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"Filed by Komag, Incorporated
Pursuant to Rule 425 under the
Securities Act of 1933, and deemed
filed pursuant to Rule 14a-12 under
the Securities and Exchange Act of
1934. Subject Company:
Komag Incorporated
Commission File No. 000-16852"
On July 20, 2000, the following script was used in connection with Komag's
quarterly earnings conference call.
Good Afternoon.
Thank you for being with us today.
This is T.H. Tan and I am President and CEO of Komag.
With me here in San Jose are:
o Ted Siegler, our Chief Financial Officer, and
o Ray Martin, our Senior Vice President of Sales and Customer Service
On the call this afternoon,
o First Ted will discuss our financial results for 2Q 2000.
o Then I will discuss significant developments in our Sales, Manufacturing
and R&D areas.
o Finally I will update you on the status of our merger with HMT, and
o Then we will open the call to your questions.
[TED]
Thanks, TH. Before I begin today, I would remind you that we make
forward-looking statements during our conference calls, in our press releases
and in our published SEC filings.
These forward-looking statements involve risks and uncertainties, but they also
represent our current judgment regarding the future direction of our business.
These associated risks and uncertainties can cause actual results to differ
materially from our forecasts.
Important factors relating to our business are described in today's press
release and in our SEC filed documents.
The press release describing our 2Q 2000 results was placed on the news wires
today at approximately 4:15 pm EDT.
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For those of you who have not read the actual text of our press release, let me
summarize the financial numbers.
2Q 2000 Net Sales were $83.5 million
o up sequentially from $79.6 million in 1Q 2000, and
o 2Q 99 Net Sales were $93.2 million.
Our 2Q 2000 Net Loss was $6.5 million or $0.10 per share based upon 66.0 million
shares. Included in the net loss was an extraordinary gain of $3.8 million
resulting from an exchange of senior debt to a new convertible note at 70% of
par value. Without this extraordinary gain, loss per share would have been
$0.16.
o In 1Q 2000 we reported a loss of $5.3 million.
o For 2Q 99, Komag reported a Net Loss of $38.2 million.
Our 2Q 2000 ending cash balance decreased by $16.7 million to $55.1 million
compared to $71.8 million in 1Q 2000. However, during the quarter we paid our
senior lenders $15.0 million in principal repayment and approximately $3.7
million in one-time fees and catch-up interest. Without these transactions our
cash balance actually grew $2 million.
Looking in more detail at our operating results:
o The revenue increase was a result of a 9.7% increase in unit shipments, to
11.8 million disks, offset by a 4.5% decline in average selling price.
o Gross margin of $9.9 million was $2.9 million lower than the 12.8 million
level achieved in 1Q 2000. This was due in part to lower selling prices that
were not offset by improvements in cost. In particular we incurred freight
charges that were $2.5 million above our normal run rate in order to meet
expedited customer commitments front-end loaded into the early part of the
quarter. Also included in our sales were $2.1 million of distribution sales
for our Japanese joint venture, AKCL that carried no gross margin.
o R&D at $8.3 million and SG&A at $3.8 million were essentially unchanged
compared to last quarter.
o On a company-wide basis, fixed cash manufacturing and operating expenses
remain in line with our new business model and are approximately $28 million
less than 2Q99.
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o Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$16 million in 2Q 2000 compared with approximately $21 million in 1Q 2000.
EBITDA is a measure of the cash generation potential of our business and is
critical to our ability to improve our financial health.
Looking at our Balance Sheet:
o DSO at 41 days versus 40 days in 1Q 2000 is within our expected range.
o Inventory turns for 2Q 2000 were 11.4, compared with 12.2 last quarter. The
increased inventory balance was due to seasonal slowness and industry-wide
chip shortages at the end of the quarter.
o Capital expenditures of $2 million were well within our expected range. We
expect this rate to increase. But absent the HMT merger, we expect capital
spending to remain under $20 million for the year.
o During the quarter we concluded a long awaited Loan Restructure Agreement
with our senior lenders. As a result of this agreement we are no longer in
default. The new agreement has a loan maturity of June 30, 2001. Pursuant to
the new agreement, we paid $15 million toward principal reduction at
closing. In addition, certain lenders exchanged their senior notes for
subordinate convertible notes. As a result, the balance of our senior debt
has been reduced to $231.7 million. We expect to make regular principal
payments on the newly restructured debt pursuant to the formula in the
agreement.
o Finally, other notable items affecting our cash flow included $19 million in
depreciation, a $10 million increase in working capital and $4 million spent
for restructuring items. At this point, we have substantially completed the
spending for restructuring with the exception of continuing payments for
equipment leases assumed from Western Digital.
