 659
Additional paid-in capital 449,905 445,384
Accumulated deficit (392,252) (367,909)
Accumulated other comprehensive income 579 579
--------- ---------
Total stockholders' equity 58,900 78,713
--------- ---------
$ 409,816 $ 475,871
--------- ---------
<FN>
Note: The balance sheet at January 2, 2000 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
----------------------
Oct 1 Oct 3
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 24,343) ($288,926)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 56,644 72,893
Amortization of intangibles 7,665 14,533
Extraordinary gain (3,772) --
Provision for losses on accounts receivable 200 (334)
Interest expense on note payable to related party 3,190 --
Amortized interest expense related to debt restructure 1,448 --
Amortization of warrants 854 --
Equity in net loss of unconsolidated joint venture -- 1,402
Loss on disposal of property, plant and equipment 248 260
Impairment of goodwill -- 44,348
Non-cash portion of restructuring charge
related to write-off of property, plant, and equipment -- 98,547
Deferred rent 147 (398)
Minority interest in net income (loss) of consolidated subsidiary (747) 142
Changes in operating assets and liabilities:
Accounts receivable (8,946) 37,134
Accounts receivable from related parties 8,144 (30,008)
Inventories 274 8,924
Prepaid expenses and deposits (4,252) (1,508)
Trade accounts payable 4,646 (2,120)
Accounts payable to related parties 1,516 (113)
Accrued compensation and benefits 15 (2,975)
Other liabilities (10,718) (4,032)
Income taxes receivable/payable 629 84
Restructuring liability (16,793) 33,782
--------- ---------
Net cash provided by (used in) operating activities 16,049 (18,365)
INVESTING ACTIVITIES
Acquisitions of property, plant and equipment (13,875) (28,765)
Purchases of short-term investments (5,382) (5,180)
Proceeds from short-term investments at maturity 29,291 12,715
Proceeds from disposal of property, plant and equipment 1,233 860
Other assets 2,307 (3)
--------- ---------
Net cash provided by (used in) investing activities 13,574 (20,373)
FINANCING ACTIVITIES
Payment of debt (22,500) --
Sale of Common Stock, net of issuance costs 1,776 2,255
--------- ---------
Net cash provided by (used in) financing activities (20,724) 2,255
Increase (decrease) in cash and cash equivalents 8,899 (36,483)
Cash and cash equivalents at beginning of period 25,916 64,467
--------- ---------
Cash and cash equivalents at end of period $ 34,815 $ 27,984
--------- ---------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-5-
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 1, 2000
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 normal recurring
adjustments, and the recognition of an extraordinary gain as discussed in Note
9, considered necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented have been included.
Operating results for the three- and nine-month periods ended October 1, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 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 2, 2000 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 cumulative operating
losses and lack of compliance with certain financial covenants contained in its
then-existing senior unsecured bank credit facilities.
At the time of the covenant defaults, the Company had $260 million of
debt outstanding. In June, 2000, the Company replaced these credit facilities
with a senior unsecured loan restructure agreement with its lenders and a
separate subordinated unsecured convertible debt agreement with other creditors.
As a result, the Company currently has $224.2 million in bank debt outstanding
that matures in June, 2001, and approximately $9.3 million of 8% convertible
subordinated debt that matures in 2005. As of October 1, 2000, the Company is in
compliance with the financial covenants of such agreements.
The Company will need to further restructure its debt obligations and
raise additional funds to operate its business. Inability to raise additional
funds may force the Company to reduce or possibly suspend its operations, and/or
sell additional securities on terms that would be highly dilutive to the
Company's current stockholders. The financial statements do not include any
adjustments to reflect the possible future effects on the
-6-
<PAGE>
recoverability and classification of assets or the amounts and classification of
assets and liabilities that may result from the outcome of this uncertainty.
For further information, refer to the consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended January 2, 2000.
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:
(in thousands)
Oct 1 Jan 2
2000 2000
------- -------
Municipal auction rate preferred stock $17,000 $39,200
Corporate debt securities 8,178 7,339
Mortgage-backed securities 17,755 24,650
------- -------
$42,933 $71,189
------- -------
Amounts included in cash and cash equivalents $23,232 $27,579
Amounts included in short-term investments 19,701 43,610
------- -------
$42,933 $71,189
------- -------
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 $400,000 and $1.2
million for the three-and nine-month periods ended October 1, 2000,
respectively, and $400,000 and $1.1 million for the three- and nine-month
periods ended October 3, 1999, respectively, represent foreign withholding taxes
on royalty and interest payments. The Company's wholly-owned thin-film media
operation, Komag USA (Malaysia) Sdn. ("KMS"), received a five-year extension of
its initial tax holiday through June, 2003, for
-7-
<PAGE>
its first plant site. KMS has also been granted an additional ten-year tax
holiday for its second and third plant sites in Malaysia. The government will
reassess the tax holiday start date for the second and third plant sites by the
year 2001, based on achieving certain investment criteria.
NOTE 4 - COMPREHENSIVE LOSS
Comprehensive loss for the three- and nine-month periods ended October 1,
2000, and October 3, 1999 in the accompanying Consolidated Statements of
Operations is the same as the Company's net loss.
Accumulated other comprehensive income at October 1, 2000, and January 2,
2000, in the accompanying Consolidated Balance Sheets consists entirely of
accumulated foreign currency translation adjustments.
NOTE 5 - RESTRUCTURING CHARGES
During the third quarter of 1997, the Company evaluated the size of its
production capacity relative to market demand and implemented a restructuring
plan to close two older Milpitas, California facilities. The Company recorded a
$52.2 million restructuring charge which included $3.9 million for severance
costs associated with approximately 330 terminated employees (all in the US and
predominately all from the manufacturing area), $33.0 million for the write-down
of the net book value of excess equipment that was scrapped and disposed of
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. Due to the 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. Based on
this analysis of the Company's production capacity and its expectations of the
media market over the remaining life of the Company's fixed assets, the Company
concluded that it would not be able to recover the book value of those assets
based on projected undiscounted cash flows. As a result, the Company implemented
a restructuring plan in June, 1998, that included a reduction in the Company's
US and Malaysian workforce and the cessation of operations at its oldest San
Jose, California plant. The Company recorded a restructuring charge of $187.8
million which included $4.1 million for severance costs (approximately 170
employees, predominately in the US and approximately 69%, 27% and 4% from the
manufacturing area, engineering area, and sales, general and administrative
area, respectively), $5.9 million related to equipment order cancellations and
other equipment related costs, and
-8-
<PAGE>
$2.8 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 under-utilization of the Company's production equipment and
facilities. 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 (15.8%). The cash component of the total charge was
$12.8 million. 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 reached a lease termination agreement with its
landlord on the second Milpitas plant in the third quarter of 1998. The Company
thereby avoided 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. As a result, the Company did 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. A total of 515 employees
were terminated in the restructuring activities.
The following tables summarize the activity in the restructuring reserves during
the first nine months of 2000:
1997 Restructuring Reserve
Equipment Order
Cancellations And
Other
(in millions) Related Costs
---------------
Balance at January 2, 2000 $1.8
Adjustment to Reserve (0.2)
Charged to Reserve (1.6)
---------------
Balance at October 1, 2000 $0.0
---------------
-9-
<PAGE>
1998 Restructuring Reserve
Equipment Order
Cancellations And
(in millions) Other Related Costs
-----------------
Balance at January 2, 2000 $0.6
Adjustment to Reserve (0.6)
Charged to Reserve --
-----------------
Balance at October 1, 2000 $0.0
-----------------
The Company has made cash payments totaling approximately $31.0 million
primarily for severance, equipment order cancellations and facility closure
costs under the 1997 and 1998 restructuring activities.
