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 July 2, 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 July 2, 2000, 66,772,819 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 six-
months ended July 2, 2000 and July 4, 1999 ....................... 3
Consolidated balance sheets--July 2, 2000
and January 2, 2000 .............................................. 4
Consolidated statements of cash flows--Six-months
ended July 2, 2000 and July 4, 1999 .............................. 5
Notes to consolidated financial statements--
July 2, 2000 .................................................. 6-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 16-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 25
Item 2. Changes in Securities ........................................... 25
Item 3. Defaults Upon Senior Securities ................................. 25
Item 4. Submission of Matters to a Vote of Security Holders .......... 25-26
Item 5. Other Information ............................................... 26
Item 6. Exhibits and Reports on Form 8-K ............................. 26-27
SIGNATURES .................................................................. 28
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<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Jul 2 Jul 4 Jul 2 Jul 4
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales to unrelated parties $ 38,305 $ 23,913 $ 65,712 $ 113,926
Net sales to related parties 45,163 69,313 97,389 69,313
--------- --------- --------- ---------
NET SALES 83,468 93,226 163,101 183,239
Cost of sales 73,534 97,857 140,329 187,123
--------- --------- --------- ---------
GROSS PROFIT (LOSS) 9,934 (4,631) 22,772 (3,884)
Operating expenses:
Research, development and engineering 8,343 12,151 16,892 24,166
Selling, general and administrative 3,769 5,612 7,414 11,090
Amortization of intangibles 2,555 7,359 5,110 7,359
Restructuring charges (711) 4,321 (2,661) 4,321
--------- --------- --------- ---------
13,956 29,443 26,755 46,936
--------- --------- --------- ---------
OPERATING LOSS (4,022) (34,074) (3,983) (50,820)
Other income (expense):
Interest income 1,168 1,345 2,150 2,961
Interest expense (7,457) (5,935) (13,908) (10,939)
Other, net 196 869 571 1,530
--------- --------- --------- ---------
(6,093) (3,721) (11,187) (6,448)
--------- --------- --------- ---------
Loss before income taxes, minority interest,
equity in joint venture loss and extraordinary gain (10,115) (37,795) (15,170) (57,268)
Provision for income taxes 450 350 826 750
--------- --------- --------- ---------
Loss before minority interest, equity in
joint venture loss and extraordinary gain (10,565) (38,145) (15,996) (58,018)
Minority interest in net income (loss) of consolidated subsidiary (319) 89 (456) 340
Equity in net loss of unconsolidated joint venture -- -- -- (1,402)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY GAIN ($ 10,246) ($ 38,234) (15,540) (59,760)
Extraordinary gain 3,772 -- 3,772 --
--------- --------- --------- ---------
NET LOSS ($ 6,474) ($ 38,234) ($ 11,768) ($ 59,760)
========= ========= ========= =========
Basic and diluted loss before extraordinary gain per share ($ 0.16) ($ 0.60) ($ 0.24) ($ 1.01)
Basic and diluted extraordinary gain per share $ 0.06 $ -- $ 0.06 $ --
--------- --------- --------- ---------
Basic and diluted net loss per share ($ 0.10) ($ 0.60) ($ 0.18) ($ 1.01)
========= ========= ========= =========
Number of shares used in basic and diluted computations 66,039 64,246 65,958 59,080
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
Jul 2 Jan 2
2000 2000
--------- ---------
<S> <C> <C>
ASSETS (unaudited) (note)
Current Assets
Cash and cash equivalents $ 27,848 $ 25,916
Short-term investments 27,281 43,610
Accounts receivable (including $24,931 and
$25,971 due from related parties in 2000
and 1999, respectively) less allowances
of $2,554 in 2000 and $2,180 in 1999 41,436 36,494
Inventories:
Raw materials 10,734 7,695
Work-in-process 6,731 4,820
Finished goods 8,432 10,503
--------- ---------
Total inventories 25,897 23,018
Prepaid expenses and deposits 8,102 3,254
Income taxes receivable 87 815
Deferred income taxes 3,767 3,767
--------- ---------
Total current assets 134,418 136,874
Property, Plant and Equipment
Land 7,785 7,785
Buildings 134,805 134,471
Equipment 493,617 630,221
Furniture 7,573 10,980
Leasehold improvements 31,714 36,656
--------- ---------
675,494 820,113
Less allowances for depreciation and amortization (398,626) (506,658)
--------- ---------
Net property, plant and equipment 276,868 313,455
Net Intangible Assets 17,886 22,996
Deposits and Other Assets 915 2,546
--------- ---------
$ 430,087 $ 475,871
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 231,740 $ 260,000
Trade accounts payable 23,176 21,474
Accounts payable to related parties 3,503 2,019
Accrued compensation and benefits 10,480 10,048
Other liabilities 16,223 19,615