Now TH will discuss our operations
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[TH}
From a sales perspective:
o 2Q 2000 unit shipments of 11.8 million disks continued the improved trend
started last quarter. They were up sequentially 10% from the 10.8 million
shipped in last quarter. We believe we continue to benefit from market share
gains due to our strong technology. Partially offsetting improved unit
shipments, average selling price declined approximately 4.5% during the
quarter, despite the rapid introduction of new generations of products.
o We continue to execute on higher density products. Most of our shipments
were at 10 GB per platter and above. Of this total 19% comprised of 15 or
more GB per platter disks.
o We continue to make progress with our customer mix. During the quarter
Western Digital represented 52% of total revenue, down from 66% in the first
quarter. Maxtor's percentage was 25% up from 22% in the first quarter.
Seagate comprised 17% of our total revenue, the first time they have
represented more than 10% in any given quarter since 1998.
o Customer demand was uneven through the quarter with some weakness exhibited
in the month of June due to seasonality and chip shortages. We are currently
in the weakest part of the year on a seasonal basis, but expect improved
demand towards the end of the third quarter. On the whole we estimate that
shipments will be up slightly this quarter. But the pricing environment
remains difficult and may offset volume gains.
From a manufacturing standpoint:
o Overall manufacturing yields were flat compared to first quarter. The rapid
introduction of new products makes yield improvement difficult. We are doing
a good job of compressing the learning curve to at least maintain yields,
but we need to continue to challenge ourselves to introduce new products at
ever higher yields from the first day of production.
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o Material input costs increased primarily due to the freight issue Ted
described and also due to purchasing aluminum substrates from an external
source to balance our production.
o We have operated in our new business model for two quarters now. We have
been extremely successful in transferring technology to our Malaysian
operations and in turn our Malaysian team has performed flawlessly in
product qualification and production ramp throughout these two quarters.
This performance is a real credit to what we call our virtual teams; people
on both sides of the Pacific Ocean who have made it happen. These virtual
teams are definitely up to the challenge of our unforgiving industry.
On the R&D side,
o The march to higher density disks is relentless. The R&D group continues to
provide process improvements to at least double storage density on an annual
basis.
o Our low cost glass substrate program remains on track. We are currently
designing and using prototype equipment to cut the glass substrates from
square blanks. We expect shortly to be able to turn our designs over to an
equipment maker to make production-ready tools. We are currently working
with customers to finalize substrate specifications for the initial
products.
o We continue to work on advanced media in cooperation with our head and
channel partners to understand the extendibility of our designs. Our current
focus is on extensions to 100 gigabits per square inch or higher areal
density.
HMT merger status:
o We continue to be excited by the prospects of the merger with HMT. As we are
more fully engaged in the planning process we find confirmation of the
assumptions behind our agreement to merge. HMT's technology complements
ours. We expect to be able to build on the relationships we have both
developed with our customers. The planning for integrating our operations
and achieving the promised low cost structure is proceeding well. In
general, I am quite pleased to be working with a team that matches up well
with our own strengths.
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o We have cleared the regulatory hurdles. The Hart-Scott-Rodino waiting period
has expired and the SEC has notified us they do not intend to review our
filings.
o We are currently working with our senior lenders to secure their consent to
the merger.
o Once we secure lender consent, we will immediately set a date for our
stockholders' meeting and mail the Proxy. We continue to expect completion
of the merger before the end of this quarter.