All restructuring activity related to the 1997 and 1998 restructuring reserves
was complete as of July 2, 2000.
The Company recorded restructuring charges of $4.3 million in the second
quarter of 1999. This restructuring charge related to severance costs associated
with 400 terminated employees, all in the US and predominately all from the
manufacturing area. The entire $4.3 million was paid out to the employees during
the second and third quarters of 1999.
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 US 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 (all in the US and predominately all from the manufacturing area), and
$7.5 million in plant closure costs. Non-cash items included in the
restructuring charge totaled approximately $98.5 million.
-10-
<PAGE>
<TABLE>
1999 Restructuring Reserve - Changes During First Nine Months of 2000
<CAPTION>
Writedown Net Book Liabilities Under
Value of Equipment Non-Cancelable Facility
and Leasehold Equipment Closure Severance
(in millions) Improvements Leases Costs Costs Total
------------------------- ------------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 2000 $-- $13.8 $4.5 $4.8 $23.1
Adjustment to Reserve 2.4 -- (3.7) (0.7) (2.0)
Charged to Reserve (2.4) (5.8) (0.5) (4.0) (12.7)
------------------------- ------------------ ---------- ------------- ----------
Balance at October 1, 2000 $-- $8.0 $0.3 $0.1 $8.4
------------------------- ------------------ ---------- ------------- ----------
</TABLE>
At October 1, 2000, $8.4 million related to the 1999 restructuring
activities remained in current liabilities. During 1999 and the first nine
months of 2000, the Company made cash payments totaling $32.3 million, primarily
for severance costs, payments for liabilities under non-cancelable equipment
leases and facility closure costs. Cash outflows of approximately $0.4 million
associated with severance pay and closure costs will occur primarily during the
fourth quarter of 2000. Cash payments of approximately $8.0 million under the
equipment leases will be made in monthly installments through mid-2002. The
facility closure liability was reduced by approximately $3.7 million in the
first nine months of 2000 due to successfully terminating the leases on
manufacturing facilities and subleasing the administrative facility earlier than
originally expected. The writedown of net book value of equipment and leasehold
improvements was increased by $2.4 million during the first nine months of 2000
for additional equipment that was determined unusable due to the restructure.
The severance costs liability was reduced by $0.7 million due to lower than
expected payments.
NOTE 6 - LOSS PER SHARE
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:
-11-
<PAGE>
<TABLE>
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
Oct 1 Oct 3 Oct 1 Oct 3
2000 1999 2000 1999
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator: Loss before extraordinary gain ($12,575) ($229,166) ($28,115) ($288,926)
--------------- -------------- --------------- --------------
Denominator for basic and diluted -
weighted-average shares 66,792 65,449 66,236 61,204
--------------- -------------- --------------- --------------
Basic and diluted loss before
extraordinary gain per share ($0.19) ($3.50) ($0.42) ($4.72)
--------------- -------------- --------------- --------------
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 120,559
and 28,009 for the three months ended October 1, 2000, and October 3, 1999, and
227,656 and 421,659 for the nine months ended October 1, 2000, and October 3,
1999, respectively, were not included in the net loss per share computation
because the effect would be antidilutive.
Incremental common shares attributable to the exercise of outstanding
warrants (assuming proceeds would be used to purchase treasury stock) of 200,693
and zero for the three months ended October 1, 2000 and October 3, 1999, and
87,635 and zero for the nine months ended October 1, 2000, and October 3, 1999,
respectively, were not included in the net loss per share computation because
the effect would be antidilutive.
Incremental common shares attributable to convertible debt of 3,668,668
and zero for the three months ended October 1, 2000 and October 3, 1999,
respectively, and 2,479,375 and zero for the nine months ended October 1, 2000,
and October 3, 1999, respectively, were not included in the net loss per share
computation because the effect would be antidilutive.
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.
-12-
<PAGE>
NOTE 8 - LIABILITIES ASSOCIATED WITH ASSET PURCHASE
In April, 1999, the Company purchased the assets of Western Digital
Corporation's ("WDC") media operation. In conjunction with the purchase, under
purchase accounting rules, the Company recorded liabilities that increased the
amount of goodwill recognized. These liabilities included estimated costs of
$5.6 million for the closure of the former WDC media operation as well as costs
of $26.5 million related to the remaining lease obligations for equipment taken
out of service due to the closure, and $4.7 million of costs for purchase order
cancellations and other costs.
During 1999 and the first nine months of 2000, liabilities arising from
this transaction were reduced by approximately $25.5 million, including
equipment lease obligations ($15.8 million), rent ($1.9 million), and other
liabilities ($7.8 million). Equipment lease obligations are expected to be paid
monthly through mid-2002. At October 1, 2000, the current portion of the
equipment lease obligations was approximately $8.9 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 the end of fiscal
2000.
NOTE 9 - TERM DEBT AND 8% CONVERTIBLE SUBORDINATED DEBT
The Company previously had borrowed $260.0 million under its term debt
and line of credit facilities. In June, 2000, the Company replaced these credit
facilities with a senior unsecured loan restructure agreement with its lenders
and a separate subordinated unsecured convertible debt agreement with other
creditors. The restructured bank debt of $224.2 million matures in June, 2001,
and bears interest at prime plus 1.25%. The Company is required to make
principal payments under the agreement of $7.5 million each quarter. The
agreement requires the Company to meet certain financial covenants with which
the Company was in compliance as of October 1, 2000.
In addition, under the loan agreement, Series A warrants were issued to
purchase 1,651,349 shares of the Company's common stock and Series B warrants
were issued to purchase 660,539 shares of the Company's common stock. The Series
A warrants are currently exercisable until June, 2010, and the Series B warrants
become exercisable in June, 2001, for a ten-year period only if the related debt
balance outstanding at that point exceeds $160.0 million. Otherwise, these
warrants become void. Because of this contingency, the Series B warrants were
not valued. The exercise price of both series of warrants is $2.13.
The Company valued the Series A warrants using the Black-Scholes model
and determined the value to be approximately $2.8 million, which has been
capitalized and is being charged to interest expense over the life of the loan
restructure agreement. The
-13-
<PAGE>
following assumptions were used in the Black-Scholes model: risk-free interest
rate of 6.38%, a volatility factor of the expected market price of the Company's
Common Stock of 74.7%, and a life of ten years. There was no dividend yield
included in the calculation as the Company does not pay dividends.
The Company currently has approximately $9.3 million of convertible subordinated
debt that matures in 2005. At the time the debt was converted from senior
unsecured debt to convertible subordinated debt, the principal balance was $13.3
million. The conversion from a principal balance of $13.3 million to $9.3
million resulted in an extraordinary gain of $3.8 million, net of expenses. The
lenders have the right to purchase additional convertible notes in an aggregate
principal amount of up to $35.7 million. The original $9.3 million in notes are
convertible into shares of the Company's common stock at a conversion price of
$2.53. The notes have an interest rate of 8% payable upon the maturity date of
the notes. The notes are convertible into the Company's common stock, at the
lenders' option, at any time on or after the issuance date of the notes. At the
Company's option, the notes are convertible into the Company's common stock,
with no forced conversion for two years, on any date on which the closing sale
price of the common stock has been, for seven of ten consecutive trading days,
greater than 200% of the conversion price in effect on the issuance date of the
applicable notes.