Income taxes payable 58 109
Restructuring Liability 9,772 25,490
--------- ---------
Total current liabilities 294,952 338,755
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 9,749 13,245
Minority Interest in Consolidated Subsidiary 3,471 3,927
Stockholders' Equity
Preferred stock -- --
Common stock 668 659
Additional paid-in capital 449,833 445,384
Accumulated deficit (379,677) (367,909)
Accumulated other comprehensive income 579 579
--------- ---------
Total stockholders' equity 71,403 78,713
--------- ---------
$ 430,087 $ 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>
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<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
Jul 2 Jul 4
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($11,768) ($59,760)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 39,115 48,608
Amortization of intangibles 5,110 7,359
Extraordinary gain (3,772) --
Provision for losses on accounts receivable 309 225
Interest expense on note payable to related party 2,070 --
Amortized interest expense related to debt restructure (289) --
Amortization of warrants (248) --
Equity in net loss of unconsolidated joint venture -- 1,402
(Gain) loss on disposal of property, plant and equipment (113) 229
Deferred rent 126 1,095
Minority interest in net income (loss) of consolidated subsidiary (456) 340
Changes in operating assets and liabilities:
Accounts receivable (6,291) 31,310
Accounts receivable from related parties 1,040 (39,783)
Inventories (2,879) (8,477)
Prepaid expenses and deposits (1,557) 131
Trade accounts payable 1,702 191
Accounts payable to related parties 1,484 6
Accrued compensation and benefits 432 902
Other liabilities (8,246) (1,482)
Income taxes receivable/payable 677 29
Restructuring liability (15,390) (367)
-------- --------
Net cash provided by (used in) operating activities 1,056 (18,042)
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (4,927) (17,564)
Purchases of short-term investments (2,681) (1,965)
Proceeds from short-term investments at maturity 19,010 1,350
Proceeds from disposal of property, plant and equipment 1,139 30
Deposits and other assets 1,631 (25)
-------- --------
Net cash provided by (used in) investing activities 14,172 (18,174)
FINANCING ACTIVITIES
Payment of debt (15,000) --
Sale of Common Stock, net of issuance costs 1,704 2,255
-------- --------
Net cash provided by (used in) financing activities (13,296) 2,255
Increase (decrease) in cash and cash equivalents 1,932 (33,961)
Cash and cash equivalents at beginning of year 25,916 64,467
-------- --------
Cash and cash equivalents at end of period $ 27,848 $ 30,506
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 2, 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 six-month periods ended July 2, 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 $231.7 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 July 2, 2000, the Company is in compliance with the financial
covenants of such agreements. In the long-term, the Company will likely 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 current stockholders of the Company. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of assets and liabilities that may result from the outcome of
this uncertainty.
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<PAGE>
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended January 2, 2000.
The Company uses a 52-53 week fiscal year ending on the Sunday closest to
December 31. The three-month reporting periods included in this report are
comprised of thirteen weeks.
NOTE 2 - INVESTMENT IN DEBT SECURITIES
The Company invests its excess cash in high-quality, short-term debt and
equity instruments. None of the Company's investments in debt securities have
maturities greater than one year. The following is a summary of the Company's
investments by major security type at amortized cost, which approximates fair
value:
Jul 2 Jan 2
(in thousands) 2000 2000
------- -------
Municipal auction rate preferred stock $24,600 $39,200
Corporate debt securities 5,404 7,339
Mortgage-backed securities 17,550 24,650
------- -------
$47,554 $71,189
======= =======
Amounts included in cash and cash equivalents $20,273 $27,579
Amounts included in short-term investments 27,281 43,610
------- -------
$47,554 $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 $0.5 and $0.8
million for the three-and six-month periods ended July 2, 2000, respectively,
and $0.4 and $0.8 for the three- and six-month periods ended July 4, 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 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 determined in the third quarter of 1999 that earnings
from the
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<PAGE>
second and third plant sites will be tax free through 2001. The remaining period
of the ten-year tax holiday will be reassessed in 2001 based on achieving
certain investment criteria.