In closing I would like to emphasize that Komag is well positioned for success.
o We have taken the steps necessary to control our destiny. We have resized
the company to the market opportunity and have an organization that should
have the lowest cost structure in the industry. Further, we have
restructured our debt so that we do not have the cloud of technical default
hanging over our heads.
o We entered into the HMT merger agreement, a transaction that will increase
the scale and sustainability of the company. Ultimately, as supply and
demand come into balance, our cost structure and scale should improve our
financial results dramatically.
o Finally, we are beginning the investigation into other areas where we can
use the numerous capabilities of our organization to augment our base
business. We are in discussions with potential partners in the area of
photonics. An entry into this business segment is an exciting prospect. It
is too early to talk about this with specificity, but we will keep you
informed as the picture unfolds.
Our survival strategy is in place. We have a path to significantly improved
results through the changes we have made in our company, through our anticipated
merger, and through what we perceive to be an emerging improvement in our
marketplace.
With that I'll ask _____________ to conduct the question and answer session.
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On July 20, 2000, Komag issued the following press release:
KOMAG ANNOUNCES SECOND QUARTER 2000 RESULTS
FOR IMMEDIATE RELEASE
SAN JOSE, Calif., July 20, 2000 /PRNewswire/ -- Komag, Incorporated (Nasdaq:
KMAG), a technical leader in the disk drive component industry, today announced
financial results for the second fiscal quarter of 2000.
SECOND QUARTER RESULTS:
Net sales for the second quarter of fiscal 2000 totaled $83.5 million, up 5%
from $79.6 million in the first quarter of 2000. Net sales for the second
quarter of fiscal 1999 totaled $93.2 million. The company's net loss for the
second quarter of 2000 was $6.5 million, or $0.10 per share based on 66.0
million shares. The net loss included an extraordinary gain of $3.8 million
resulting from the exchange of senior debt to a new convertible, subordinated
note. The loss per share without extraordinary gain is $0.16. The company
reported a loss for the first quarter of 2000 of $5.3 million, or $0.08 per
share based on 65.9 million shares. A year ago, Komag reported a net loss for
the second quarter of 1999 of $38.2 million, or $0.60 per share based on 64.2
million shares.
SECOND QUARTER REVIEW:
Second quarter results were negatively affected by several items. Freight
charges were higher than normal due primarily to expediting shipments early in
the quarter to meet customer requirements. In addition, the gross margin
percentage of 11.9% was depressed because of the effect of selling $2 million of
disks produced by AKCL, the company's Japanese joint venture, at no margin.
Interest expense also increased $1 million due to higher bank prime rates and
the effect of completing a Loan Restructure Agreement with the company's senior
lenders.
"There were many positives during the second quarter," stated T.H. Tan, Komag's
president and chief executive officer. "During the quarter we began volume
shipments of 15 gigabyte ("GB") disks that comprised 19% of our shipment volume.
Our manufacturing operations were able to sustain product yield performance at
the same level as in the first quarter of 2000, an excellent performance in
light of the rapid introduction of these new products. Our unit sales increased
9.7% sequentially to 11.8 million disks. Of this total, 91% were 10 GB per disk
or greater, providing excellent value to our customers. As sales have increased,
we also made progress toward balancing our customer mix. Western Digital still
comprised the majority of our sales at 52%, but Maxtor accounted for 25% and
Seagate purchased 17% of total sales. Finally, on the financial side of our
business, we completed the Loan Restructure Agreement that was under negotiation
for almost two years. By completing this agreement we are no longer in technical
default under our line of credit."
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BUSINESS OUTLOOK
"We expect pricing pressure to offset modest gains in unit volume during the
third quarter," said Mr. Tan. "Over the next quarter we must maintain focus on
cost reduction, yield improvement and productivity increases. At the same time
we will continue the rapid pace of new product introduction. And, of course, we
must plan for the HMT merger. We have our hands full, but have a proven record
of accomplishment. At this point we have rebuilt the company's foundation for
success."