NOTE 10 - EQUITY
In March, 2000, the Company entered into an agreement with an
institutional investor to sell up to $20 million of common stock. The shares of
common stock will be sold pursuant to a private equity line of credit, under
which the Company may exercise "put options" to sell shares for a price equal to
90%, 92% or 94% of market price depending on the level of the market price at
the time of exercise of the "put option." The shares may be sold periodically in
maximum increments of $1.5 million to $3.5 million over a period of up to thirty
months. On signing the agreement, the Company issued warrants to the investor to
acquire 80,000 shares of common stock at an exercise price of $4.6875 per share.
The warrants are exercisable during a three-year period beginning in September,
2000. The Company valued the warrants using the Black-Scholes model and
determined the value to be immaterial. As of October 1, 2000, no shares have
been sold under this agreement.
NOTE 11 - HMT MERGER
In April, 2000, the Company entered into a definitive merger agreement
with HMT Technology Corporation (HMT). HMT designs, develops, manufactures and
markets high-performance thin-film disks. On September 20, 2000, the
stockholders of the Company and HMT approved the merger transaction, and the
merger was completed on October 2, 2000. In accordance with the merger
agreement, each issued and outstanding share of HMT stock was converted into
0.9094 shares of the Company's common stock.
-14-
<PAGE>
The merger will be accounted for under purchase accounting in the Company's
fiscal fourth quarter of 2000.
NOTE 12 - NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended, is required to be
adopted by the Company effective January 1, 2001 and is not anticipated to have
an impact on the Company's results of operations or financial position when
adopted as the Company holds no derivative financial instruments and does not
currently engage in hedging activities.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition. SAB 101 is required to be adopted
by the Company in the fourth quarter of 2000 and is not anticipated to have a
material impact on the Company's results of operations or financial position
when adopted.
In March, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; accounting for an
exchange of stock compensation awards in a business combination; and the
accounting and separate-entity reporting of awards granted between companies in
a consolidated group. The adoption of this interpretation had no impact on the
company's results of operations or financial condition.
NOTE 13 - LEGAL PROCEEDINGS
Asahi Glass Company, Ltd. (Asahi) has asserted that an agreement between the
Company and Asahi gives Asahi exclusive rights to certain glass
substrate-related intellectual property developed by the Company. The Company
has sent Asahi a notice of termination of the agreement and has filed a lawsuit
for, among other things, a declaration that the agreement has been terminated
and that Asahi has no rights to the glass substrate technology. This case is
currently pending.
-15-
<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. The Company's
business is subject to a number of risks and uncertainties. While this
discussion represents the Company's current judgment on the future direction of
its business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested herein.
The Company sells a single product into a market characterized by rapid
technological change and sudden shifts in the balance between supply and demand.
Further, the Company is dependent on a limited number of customers, some of whom
also manufacture some or most of their own disks internally. 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.
Competition in the market, defined by both technology offerings and
pricing, can be fierce, especially during times of excess available capacity.
Such conditions have been prevalent since 1997.
In addition, there are risks relating to the timing and successful
completion of technology and product development efforts, integration of the
technologies and businesses of Komag and HMT, unanticipated expenditures, and
changing relationships with customers, suppliers and strategic partners.
Other factors that could cause actual results to differ include the
following:
o changes in the industry supply-demand relationship and related
pricing for enterprise and desktop disk products;
o timely and successful qualification of next-generation
products;
o use of manufacturing facilities;
o changes in manufacturing efficiencies, in particular product
yields and material input costs;
o ability to extend process equipment to meet more stringent
future product requirements;
o structural changes within the disk media industry such as
combinations, failures, and joint venture arrangements;
-16-
<PAGE>
o vertical integration and consolidation within the Company's
customer base;
o its dependence on a limited number of customers for sales;
o increased competition;
o timely and successful deployment of new process technologies
into manufacturing;
o the availability of certain sole-sourced raw material supplies
and retention of key employees.
In addition, the Company's business requires substantial investments for
research and development activities and for physical assets such as equipment
and facilities that depend on its access to financial resources.
Furthermore, in June, 2000, the Company replaced its credit facilities
with a senior unsecured loan restructure agreement with its lenders which
matures in June, 2001, and a separate subordinated unsecured convertible debt
agreement with other creditors which matures in June 2005.
The Company will need to further restructure its debt obligations and
raise additional funds to operate it business. The Company's ability to
restructure its debt and raise additional funding will depend on improving its
financial performance.
Other risk factors that may affect the Company's financial performance
are listed in the Company's SEC filings, including its Form 10-K for the fiscal
year ended January 2, 2000, which was filed on March 31, 2000, and in the Other
Factors section beginning on page 26. 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, 1999, and 2000. Demand for 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, resulted in excess media production
capacity.
-17-
<PAGE>
In addition to adversities caused by the excess supply of media, 1998
was a year of transition for the Company and the disk drive industry to
advanced, magnetoresistive ("MR") media and recording heads. The transition to
MR disk drives led to unprecedented increases in areal density and, therefore,
the amount of data that can be stored on a single disk platter. Increased
storage capacity per disk allows drive manufacturers to offer lower-priced disk
drives 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 disk demand in 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.
Despite the difficult market conditions, the Company believes that its
recently-completed merger with HMT, its low Maylasian manufacturing costs, and
technological advances such as 63 Gigabits per square inch recording density and
low-cost glass substrates, position the Company to be a successful competitor.
In April, 1999, the Company purchased the assets of WDC's media
operation. 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 most of its media requirements from the Company after the closing
date. Due to assimilation of the WDC media operation, 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. However, 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. As a result, 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%. 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.
Following the closing of the former WDC media operation in June, 1999,
the Company announced in July, 1999, that it would further reduce the size of
its US operations in response to the poor industry conditions. In August, 1999,
the Company indicated that it would stop volume production of finished disks in
the US, close two manufacturing facilities in San Jose, California, and
institute staged workforce reductions that would affect 980 workers by the end
of 1999. These reductions, combined with the
-18-
<PAGE>
June, 1999, reduction of 400 workers, lowered the employment base at the
Company's US operations from 1,950 in April, 1999 (subsequent to the acquisition
of WDC's media operation), to 529 by the end of the second quarter of 2000. As a
result of these actions, the Company began realizing significant cash savings in
US payroll costs.
The Company recorded a restructuring charge of $139.3 million in the
third quarter of 1999 for the write-off of equipment and leasehold improvements
in the US, production facilities scheduled for closure, and for severance pay
related to the reorganization of its US operations.
After ceasing volume production, the Company's San Jose site is focused
solely on activities related to research, process development, and product
prototyping. Selling, general, and administrative functions also remain in San
Jose. The Company's highly- automated substrate manufacturing facility in Santa
Rosa, California, continues to produce low-cost aluminum substrates and perform
advanced development work for both aluminum and glass substrates. We believe
that the Company's shift of high volume production to its cost-advantaged
Malaysian manufacturing plants has improved the Company's overall cost
structure, resulted in lower unit production costs, and improved the Company's
ability to respond to the continuing price pressures in the disk industry.
Revenue
Net sales increased to $84.2 million in the third quarter of 2000, up
5.3% compared to $79.9 million in the third quarter of 1999. The increase was
primarily due to the net effect of a 26.3% increase in unit sales volume, which
was offset by a 16.6% decline in the overall average selling price. Year-to-date
net sales decreased to $247.3 million, a 6% decline from the $263.1 million in
the same period of 1999. Although finished units were up 12.8% over the year-ago
period, the overall selling price declined 16.6% during the same period,
accounting for the year-over-year decline.
Net sales of substrate and single-sided disks in the third quarters of
2000 and 1999 were $5.2 million and $1.8 million respectively. Year-to-date net
sales of substrate and single-sided disks in 2000 and 1999 were $16.5 million
and $7.9 million respectively.