NOTE 4 - COMPREHENSIVE LOSS
Comprehensive loss for the three- and six-month periods ended July 2,
2000 and July 4, 1999 in the accompanying Consolidated Statements of Operations
is the same as the Company's net loss.
Accumulated other comprehensive income at July 2, 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 U.S.
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
U.S. 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 U.S. and approximately 69%, 27% and 4% from the
manufacturing area, engineering area and sales, general and administrative area,
respectively), $5.9
-8-
<PAGE>
million related to equipment order cancellations and other equipment related
costs, and $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 six-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 July 2, 2000 $0.0
=======
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<PAGE>
1998 Restructuring Reserve
Equipment Order
Cancellations And
Other
(in millions) Related Costs
----------------
Balance at January 2, 2000 $0.6
Adjustment to Reserve (0.6)
Charged to Reserve --
-------
Balance at July 2, 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
have been completed 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 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 quarter 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.
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<PAGE>
<TABLE>
1999 Restructuring Reserve - Changes During First Half 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) (4.5) (0.4) (4.0) (11.3)
----------- ------------ ------------ --------- --------
Balance at July 2, 2000 $-- $9.3 $0.4 $0.1 $9.8
----------- ------------ ------------ --------- --------
</TABLE>
At July 2, 2000, $9.8 million related to the 1999 restructuring
activities remained in current liabilities. During 1999 and the first six-months
of 2000, the Company made cash payments totaling $30.9 million, primarily for
severance costs, payments for liabilities under non-cancelable equipment leases
and facility closure costs. Cash outflows of approximately $0.5 million
associated with severance pay and closure costs will occur primarily during the
third quarter of 2000. Cash payments of approximately $9.3 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 half 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 half 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.
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<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Jul 2 Jul 4 Jul 2 Jul 4
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Numerator: Loss before extraordinary gain ($10,246) ($38,234) ($15,540) ($59,760)
-------- -------- -------- --------
Denominator for basic and diluted -
weighted-average shares 66,039 64,246 65,958 59,080
-------- -------- -------- --------
Basic and diluted loss before
extraordinary gain per share ($ 0.16) ($ 0.60) ($ 0.24) ($ 1.01)
-------- -------- -------- --------
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 189,100
and 60,803 for the three months ended July 2, 2000 and July 4, 1999, and of
281,205 and 1,069,004 for the six-months ended July 2, 2000 and July 4, 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 144,417 and zero
for the three months ended July 2, 2000 and July 4, 1999, and of 108,637 and
zero for the six-months ended July 2, 2000 and July 4, 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 1,290,081 and zero
for the three months ended July 2, 2000 and July 4, 1999, and of 645,041 and
zero for the six-months ended July 2, 2000 and July 4, 1999, respectively, were
not included in the net loss per share computation because the effect would be
antidilutive.
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<PAGE>
NOTE 7 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 8 - LIABILITIES ASSOCIATED WITH 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 six-months of 2000, the Company paid a total of
approximately $20.7 million against liabilities arising from this transaction
including equipment lease obligations ($13.7 million), rent ($1.6 million),
property taxes ($1.3 million) and other liabilities ($4.1 million). Equipment
lease obligations are expected to be paid monthly through mid-2002. At July 2,
2000, the current portion of the equipment lease obligations was approximately
$8.8 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. As a result, the Company currently has $231.7 million in bank debt
outstanding, which matures in June 2001 and bears interest at prime plus 1.25%.