HMT MERGER
On April 26, 2000 Komag and HMT Technology Corporation ("HMT") announced that
the companies had agreed to merge. The combined company will offer greater value
to both customers and shareholders by bringing together the best of the
technology and manufacturing capabilities of each company. Further, the combined
company will have the broadest customer base in the industry and sufficient
scale to achieve the industry's lowest cost structure.
Completion of the merger is subject to regulatory approvals, consent of Komag's
senior lenders, and consent of both companies' stockholders. To date, the
Hart-Scott-Rodino Act waiting period applicable to the transaction expired and
the SEC has informed the companies that it will not review the S-4 filing and
associated proxy. Immediately following receipt of consent from the senior
lenders, the companies will set a date for the required stockholders' meetings
and mail the Proxy. The companies expect to complete the merger prior to the end
of the September quarter.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
Komag has filed a preliminary Registration Statement on SEC Form S-4 in
connection with the merger, and Komag and HMT expect to mail a Joint Proxy
Statement/Prospectus to stockholders of Komag and HMT containing information
about the merger. Investors and security holders are urged to read the
Registration Statement and the Joint Proxy Statement/Prospectus carefully when
they are available. The Registration Statement and the Joint Proxy
Statement/Prospectus will contain important information about Komag, HMT, the
merger and related matters. Investors and security holders will be able to
obtain free copies of these documents through the website maintained by the U.S.
Securities and Exchange Commission at http://www.sec.gov. Free copies of the
Joint Proxy Statement/Prospectus and these other documents may also be obtained
from Komag by directing a request through the Investors Relations portion of
website at http://www.komag.com or by mail to Komag, Incorporated, 1710
Automation Parkway, San Jose, CA 95131, attention: Investor Relations,
telephone: (408) 576-2000.
In addition to the Registration Statement and the Joint Proxy
Statement/Prospectus, Komag and HMT file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
filed by Komag or HMT at the SEC public reference rooms at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at any of the Commission's other public
reference rooms in New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Komag's and HMT's filings with the
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Commission are also available to the public from commercial document-retrieval
services and at the website maintained by the Commission at http://www.sec.gov.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Komag will be soliciting proxies from Komag stockholders in favor of the
adoption of the merger agreement. The directors and executive officers of Komag
and the directors and executive officers of HMT may be deemed to be participants
in HMT's solicitation of proxies. Information concerning the directors and
officers is contained in the preliminary Registration Statement.
The directors and executive officers of Komag have interests in the merger, some
of which may differ from, or may be in addition to, those of HMT's stockholders
generally. Information concerning those interests is contained in the
preliminary Registration Statement.
FORWARD-LOOKING STATEMENTS
The above information contains predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties. While this outlook
represents Komag's current judgment on the future direction of the business,
actual results may differ materially from any future performance suggested
above. Factors that could cause or contribute to such differences include, but
are not limited to, risks relating to the consummation of the contemplated
merger, including the risk that required regulatory clearances, the bank
consents or stockholder approval might not be obtained in a timely manner or at
all. In addition, statements in this press release relating to the expected
benefits of the contemplated merger are subject to 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, changing relationships with customers, suppliers and strategic
partners. Predictions about third quarter pricing, new product introduction and
pricing may differ due to unanticipated changes in the disk market. These and
other factors are described in the most recent Form 10-Q, most recent Form 10-K
and other periodic reports filed by Komag and HMT with the Securities and
Exchange Commission.
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ABOUT KOMAG:
Founded in 1983, Komag, Incorporated has produced over 465 million thin-film
disks, the primary storage medium for digital data used in computer disk drives.
The company is well positioned as the broad-based strategic supplier of choice
for the industry's leading disk drive manufacturers. Through its advanced
development facilities in the United States and high volume production factories
in Southeast Asia, Komag provides high quality, leading-edge disk products at a
low overall cost to its customers. These attributes enable Komag to partner with
customers in the execution of their time-to-market design and time-to-volume
manufacturing strategies.
For more information about Komag, visit Komag's Internet home page at
http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line at
888-66-KOMAG or 408-576-2901.
Contact: KOMAG, INCORPORATED, San Jose, CA
Ted Siegler at (408) 576-2209
E-mail communications: [email protected]