Third quarter 2000 finished media unit sales increased to 12.2 million
disks from 9.7 million disks in the third quarter of 1999, a 26.3% increase.
Year-to-date finished media unit sales were 34.8 million, a 12.8% increase over
the same period in 1999.
The severe pricing pressures generated by the continuing imbalance in
supply and demand for thin-film media in the first nine months of 2000 resulted
in the year-over-year decrease in the overall average selling price. The Company
expects the pricing pressures to continue through the remainder of 2000.
-19-
<PAGE>
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 $3.5 million and $5.6 million in the third quarter and
first nine months of 2000 respectively, and negligible in the third quarter and
first nine months of 1999. Distribution sales of AKCL product are not expected
to be material in the fourth quarter of 2000.
During the third quarter of 2000, sales to WDC, Maxtor Corporation and
Seagate Technology, Inc. accounted for approximately 53%, 28%, and 15%,
respectively, of consolidated net sales. Net sales to each of the Company's
other customers were less than 10% during the third quarter of 2000. The Company
expects that it will continue to derive a substantial portion of its sales from
WDC and from a small number of 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.
Gross Margin
Third quarter 2000 gross margin percentage improved to 11.6%, compared
to a gross loss percentage of 22% in the third quarter of 1999. The improvement
was primarily due to a reduction of $19.3 million in fixed manufacturing costs.
Depreciation and payroll-related charges in the third quarter of 2000 were
approximately 29% lower and 34% lower, respectively, than the third quarter of
1999 primarily due to the restructuring charge recorded in September, 1999.
Year-to-date 2000 gross margin was 13.2 % versus a negative 8.2% for
year-to-date 1999. Reductions in fixed manufacturing costs and higher unit
production volumes favorably impacted the Company's gross margin in 2000.
Year-to-date 2000 depreciation and payroll-related charges were approximately
38% lower and 51% lower, respectively, than in the first nine months of 1999,
primarily due to the restructuring charge recorded in September, 1999.
The Company produced 11.4 million units in the third quarter of 2000
compared to 9.1 million units in the third quarter of 1999. This 25.3% increase
primarily corresponds with the 26.3 % increase in units sold over the same
periods.
The Company produced 33.7 million units in the first nine months of 2000
compared to 30.5 million units in the corresponding period of 1999. This 10.3%
increase primarily corresponds with the 12.8 % increase in units sold over the
same periods.
-20-
<PAGE>
Operating Expenses
Research and development ("R&D") expenses decreased to $8.3 million in
the third quarter of 2000 from $11.5 million in the third quarter of 1999. For
the first nine months of the year, R&D expenses decreased to $25.2 million in
2000 from $35.7 million in 1999. Decreased R&D staffing and lower facility and
equipment costs (primarily due to the 1999 restructuring activities) accounted
for most of the decrease in R&D expenses in both the three- and nine-month
periods of 2000 compared to the same periods in 1999.
Selling, general and administrative ("SG&A") expenses decreased to $3.0
million in the third quarter of 2000 from $4.2 million in the third quarter of
1999. Year-to-date SG&A expenses decreased to $10.4 million from $15.3 million
in the first nine months of 1999. The decrease for the three- and nine-month
periods of 2000 relative to the comparable periods of 1999 was primarily due to
lower payroll and related employee costs, partially offset by an increase in
bonus expense implemented for general retention purposes.
Restructuring Activities
The Company recorded restructuring charges of $4.3 million in the second
quarter of 1999. This restructuring charge primarily related to severance pay
associated with 400 terminated employees (all in the U.S. and predominately all
from the manufacturing area). The entire $4.3 million was paid out to the
employees during the second and third quarters of 1999.
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 (all in the U.S. and predominately all from the
manufacturing area), and $7.5 million in plant closure costs. Non-cash items
included in the restructuring charge totaled approximately $98.5 million.
-21-
<PAGE>
<TABLE>
1999 Restructuring Reserve - Changes During First Nine Months of 2000
<CAPTION>
Writedown Net Book Liabilities Under
Value of Equipment Non-Cancelable Facility
and Leasehold Equipment Closure Severance
(in millions) Improvements Leases Costs Costs Total
------------------------- ------------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 2000 $-- $13.8 $4.5 $4.8 $23.1
Adjustment to Reserve 2.4 -- (3.7) (0.7) (2.0)
Charged to Reserve (2.4) (5.8) (0.5) (4.0) (12.7)
------------------------- ------------------- --------- ------------- ----------
Balance at October 1, 2000 $-- $8.0 $0.3 $0.1 $8.4
------------------------- ------------------- --------- ------------- ----------
</TABLE>
At October 1, 2000, $8.4 million related to the 1999 restructuring
activities remained in current liabilities. During 1999 and the first nine
months of 2000, the Company made cash payments totaling $32.3 million, primarily
for severance costs, payments for liabilities under non-cancelable equipment
leases and facility closure costs. Cash outflows of approximately $0.4 million
associated with severance pay and closure costs associated with these
restructuring activities will occur primarily during the fourth quarter of 2000.
Monthly cash payments under the equipment leases will be made through mid-2002.
These equipment lease payments, in total, approximate $8 million.
The facility closure liability was reduced by approximately $3.7 million
in the first nine months of 2000 due to successfully terminating the leases on
manufacturing facilities and subleasing the administrative facility earlier than
originally expected. The writedown of net book value of equipment and leasehold
improvements was increased by $2.4 million during the first nine months of 2000
for additional equipment that was determined unusable due to the restructure.
The severance costs liability was reduced by $0.7 million due to lower than
expected payments.
Interest and Other Income/Expense
Interest income decreased $500,00 and $1.3 million in the three- and
nine-month periods ended October 1, 2000 relative to the same periods ended
October 3, 1999 due to lower average cash and short-term investment balances in
the current year period.
Interest expense increased $2.7 million and $5.7 million in the three-
and nine-month periods ended October 1, 2000, relative to the same periods ended
October 3, 1999. The year-to-date increase in interest expense compared to the
same period in 1999 was primarily due to higher bank prime rates and the
amortization of loan fees and warrant expense associated with the completion of
the loan restructure agreement with the Company's senior lenders.
Other income decreased $500,000 and $1.4 million in the third quarter
and first nine months of 2000 compared to the same periods of 1999, due
primarily to a reduction in royalty income.
-22-
<PAGE>
Income Taxes
The Company's income tax provision was approximately $400,000 and $1.2
million for the three-month and nine-month periods of 2000, respectively,
compared to $400,000 and $1.1 million for the three-month and nine-month periods
of 1999, respectively.
The income tax provisions for both the 2000 and 1999 periods represent
foreign withholding taxes on royalty and interest payments. The Company's
wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"),
received a five-year extension of its initial tax holiday through June 2003 for
its first plant site. KMS was granted an additional ten-year tax holiday for its
second and third plant sites in Malaysia. The government will reassess the tax
holiday start date for the second and third plant sites by the year 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 (loss) of consolidated
subsidiary represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") 20% share of
Komag Material Technology, Inc.'s ("KMT") net income (loss). KMT recorded a net
loss of $1.5 million and a net loss of $3.7 million in the third quarter and
first nine months of 2000, respectively, compared to a net loss of $1.0 million
and net income of $.7 million in the third quarter and first nine months of
1999, respectively.