The Company is required to make principal payments under the agreement based on
specific calculations with a minimum of $1.0 million and a maximum of $7.5
million due quarterly. The agreement requires the Company to meet certain
financial covenants which the Company was in compliance with as of July 2, 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
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<PAGE>
the Series B warrants only become exercisable in June 2001 for a ten year period
if the related debt balance outstanding at that point exceeds $160.0 million,
otherwise these warrants become void. The exercise price of both series of
warrants is $2.13. The Company valued the warrants using the Black-Scholes model
and determined the value to be approximately $2.8 million, which has been
capitalized and is being amortized to interest expense over the life of the loan
restructure agreement. The 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 to the Company 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, on any date on which the closing sale price of the
common stock has been 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 $20.0 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. 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. As of July 2, 2000, no shares have
been sold under this agreement.
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<PAGE>
NOTE 11 - 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. Under the terms of the definitive
merger agreement, each issued and outstanding share of HMT stock will be
converted into 0.9094 shares of the Company's common stock. The merger will be
accounted for under purchase accounting and is subject to customary closing
conditions, including regulatory approvals, the approval of both companies'
shareholders and the Company's lenders. The merger is expected to close in the
third quarter of calendar 2000.
-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 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. There are
risks relating to the consummation of the contemplated merger with HMT
Technology (HMT), 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, 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,
changing relationships with customers, suppliers and strategic partners. Other
factors that could cause actual results to differ include the following: changes
in the industry supply-demand relationship and related pricing for enterprise
and desktop disk products; timely and successful qualification of
next-generation products; utilization of manufacturing facilities; changes in
manufacturing efficiencies, in particular product yields and material input
costs; extensibility of process equipment to meet more stringent future product
requirements; structural changes within the disk media industry such as
combinations, failures, and joint venture arrangements; vertical integration and
consolidation within the Company's customer base; its dependence on a limited
number of customers for sales; increased competition; timely and successful
deployment of new process technologies into manufacturing; 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
-16-
<PAGE>
and development activities and for physical assets such as equipment and
facilities that are dependent 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. In the long-term the Company will likely need to
further restructure its debt obligations and raise additional funds to operate
it business. The Company's ability to restructure is debt and raise additional
funding will be dependent upon improving its financial performance. Other risk
factors that may affect the Company's financial performance are listed in the
Company's various SEC filings, including its Form 10-K for the fiscal year ended
January 2, 2000 which was filed on March 31, 2000. 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.
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 restructuring activities and the resulting lower manufacturing costs,
and technological advances such as 50 Gigabits per square inch recording density
and low-cost glass
-17-
<PAGE>
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 closure of the former WDC media operation at the end of
June 1999, the Company announced in July 1999 that it would reduce the size of
its U.S. operations further in response to the poor industry conditions. Later
in August 1999, the Company indicated that it would cease volume production of
finished disks in the U.S., close two manufacturing facilities in San Jose,
California, and institute staged work force reductions that would affect 980
people by the end of 1999. These reductions, combined with the June 1999 work
force reduction of 400 people, lowered the employment base at the Company's U.S.
operations from 1,950 people in April 1999 (subsequent to the acquisition of
WDC's media operation) to 529 people by the end of the second quarter of 2000.
As a result of these actions the Company expected to realize cash savings of
approximately $20 million per quarter in U.S. 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 U.S. production
facilities scheduled for closure and for severance pay related to the
reorganization of its U.S. operations.
After ceasing volume production, the Company's San Jose site is solely
focused 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. The Company's
shift of high volume production to its
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<PAGE>
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 decreased to $83.5 million in the second quarter of 2000,
down 10.5% compared to $93.2 million in the second quarter of 1999. The
year-over-year decrease was primarily due to the net effect of a 16.2% decrease
in the overall average selling price and a 6.8% increase in unit sales volume.
Net sales in the second quarters of 2000 and 1999 included $6.3 million and $2.2
million of substrate and single sided disk sales, respectively. Second quarter
2000 unit sales of finished media increased to 11.8 million disks from 11.1
million disks in the second quarter of 1999. The severe pricing pressures
generated by the continuing imbalance in supply and demand for thin-film media
in the first half 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. Net sales in the first half of 2000 decreased
11.0% relative to the first half of 1999. Net sales in the first six months of
2000 and 1999 included $11.4 million and $6.1 million of substrate and single
sided disk sales, respectively. The decrease in net sales for the first half of
2000 compared to the first half of 1999 was primarily due to the net effect of a
16.6% decrease in the overall average selling price and a 6.7% increase in unit
sales volume.