The Company owns a 50% interest in Asahi Komag Co., Ltd. ("AKCL") and
records its share of AKCL's net income (loss) as equity in net income (loss) of
unconsolidated joint venture. The Company recorded a loss of $1.4 million as its
equity in AKCL's net loss in the first quarter of 1999, which reduced the
Company's investment in AKCL down to zero. During 1999 and the first nine months
of 2000 the Company did not record $2.6 million and $16.2 million in losses,
respectively, as it would have reduced the net book value of its investment in
AKCL below zero. To the extent that 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.
Extraordinary Gain
The Company previously had borrowed $260.0 million under its term debt
and line of credit facilities. In June, 2000, the Company replaced these credit
facilities with a senior unsecured loan restructure agreement with its lenders
and a separate subordinated unsecured convertible debt agreement with other
creditors. As a result, the Company currently has $224.2 million in bank debt
and $9.3 million of convertible subordinated debt. At the time the convertible
subordinated debt was converted from senior unsecured
-23-
<PAGE>
debt, the principal balance was $13.3 million. The conversion from a principal
balance of $13.3 million to $9.3 million resulted in an extraordinary gain of
$3.8 million, net of expenses.
HMT Merger
In April, 2000, the Company entered into a definitive merger agreement
with HMT Technology Corporation (HMT). HMT designs, develops, manufactures and
markets high-performance thin-film disks. On September 20, 2000, the
stockholders of the Company and HMT approved the merger transaction, and the
merger was completed on October 2, 2000. In accordance with the merger
agreement, each issued and outstanding share of HMT stock was converted into
0.9094 shares of the Company's common stock. The merger will be accounted for
under purchase accounting in the Company's fiscal fourth quarter of 2000.
Liquidity and Capital Resources
Cash and short-term investments of $54.5 million at the end of the third
quarter of 2000 decreased $15.0 million from the end of the prior fiscal year.
Working capital improved by $39.3 million compared to the end of the previous
fiscal year.
Year-to-date 2000 consolidated operating activities provided $16 million
in cash. The primary components of this change include the following:
o The year-to-date net loss of $24.3 million (net of non-cash
depreciation and amortization of $64.3 million and other
non-cash charges of $1.6 million) provided $41.6 million in
cash.
o Accounts receivable and inventories were generally flat during
the nine-month period, using $.8 million and generating $.3
million in cash, respectively.
o Prepaid expenses used $4.3 million in cash, reflecting
primarily the increase in prepaid loan fees and bank warrants.
o Accounts payable generated $6.2 million in cash, reflecting
increases in production activity and capital expenditures at
the end of the third quarter of 2000, compared to the fourth
quarter of 1999.
o Income tax activity generated $.6 million in cash, primarily
due to an income tax refund, during the nine-month period.
o Other liabilities used $27.5 in cash, primarily for equipment
leases, building exit costs, and severance payments associated
with the 1999 Western Digital asset purchase and the 1999
restructuring activity.
-24-
<PAGE>
The Company spent $13.9 million on fixed assets during the first nine
months of 2000. Net short-term investment activity provided $23.9 million in
cash. Other net investing activities provided $3.5 million in cash.
Repayment of debt used $22.5 million in cash, and sales of common stock
under the Company's stock programs generated $1.8 million in cash.
Current noncancellable capital commitments as of October 1, 2000,
totaled approximately $21.2 million. Year-to-date capital expenditures were
approximately $13.9 million, and primarily included costs for projects designed
to improve yield and productivity, as well as costs for the installation of
certain production equipment transferred from the closed US manufacturing plant
to Malaysia. In addition, during the third quarter of 2000, the Company
purchased a sputter machine and other production equipment from HMT and began
installation of the equipment in the Company's Penang, Malaysia, manufacturing
plant. The Company expects to incur approximately $30 million to modify its
Penang factory and transfer equipment from the HMT site in Fremont, California,
to Malaysia over the next three quarters.
In June, 2000, the Company replaced its credit facilities with a senior
unsecured loan restructure agreement with its lenders, and a separate
subordinated unsecured convertible debt agreement with other creditors. As a
result, the Company currently has $224.2 million in senior unsecured bank debt
outstanding that matures in June, 2001, and approximately $9.3 million of
convertible debt that matures in 2005. In addition, the Company has a note
payable to WDC with a principal balance of $21.2 million, and which is due in
April, 2002, unless WDC realizes a return on its Komag equity holdings in excess
of a targeted amount by April, 2002. In the event the excess is realized, then
the excess amount will reduce the balance due under the note. The Company will
likely need to further restructure its debt obligations and raise additional
funds to operate its business.
In March, 2000, the Company entered into an agreement with an
institutional investor to sell up to $20.0 million of common stock. The shares
of common stock may be sold pursuant to a private equity line of credit, under
which the Company may exercise "put options" to sell shares for a price equal to
90%, 92%, or 94% of market depending on the level of the actual market price at
the time of exercise of the "put option." The shares may be sold periodically in
maximum increments of $1.5 million to $3.5 million over a period of up to thirty
months. Upon signing the agreement, the Company issued warrants to the investor
to acquire 80,000 shares of common stock at an exercise price of $4.6875 per
share. The warrants are exercisable during a three-year period beginning in
September, 2000. The Company valued the warrants using the Black-Scholes model
and determined the value to be immaterial.
-25-
<PAGE>
The Company believes that in order to achieve its long-term growth
objectives and maintain and enhance its competitive position, additional funds
will need to be raised for capital expenditures, working capital, and research
and development. Further, the Company most likely will need to restructure its
bank credit facilities again before June, 2001.
There can be no assurance that the Company will be able to restructure
its debt again, or secure other 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 sell
additional securities on terms that would be highly dilutive to current
stockholders.
Other Factors that May Affect Future Operating Results
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing Komag. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business options.
To the extent the following risks negatively impact our business,
results of operations and/or cash flows could be adversely affected. In those
cases, the trading price of our common stock could decline, and you may lose all
or part of your investment.
If we do not successfully integrate the technologies and businesses of Komag and
HMT, our business, financial condition and operating results will suffer, we
will lose key personnel and as a result will not achieve the anticipated
benefits from the merger.
We completed the merger of HMT Technology Corporation, or HMT, with
Komag on October 2, 2000. We need to overcome significant issues in order to
fully integrate the two companies and realize any benefits or synergies from the
merger, including the timely, efficient and successful execution of a number of
post-merger events. Key events include:
o integrating the operations of the two companies;
o retaining and assimilating the key personnel of each company;
o integrating HMT's process and equipment into our existing Malaysian
factories;
o retaining the existing customers and strategic partners of each company;
and
o maintaining uniform standards, controls, procedures and policies.
The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:
o the potential disruption of the combined company's ongoing business and
distraction of its management;
o unanticipated expenses related to technology integration;
o unanticipated expenses related to relocating HMT manufacturing equipment;
o the impairment of relationships with employees, customers, suppliers and
strategic partners as a result of any integration of new management
personnel; and
o potential unknown liabilities.
We may not succeed in addressing these risks or any other problems
encountered in connection with the merger. As a result, our business, financial
condition and operating results could suffer, we would lose key personnel and we
would not achieve the anticipated benefits from the merger.
-26-
<PAGE>
The Merger could adversely affect combined financial results.
The merger will be treated as a purchase for accounting purposes. This
may potentially result in a greater net loss for us for the forseeable future,
which could have a material adverse effect on the market price of our common
stock. We incurred direct transaction costs of approximately $8 million in
connection with the merger. Under purchase accounting, we will record and
amortize intangible assets related to deferred compensation, patents, existing
technology, assembled workforce and goodwill in connection with the merger. This
amortization over a number of years will reduce future earnings.
We also expect interest accretion on convertible subordinated notes of
approximately $13 million per year will reduce future earnings through January
2004. In addition, we expect to expense HMT's in-process research and
development in the fourth quarter of 2000. If the benefits of the merger do not
exceed the costs associated with the merger, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
merger, our financial results, including earnings per share, could be adversely
affected.
Customers have demanding product requirements.
Our thin-film disk products primarily serve the 3 1/2-inch hard disk
drive market, where product performance, consistent quality, price, and
availability are of great competitive importance. Short program life-cycles and
product customization increase the risk of inventory obsolescence. To succeed in
an industry characterized by rapid technological developments, we must
continuously advance our thin-film technology at a pace consistent with or
faster than our competitors. If we are unable to keep pace with rapid advances,
we may lose market share and face increased price competition from other
manufacturers. Such competition could materially adversely affect our results of
operations.
The thin film media industry is very competitive.
The market for our products is highly competitive, and we expect
competition to continue in the future. Compteitors in the thin-film disk
industry, subsequent to our merger with HMT, fall into two groups: Asian-based
manufacturers and U.S. captive manufacturers. Our Asian-based competitors
include Fuji, Mitsubishi, Trace (currently acquiring MMC Technology, Inc.),
Showa Denko and Hoya. The U.S. captive manufacturers include the disk media
operations of Seagate and IBM.
-27-
<PAGE>
In 2000, as in 1999, media supply exceeds media demand. As independent
suppliers struggle to utilize their capacity, the result of excess media supply
has been declining average selling prices for disk products. Pricing pressure on
component suppliers is further compounded by high consumer demand for sub-$1,000
personal computers. Further, structural change in the disk media industry,
including combinations, failures and joint venture arrangements, may be required
before media supply and demand balances.
In response to high historical and projected growth rates for the disk
drive market at the time, a majority of our competitors (both independent disk
and captive disk manufacturers) and Komag substantially increased disk
manufacturing capacity in 1997 to satisfy the anticipated demand for disk
products. These significant investments in capable new disk production capacity,
combined with the slowdown in demand, have resulted in excess disk media
capacity in the merchant market as drive manufacturers source a higher portion
of their disk requirements from their captive media operations.
Low-cost manufacturing has become more important as pricing pressures
have increased. During the third quarter of 1999, we announced that all media
production would be consolidated into our Malaysian factories. While we believe
that our manufacturing operations in Malaysia can provide a competitive cost
advantage relative to most other thin-film disk manufacturers that operate
exclusively or primarily in the U.S. or Japan, our media manufacturing is now
concentrated in one foreign country (see "Our Foreign Operations Subject Us to
Additional Risks" below).
In general, the life cycles of recent disk drive programs have been
shortening. Additionally, media must be more customized to each disk drive
program. Supply chain management, including just-in-time delivery, has become a
standard industry practice. Timely development of new products and technologies
that assist customers in reducing their time-to-market performance and
operational excellence that supports high-volume manufacturing ramps and tight
inventory management throughout the supply chain will continue to be keys to
both the maintenance of constructive customer relationships and our
profitability. We cannot assure you that we will be able to respond to this
rapidly changing environment in a manner that will maximize utilization of our
production facilities and minimize our inventory losses. Furthermore, there are
a relatively large number of capable competitors, some with greater financial
resources than us.
We have a significant amount of debt that may need restructuring, and inability
to raise additional financing will adversely affect our business.
The size of our second quarter 1998 net loss resulted in defaults under
certain financial covenants contained in our then-existing senior unsecured bank
credit facilities. At the time of the covenant defaults we had $260 million of
debt outstanding against these lines. In June, 2000, we replaced these credit
facilities with a senior unsecured loan restructure agreement with our lenders
and a separate subordinated unsecured convertible debt agreement with other
creditors. As a result, as of October 1, 2000 we have $224.2
-28-
<PAGE>
million in senior debt outstanding, that matures in June 2001 and approximately
$9.3 million of convertible debt that matures in 2005. In connection with the
restructure agreement, we issued warrants to purchase up to 3 1/2% of our common
stock. Upon completion of the HMT merger, our debt increased with the
consolidation of HMT's convertible notes due January 2004. The principal amount
of these notes is $230 million. For the long term, we will likely need to
further restructure our debt obligations and raise additional funds to operate
our business.
In addition, the disk media business is capital intensive, and we
believe that in order to remain competitive, we will likely require additional
financing resources over the next several years for capital expenditures,
working capital and research and development. Inability to raise additional
funds may force us to reduce or suspend operations. Raising additional funds or
another significant debt restructuring may require significant dilution to
stockholders.
We depend on a limited number of customers.
Our sales are concentrated in a small number of customers. This concentration is
due to the high-volume requirements of the dominant disk drive manufacturers and
their tendency to rely on a few suppliers because of the close interrelationship
between media performance and disk drive performance and the complexity of
integrating components from a variety of suppliers. Also influencing customer
concentration are the increases in areal densities that led to decreases in the
platter count per drive. With lower platter counts, captive disk drive
manufacturers have excess internal media capacity and they rely less on
independent sources of media. In the third quarter of 2000, 53% of our sales
were to Western Digital, 28% to Maxtor, and 15% to Seagate. The proforma
combined sales of Komag and HMT during the third quarter of 2000 were 45% to
Western Digital, 35% to Maxtor and 12% to Seagate.
During the third quarter of 2000, IBM and Seagate produced more than
90% of their media demand internally and MMC Technology, Inc. supplied
approximately half of Maxtor's requirement for media. Hyundai Electronics
America owns MMC Technology, Inc. and is also one of Maxtor's major
stockholders. Hyundai has entered into an agreement with Trace, another media
supplier, to sell MMC Technology, Inc. To date, MMC Technology, Inc. and the
captive media operations of IBM and Seagate have sold minimal quantities of
disks in the merchant market.
Given the relatively small number of disk drive manufacturers, we
expect that we will continue to depend on a limited number of customers.
However, we can not assure you that our current and potential customers will not
acquire or develop capacity to produce thin-film disks for internal use, and any
such changes could have a material adverse effect on our business, operating
results and financial condition. In addition, our customers are headquartered in
the United States. Should U.S. based drive companies lose market share to
foreign competitors, it could have a negative impact on our sales.
-29-
<PAGE>
Our sales are generally made pursuant to purchase orders that are
subject to cancellation, modification or rescheduling without significant
penalties. We cannot assure you that our current customers will continue to
place orders with us, that orders by existing customers will recover to the
levels of earlier periods or that we will be able to obtain orders from new
customers.
Our sales are significantly connected to Western Digital's performance.
In April of 1999, we purchased Western Digital's media operation. As part of the
purchase, we entered into a volume purchase agreement with Western Digital
whereby Western Digital is obligated, over the three years following the
acquisition date, to purchase a significant majority of its media requirements
from us. We also acquired building and equipment leases with remaining lease
commitments. As of October 1, 2000, the majority of the building lease
commitments have been settled with limited ongoing obligations. The leased
assets have continuing payment obligations totaling approximately $18 million.
The leased assets are substantially unused and thus, to the extent that we
cannot terminate our obligations under the leases, we will suffer a cash drain.
Qualifying thin-film disks for incorporation into a new disk drive
product requires us to work extensively with the customer and the customer's
other suppliers to meet product specifications. Therefore, customers often
require a significant number of product presentations and demonstrations, as
well as substantial interaction with our senior management, before making a
purchasing decision. Accordingly, our products typically have a lengthy sales
cycle, which can range from six to 12 months, during which we may expend
substantial financial resources and management time and effort with no assurance
that a sale will result.
Our sole product is sold to hard disk drive manufacturers.