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 $2.1 million in the second quarter and first half of
2000 and negligible in the second quarter and first half of 1999. Distribution
sales of AKCL product will be dependent on market demand for the remainder of
2000.
During the second quarter of 2000, sales to WDC, Maxtor Corporation and
Seagate Technology, Inc. accounted for approximately 52%, 25% and 17%,
respectively, of consolidated net sales. Net sales to each of the Company's
other customers were less than 10% during the second 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.
However, as a result of the April 1999 acquisition of WDC's media operation and
related volume purchase agreement, the Company expects WDC to consume a high
percentage of its total net sales.
Gross Margin:
The Company recorded a gross margin of 11.9% in the second quarter of
2000
-19-
<PAGE>
compared to a gross loss of 5.0% in the second quarter of 1999. The improvement
in the gross margin percentage was primarily due to a reduction of $28.3 million
in fixed manufacturing costs. Depreciation charges in the second quarter of 2000
were approximately 26.5% lower than in the second quarter of 1999 primarily due
to the restructuring charge recorded in September 1999. The Company produced
11.9 million units in the second quarter of 2000 compared to 11.3 million units
in the second quarter of 1999. The positive effects were more than offset by the
effect of the 16.2% decline in the overall average selling price.
The gross margin improved to 14.0% for the first half of 2000 from a
negative 2.1% for the first half of 1999. Unit production increased to 22.3
million disks in the first half of 2000 compared to 21.4 million disks in the
first half of 1999. Reductions in fixed manufacturing costs and higher unit
production volumes favorably impacted the Company's gross margin in 2000.
Depreciation charges in the first half of 2000 were approximately 58.2% lower
than in the first half of 1999 primarily due to the restructuring charge
recorded in September 1999. The effect of these manufacturing cost reductions
more than offset the effect of the decline in the overall average selling price
on the Company's gross margin.
Operating Expenses:
Research and development ("R&D") expenses decreased to $8.3 million in
the second quarter of 2000 from $12.2 million in the second quarter of 1999. R&D
expenses decreased to $16.9 million in the first half of 2000 from $24.2 million
in the first half of 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 six-month
periods of 2000 compared to the same periods in 1999. Selling, general and
administrative ("SG&A") expenses decreased to $3.8 million in the second quarter
of 2000 from $5.6 million in the second quarter of 1999. SG&A expenses decreased
to $7.4 million in the first half of 2000 from $11.1 million in the first half
of 1999. The decrease for the three- and six-month periods of 2000 relative to
the comparable periods of 1999 was primarily due to lower payroll and related
employee costs (primarily due to the 1999 restructuring activities), partially
offset by an increase in bonus expense.
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
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<PAGE>
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.
<TABLE>
1999 Restructuring Reserve - Changes During First Half 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) (4.5) (0.4) (4.0) (11.3)
-------- -------- -------- -------- --------
Balance at July 2, 2000 $-- $9.3 $0.4 $0.1 $9.8
-------- -------- -------- -------- --------
</TABLE>
At July 2, 2000, $9.8 million related to the 1999 restructuring
activities remained in current liabilities. During 1999 and the first six-months
of 2000, the Company made cash payments totaling $30.9 million, primarily for
severance costs, payments for liabilities under non-cancelable equipment leases
and facility closure costs. Cash outflows of approximately $0.5 million
associated with severance pay and closure costs will occur primarily during the
third quarter of 2000. Cash payments of approximately $9.3 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 half 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 half 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 $200,000 and $800,000 in the three- and
six-month
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<PAGE>
periods ended July 2, 2000 relative to the same periods ended July 4, 1999 due
to lower average cash and short-term investment balances in the current year
period. Interest expense increased $1.5 million and $3.0 million in the first
three- and six-months of 2000, respectively, compared to the same periods in
1999. The increase in interest expense for the second quarter of 2000 compared
to the same quarter in 1999 was due to higher bank prime rates and the effect of
completing the loan restructure agreement with the Company's senior lenders. The
increase in interest expense for the first half of 2000 compared to the first
half of 1999 was due higher bank prime rates, the effect of completing the loan
restructure agreement with the Company's senior lenders and approximately $1.0
million of interest expense on the Company's $21.2 million note payable to WDC.