Our sole product, thin-film media, is used in hard disk drives. Demand
for our high-performance, thin-film disks depends upon the demand for hard disk
drives and our ability to provide high quality, technically superior products at
competitive prices.
The hard disk drive industry is very competitive. With short product
life cycles and rapid technological change, new products must be qualified
frequently and high volume production must be achieved rapidly. Hard disk drive
programs have increasingly become "bimodal" in that a few programs are
high-volume and the remaining programs are small in terms of volume. Supply and
demand balance can change quickly from customer to customer and program to
program. Further, we make substantial investments in qualifying on new programs
whether or not the customer program or our share of the program ultimately
results in high volume production.
-30-
<PAGE>
If we do not keep pace with rapid technological change, we will not be able to
compete.
We believe that our future success depends, in large measure, on our
ability to develop and implement new process technologies in a timely manner and
to continually improve these technologies. New process technologies must support
cost-effective, high-volume production of thin-film disks that meet the
ever-advancing customer requirements for enhanced magnetic recording
performance.
Advances in hard disk drive technology demand continually lower glide
heights and higher areal densities. These advances require substantial on-going
process and technology development. Although we have a significant, ongoing
research and development effort to advance our process technologies and the
resulting products, we cannot assure you that we will be able to develop and
implement such technologies in a timely manner in order to compete effectively
against competitors' products and/or entirely new data storage technologies.
Technology must be transferred overseas from our U.S. research and development
center to our Malaysian manufacturing operations. Our results of operations
would be materially adversely affected if our efforts to advance our process
technologies or implement those advanced technologies in our Malaysian
operations are not successful or if the technologies that we have chosen not to
develop proved to be viable competitive alternatives.
Asahi Glass Company, Ltd. has asserted that an agreement between us and
Asahi gives Asahi exclusive rights, even as to Komag, to certain glass substrate
related intellectual property developed by us. We have sent Asahi a notice of
termination of the agreement and have filed a lawsuit for, among other things, a
declaration that the agreement has been terminated and that Asahi has no rights
to the glass substrate technology developed by us. While we intend to pursue
vigorously our lawsuit against Asahi, due to the inherent uncertainty of
litigation, we cannot assure you that we will prevail. In the event we do not
prevail, we may be prevented or substantially impaired from exploiting our glass
substrate manufacturing process, which may have a materially adverse effect on
our results.
Our operating results are subject to quarterly fluctuations.
Our operating results historically have been subject to significant
quarterly and annual fluctuations. As a result, our operating results in any
quarter may not be indicative of its future performance. We believe that our
future operating results will continue to be subject to quarterly variations
based upon a wide variety of factors, including:
-31-
<PAGE>
o timing of significant orders; order cancellations, modifications and
quantity adjustments and shipment reschedulings;
o availability of media versus demand;
o the cyclical nature of the hard disk drive industry;
o our ability to develop and implement new manufacturing process
technologies;
o increases in our production and engineering costs associated with initial
design and production of new product programs; the extensibility of our
process equipment to meet more stringent future product requirements;
o our ability to introduce new products that achieve cost-effective,
high-volume production in a timely manner, timing of product announcements,
and market acceptance of new products;
o changes in our product mix and average selling prices;
o the availability and the extent of utilization of our production capacity;
o changes in our manufacturing efficiencies, in particular product yields and
input costs for direct materials, operating supplies and other running
costs;
o prolonged disruptions of operations at any of our facilities for any
reason;
o changes in the cost of or limitations on availability of labor; and
o structural changes within the disk media industry, including combinations,
failures, and joint venture arrangements.
The impact of these and other factors on our revenues and operating
results in any future period cannot be forecasted with certainty. Our expense
levels are based, in part, on its expectations as to future revenues. If revenue
levels are below expectations, operating results are likely to be materially
adversely affected. Because thin-film disk manufacturing requires a high level
of fixed costs, our gross margins are extremely sensitive to changes in volume.
At constant average selling prices, reductions in our manufacturing efficiency
cause declines in our gross margins. Additionally, decreasing market demand for
our products generally results in reduced average selling prices and/or low
capacity utilization that, in turn, adversely affect gross margins and operating
results.
We are dependent on our Malaysian factories.
During the third quarter of 1999, we announced that all media
production would be consolidated into our Malaysian factories. While we continue
to manufacture aluminum substrates at our factory in Santa Rosa, California,
substantially all our media production occurred in Malaysia in the first quarter
of 2000. In addition, we are in the process of transferring the manufacture
capacity of HMT's Fremont, California facility to Malaysia. While we believe
that our manufacturing operations in Malaysia can provide a competitive cost
advantage relative to most other thin-film disk manufacturers that operate
exclusively or primarily in the U.S. or Japan, the closure of the U.S. media
manufacturing operations leaves us fully dependent on our Malaysian media
operations.
-32-
<PAGE>
Technology developed at our U.S. research and development center must
now be first implemented at our Malaysian facilities without the benefit of
initial implementation at a U.S. factory.
Recent fluctuations in the electrical voltage available to our
Malaysian factories resulted in substantial down time. Prolonged disruption of
operations in Malaysia for any reason would cause delays in shipments of our
products, thus materially adversely affecting our results of operations.
The ability to transfer funds from our Malaysian operations to the
United States is subject to local rules and regulations. In 1999, the Malaysian
government repealed a regulation that restricted the amount of dividends that a
Malaysian company may pay to its stockholders. This regulation would have
potentially limited our ability to transfer funds to the United States from our
Malaysian operations. While the political and economic issues in Southeast Asia
have not had a material adverse affect on our Malaysian operations, we cannot
assure you that future events would not cause a disruption in our operations.
Our foreign operations subject us to additional risks.
We are subject to a number of risks of conducting business outside of
the United States. Our sales to customers in Asia, including the foreign
subsidiaries of domestic disk drive companies, account for substantially all of
our net sales from our U.S. and Malaysian facilities. Our customers assemble a
substantial portion of their disk drives in the Far East and subsequently sell
these products throughout the world. Therefore, our high concentration of Far
East sales does not accurately reflect the eventual point of consumption of the
assembled disk drives. We anticipate that international sales will continue to
represent the majority of our net sales.
We are subject to these risks to a greater extent than most companies
because, in addition to selling our products outside the United States, our
Malaysian operations will account for a large majority of our net sales this
year.
Accordingly, our operating results are subject to the risks inherent
with international operations, including, but not limited to:
o compliance with changing legal and regulatory requirements of foreign
jurisdictions;
o fluctuations in exchange rates, tariffs or other trade barriers;
o foreign currency rate fluctuations because certain costs of our foreign
manufacturing and marketing operations are incurred in foreign currency
including purchase of certain operating supplies and production equipment
from Japanese suppliers in yen-denominated transactions;
o difficulties in staffing and managing foreign operations;
-33-
<PAGE>
o political, social and economic instability;
o exposure to taxes in multiple jurisdictions; and
o transportation delays and interruptions.
We may not be able to attract and retain key personnel.
Our future success depends on the continued service of our executive
officers, our highly skilled research, development and engineering team,
manufacturing team and other key administrative, sales and marketing and support
personnel. Competition for skilled personnel is intense, and we may not be able
to attract, assimilate or retain highly qualified personnel in the future.
We rely on a limited number of suppliers for materials and equipment used in our
manufacturing processes.
We rely on a limited number of suppliers, and in some cases a sole
supplier, for some of the materials and equipment used in our manufacturing
processes including aluminum substrates, nickel plating solutions, polishing and
texturing supplies, and sputtering target materials. As a result, our production
capacity would be limited if one or more of these materials were to become
unavailable or available in reduced quantities. If such materials were
unavailable for a significant period of time, our results of operations would be
adversely affected. The supplier base has been weakened by the poor financial
condition of the industry and some suppliers have either exited the business or
failed.
The manufacture of our products is subject to process quality control risks.
The manufacture of our high-performance thin-film disks requires a
tightly controlled multi-stage process and the use of high-quality materials.
Efficient production of our products requires utilization of advanced
manufacturing techniques and clean room facilities. Disk fabrication occurs in a
highly controlled, clean environment to minimize dust and other yield- and
quality-limiting contaminants. Despite stringent manufacturing controls,
weaknesses in process control or minute impurities in materials may cause a
substantial percentage of the disks in a lot to be defective. The success of our
manufacturing operation depends in part on our ability to maintain process
control and minimize such impurities in order to maximize its yield of
acceptable high-quality disks. Minor variations from HMT's specifications could
have a disproportionately adverse impact on manufacturing yields.
Our business depends upon our ability to protect our patents and information
rights.
Protection of technology through patents and other forms of
intellectual property rights in technically sophisticated fields is commonplace.
In the disk drive industry, it is not uncommon for companies and individuals to
-34-
<PAGE>
initiate actions against others in the industry to enforce intellectual property
rights. Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot assure you that
we will be able to protect our technology adequately or that competitors will
not be able to develop similar technology independently, have or will perfect
intellectual property rights and enforce those rights to prevent us from using
such technologies or demand royalty payments from us in return for using such
technologies. Either of these actions may have a material adverse affect on our
results of operations. As a measure of protection, we have entered into
cross-license agreements with certain customers.
We have occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual rights
alleged to cover certain of our products or manufacturing processes or
equipment. In such cases, we evaluate whether it would be necessary to defend
against the claims or to seek licenses to the rights referred to in such
communications. No assurance can be given that we will be able to negotiate
necessary licenses on terms that would not have a material adverse effect on us
or that any litigation resulting from such claims would not have a material
adverse effect on our business and financial results.
We cannot assure you that we will anticipate claims that we infringe
the technology of others or successfully defend ourselves against such claims.
For instance, we currently have a dispute with Asahi Glass Company Ltd. over the
use of certain glass substrate related intellectual property. Similarly, we
cannot assure you that we will discover significant infringements of our
technology or successfully enforce our rights to our technology if we discover
infringing uses.
Earthquakes or other natural or man-made disasters could disrupt our operations.
Our California facilities located in San Jose, Fremont and Santa Rosa,
AKCL, Kobe, other Japanese suppliers of key manufacturing supplies and our
Japanese supplier of sputtering machines are each located in areas with seismic
activity. Our Malaysian operations have been subject to temporary production
interruptions due to localized flooding, disruptions in the delivery of
electrical power, and, on one occasion in 1997, by smoke generated by large,
widespread fires in Indonesia. We cannot assure you that natural or man-made
disasters will not result in a prolonged disruption of production in the future.
If any natural or man-made disasters do occur, they could have a material
adverse effect on our results of operations.
-35-
<PAGE>
Our operations are subject to environmental laws and regulations.
Our operations and manufacturing processes are subject to certain
environmental laws and regulations, which govern the use, handling, storage,
transportation, disposal, emission and discharge of hazardous materials and
wastes, the treatment and discharge of process waste waters and the emission of
air pollutants. From time to time we have been notified of minor violations of
environmental laws and regulations. These violations have been corrected in all
material respects without undue expense. Environmental laws and regulations,
however, may become more stringent over time, and there can be no assurance that
failure to comply with either present or future laws or regulations, which may
become more stringent, would not subject us to significant compliance expenses,
production suspension or delay, restrictions on expansion or the acquisition of
costly equipment.
The market price of our stock has been depressed.
The market price of our common stock has been depressed in response to
actual and anticipated quarterly variations in:
o our operating results;
o perceptions of the disk drive industry's relative strength or weakness;
o developments in our relationships with our customers and/or suppliers;
o announcements of alliances, mergers or other relationships by or between
our competitors and/or customers;
o announcements of technological innovations or new products by us or our
competitors;
o the success or failure of new product qualifications;
o developments related to patents or other intellectual property rights; and
o other events or factors.
We expect this volatility to continue in the future. In addition, any
shortfall or changes in our revenue, gross margins, earnings or other financial
results from analysts' expectations could cause the price of our common stock to
fluctuate significantly. In recent years, the stock market in general has
experienced extreme price and volume fluctuations which have particularly
affected the market price of many technology companies and which have often been
unrelated to the operating performance of those companies. These broad market
fluctuations may adversely affect the market price of our common stock.
Volatility in the price of stocks of companies in the hard disk drive industry
has been particularly high, especially since 1997. During the third quarter of
2000, the price of our stock fell to a low of $1.16 from a high of $35.13 during
the second quarter of 1997.
-36-
<PAGE>
The market price of our common stock may decline as a result of the merger.
The market price of our common stock may decline as a result of the
merger for a number of reasons, including if:
o the integration of Komag and HMT is unsuccessful;
o We do not achieve the perceived benefits of the merger as rapidly or to the
extent anticipated by financial or industry analysts; or
o the effect of the merger on our financial results is not consistent with
the expectations of financial or industry analysts.
Recovery of the stock price is contingent upon a correction in the
industry supply and demand imbalance as well as on internal execution on
industry-mandated technology, cost and yields targets. The timing of the supply
and demand correction may be influenced by structural changes including mergers,
acquisitions and failures.
-37-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Asahi Glass Company, Ltd. (Asahi) has asserted that an
agreement between Komag and Asahi gives Asahi exclusive rights, even as
to Komag, to certain glass substrate related intellectual property
developed by Komag. Komag has sent Asahi a notice of termination of the
agreement and has filed a lawsuit in the Superior Court of Santa Clara,
California, for, among other things, a declaration that the agreement
has been terminated and that Asahi has no rights to the glass substrate
technology developed by Komag. Asahi has removed the case to the
Federal District Court for the District Court of Northern California.
Asahi's motion to stay pending arbitration has been granted in part. A
case management conference is scheduled for February 13, 2001.
ITEM 2. Changes in Securities
Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders was held on September 20,
2000. The purpose of the meeting was to approve Proposal 1, the
issuance of 42,775,315 shares of Komag common stock to the shareholders
of HMT Technology Corporation, in accordance with the aforementioned
merger agreement in Note 10 above, and to approve Proposal 2, an
amendment to the Komag amended and restated certificate of
incorporation to increase the authorized number of shares of common
stock by 100,000,000 shares to a total of 250,000,000 shares.
Shares of common stock voted on Proposal 1 were as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
37,194,893 518,948 76,019 24,497,114
Shares of common stock voted on Proposal 2 were as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
61,158,686 1,018,742 108,546 0
ITEM 5. Other Information
Not Applicable.
-38-
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a report on Form 8-K/A on July 6, 2000,
relating to its Form 8-K filed on June 2, 2000.
On October 10, 2000, the Company filed Form 8-K, announcing
the October 2, 2000, completion of its merger with HMT
Technology Corporation.
-39-
<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 13 , 2000 BY: /s/ Thian Hoo Tan
----------------------- ---------------------
Thian Hoo Tan
President and
Chief Executive Officer
DATE: November 13 , 2000 BY: /s/ Edward H. Siegler
--------------------- ----------------------
Edward H. Siegler
Vice President,
Chief Financial Officer
DATE: November 13 , 2000 BY: /s/ Kathleen A. Bayless
--------------------- ------------------------
Kathleen A. Bayless
Vice President,
Corporate Controller
-40-