Other income decreased $0.7 million and $1.0 million in the second quarter and
first six-months of 2000 compared to the same periods of 1999. The decrease was
primarily due to a reduction in royalty income.
Income Taxes:
The Company's income tax provision was approximately $500,000 and
$800,000 for the three- and six-month periods of 2000, respectively, compared to
$400,000 and $800,000 for the three- and six-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 has
determined that earnings from the second and third plant sites will be tax free
through 2001. The remaining period of the ten-year tax holiday will be
reassessed in 2001 based on achieving certain investment criteria.
Minority Interest in KMT/Equity in Net Income (Loss) of AKCL:
The minority interest in the net income (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 $1.6 million and $2.3 million in the second quarter and first half of
2000, respectively, compared to net income of $400,000 and $1.7 million in the
second quarter and first half 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 half of
2000, the Company did not record $2.6 million and $10.4 million in losses,
respectively, as it would have reduced the net book value of its investment in
AKCL below zero. Assuming AKCL reports net income in future periods, the Company
will record its share of such income only to the
-22-
<PAGE>
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 $231.7 million in bank debt
and $9.3 million of convertible subordinated debt. At the time the convertible
subordinated debt was converted from senior unsecured 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 to the Company of $3.8
million, net of expenses.
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. Under the terms of the definitive
merger agreement, each issued and outstanding share of HMT stock will be
converted into 0.9094 shares of the Company's common stock. The merger will be
accounted for under purchase accounting and is subject to customary closing
conditions, including regulatory approvals, the approval of both companies'
shareholders and the Company's lenders. The merger is expected to close in the
third quarter of calendar 2000.
Liquidity and Capital Resources:
Cash and short-term investments of $55.1 million at the end of the
second quarter of 2000 decreased $14.4 million from the end of the prior fiscal
year. Working capital remained flat with the end of the prior fiscal year.
Consolidated operating activities provided $1.1 million in cash during the first
six months of 2000. The $11.8 million net loss for the first six months of 2000,
net of the non-cash depreciation and amortization charges of $44.2 million, and
other non-cash charges totaling $2.4 million, provided $30.0 million of cash.
Changes in operating assets and liabilities used $29.0 million of cash. Accounts
receivable increased $5.3 million (due to an increase in sales and the timing of
sales in the first half of 2000 compared to the fourth quarter of 1999) and
other liabilities decreased $8.2 million (primarily due to cash payments for
liabilities associated with the purchase of the assets of WDC's media
operation), consuming cash. The net change in the restructuring liability for
the first six months of 2000 used $15.4 million of cash. In addition, the net
change in the other operating assets and liabilities consumed $100,000 of cash.
The Company spent $4.9 million on capital requirements during the first six
months of 2000 and other investing activities provided $2.8 million in cash.
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<PAGE>
Repayment of debt consumed $15.0 million and sales of Common Stock under the
Company's stock programs generated $1.7 million.
Current noncancellable capital commitments as of July 2, 2000 total
approximately $2.2 million. Total capital expenditures for 2000 are currently
planned at approximately $20.0 million. The 2000 capital spending plan primarily
includes costs for projects designed to improve yield and productivity as well
as costs for the installation of certain production equipment transferred from
the closed U.S. manufacturing plant to Malaysia.
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 $231.7 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 outstanding with WDC with a principal balance of $30.1 million 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. In the
long-term, 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.
Over the next several years the Company will need financial resources
for capital expenditures, working capital and research and development. In
fiscal 2000, the Company plans to spend approximately $20.0 million on property,
plant and equipment. The Company believes that in order to achieve its long-term
growth objectives and maintain and enhance its competitive position, such
additional financial resources will be required. There can be no assurance that
the Company will be able to secure such financial resources on commercially
reasonable terms. If the Company is unable to obtain adequate financing, it
could be required to significantly reduce or possibly suspend its operations,
and/or to sell additional securities on terms that would be highly dilutive to
current stockholders.
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<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 is currently pending before
the District Court.
ITEM 2. Changes in Securities-Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Cumulative losses incurred by the Company previously resulted in
a default under certain financial covenants contained in the Company's
various bank 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 of July 2, 2000, the Company is in
compliance with the financial covenants of such agreements.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held May 10, 2000.
(b) The meeting included the election of the Board of Directors,
submitted as Item No. 1, whose names are as follows:
Thian Hoo Tan
Chris A. Eyre
Irwin Federman
George A. Neil
Michael R. Splinter
Anthony Sun
Masayoshi Takebayashi
Each of the individuals elected is a continuing member of the
Board.
(c) Other matters voted upon at the stockholders meeting were:
Item No. 2 - Renew the approval of the sale and issuance by the
Company of up to $250 million of Common Stock or securities
convertible into Common Stock in private transactions from time to
time until June 30, 2001 at a price not less than the greater of
book value and 90% of the then current market value of the Common
Stock.
Item No. 3 - Ratify the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending
December 31, 2000.
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<PAGE>
Shares of Common Stock voted were as follows:
Item No. 1
(Election of Board of Directors)
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
Thian Hoo Tan 60,373,545 363,096
Chris A. Eyre 60,378,198 358,443
Irwin Federman 60,375,794 360,847
George A. Neil 60,374,395 362,246
Michael R. Splinter 60,369,201 367,440
Anthony Sun 60,383,948 352,693
Masayoshi Takebayashi 60,379,305 357,336
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Item No. 2
(Renew authorization
to sell up to $250 million
of equity below book
value) 32,985,461 711,568 576,372 26,463,240
Item No. 5
(Selection of
Independent Auditors) 60,475,705 179,202 81,734 --
</TABLE>
ITEM 5. Other Information-Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 4.3-- Loan Restructure Agreement by and among Komag and the
Restructure Lenders named therein, dated as of June 1,
2000 (incorporated by reference from Exhibit 4.1 filed
with the Company's report on Form 8-K filed June 2, 2000)
Exhibit 4.4-- Warrant Agreement by and between Komag and the Banks
named therein, dated as of June 1, 2000, with attached
form of Warrant (incorporated by reference from Exhibit
4.2 filed with the Company's report on Form 8-K filed
June 2, 2000)
Exhibit 4.5-- Registration Rights Agreement by and between Komag and
the Banks named therein, dated as of June 1, 2000
(incorporated by reference from Exhibit 4.3 filed with
the Company's report on Form 8-K filed June 2, 2000)
Exhibit 4.6-- Securities Purchase Agreement by and among Komag and
certain buyers listed therein, dated June 1, 2000
(incorporated
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<PAGE>
by reference from Exhibit 4.1 filed with the Company's
report on Form 8-K filed June 2, 2000)
Exhibit 4.7-- Registration Rights Agreement by and among Komag and
certain buyers listed therein, dated June 1, 2000
(incorporated by reference from Exhibit 4.2 filed with
the Company's report on Form 8-K filed June 2, 2000)
Exhibit 4.8-- Form of Convertible Note issued by Komag to buyer named
therein dated June 2, 2000 (incorporated by reference
from Exhibit 4.3 filed with the Company's report on Form
8-K filed June 2, 2000)
Exhibit 27--Financial Data Schedule.
b) Reports on Form 8-K
On May 1, 2000 the Company filed Form 8-K containing the contents of
its press release dated April 26, 2000 entitled "Komag & HMT Agree to
Merge to Create the Pre-eminent Independent Thin-Film Media Company".
On June 2, 2000 the Company filed Form 8-K containing the contents of
its press release dated June 1, 2000 entitled "Komag Announces signing
of Restructured Loan Agreement".
On June 2, 2000 the Company filed Form 8-K announcing that on June 2,
2000 it had entered into a Securities Purchase Agreement and a
Registration Rights Agreement with certain buyers, and executed
convertible notes in the name of such buyers.
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<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: August 9, 2000 BY: /s/ Thian Hoo Tan
------------------ ---------------------
Thian Hoo Tan
President and
Chief Executive Officer
DATE: August 9, 2000 BY: /s/ Edward H. Siegler
---------------- ----------------------
Edward H. Siegler
Vice President,
Chief Financial Officer
DATE: August 9, 2000 BY: /s/ Kathleen A. Bayless
---------------- ------------------------
Kathleen A. Bayless
Vice President,
Corporate Controller
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