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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 23, 1996
COMMISSION FILE NUMBER 0-25796
STORMEDIA INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 77-0373062
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
390 REED STREET, SANTA CLARA, CALIFORNIA 95050-3118
(Address of principal executive offices)
(Zip Code)
(408) 327-8400
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
In connection with the "safe harbor" provisions of the private
Securities Litigation Reform Act of 1995, StorMedia Incorporated (the "Company")
is hereby filing cautionary statements identifying important factors that could
cause the Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99.1 Cautioniary statements for purposes of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act
of 1995.
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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 hereunto duly authorized.
Date: July 23 , 1996 STORMEDIA INCORPORATED
/s/ JUDITH M. O'BRIEN
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Judith M. O'Brien
Secretary
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INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
99.1 Cautionary Statement for Purposes of the 5
"Safe Harbor" Provisions of the Private
Securities Reform Act of 1995.
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RISK FACTORS
StorMedia Incorporated ("The Company") periodically makes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors
including those set forth in the following risk factors and other risks detailed
from time to time in the Company's reports filed with the Securities and
Exchange Commission (the "Commission"). In evaluating the Company and its
business, prospective investors should carefully consider the following factors
in addition to the other information presented in the Company's reports
periodically filed with the Commission.
Uncertainties Associated with Supply Agreement with Maxtor; Dependence
on a Limited Number of Customers. During 1995 and the six months ended June 28,
1996, the Company sold its disks primarily to Seagate and Maxtor Corporation
("Maxtor"), with sales to Maxtor representing 45% and 36%, of net sales during
the periods, respectively . Aggregate shipments to Seagate and Maxtor in
1993,1994,1995 and the first six months of 1996 represented 52%, 91%, 99% and
97%, respectively, of net sales. In November 1995, the Company entered into a
multi-year Supply Agreement with Maxtor (the "Maxtor Supply Agreement") pursuant
to which Maxtor agreed to purchase specified volumes over a four-year period. In
June 1996, Maxtor notified the Company that it did not intend to purchase the
full committed volumes required by the Maxtor Supply Agreement. Maxtor
subsequently notified the Company that it does not intend to purchase the
quantities of disks required by the Maxtor Supply Agreement during the third
quarter of 1996. As a consequence, the Company has reduced its work force in its
Santa Clara, California facility and taken other steps to reduce its costs in
Singapore and in the United States. The Company expects Maxtor's failure to
purchase committed volumes to negatively impact its 1996 results of operation at
least in the third quarter of 1996. There can be no assurance that Maxtor will
comply with its purchase obligations under the Maxtor Supply Agreement in the
future. The Company is seeking additional customers, to utilize the
manufacturing capacity in which it has been manufacturing products for Maxtor.
While the Company expects Seagate to take a portion of this capacity, the
Company will have excess manufacturing capacity as it seeks to qualify its
products in new and existing customers' product programs. This is a costly and
time consuming process and, there can be no assurnace that the Company will
successfully find new customers or qualify it product in these product programs
on a timely basis.
Given the relatively small number of independent performance disk
drive manufacturers, the Company's dependence on a few customers will continue
in the future. The Company's existing and several of its potential customers are
expanding their ability to produce thin film disks internally and, as a result
of this expansion or other factors, could reduce the level of purchases or cease
purchasing from the Company, could sell thin film disks in competition with the
Company or might not sustain or increase their level of orders as the Company
increases its capacity. The loss of one or more of the Company's current
customers, or a significant reduction in the level of orders for any reason
would materially adversely affect the Company's business, operating results and
financial condition. Additionally, due to the
lengthy product.
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qualification process, any change in customers or product mix could have a
material adverse effect on the Company's business, results of operations and
financial condition during any such transition. Consequently, the loss of one or
more of the Company's customers or potential customers through consolidations,
adverse financial or market circumstances or otherwise, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Specifically, Seagate currently produces a portion of its own thin film
disk requirements internally and historically has produced a majority of its
requirements. Seagate's expressed corporate strategy is to significantly
increase its internal capacity to manufacture disks through construction of a
160,000 square foot disk manufacturing facility in Singapore targeted for
completion in mid-1996. In February 1996, Seagate also completed its merger with
Conner Peripherals, Inc. ("Conner") and acquired Conner's internal disk
production capacity, which supplied substantially all of Conner's disk
requirements. In addition, prior to the merger, Conner had stated its intention
to double its internal disk capacity through a newly established facility in
Singapore. This facility has begun producing disks and is expected to be
completed in 1997. Seagate's increased internal disk manufacturing capacity as
described above may reduce Seagate's disk needs from external suppliers. If
Seagate were to reduce the level of orders from the Company as a result of the
expansion of its internal disk production, an acquisition of, or the
establishment of a strategic relationship with, another disk supplier or
otherwise, or if Seagate were to begin selling disks in competition with the
Company, the Company's business, results of operations and financial condition
would be materially adversely affected.
Maxtor was recently acquired by Hyundai Electronics Industries, Co.
Ltd. ("Hyundai"). Hyundai recently announced its intention to develop and
manufacture disks for use in Maxtor disk drives, supplementing Maxtor's current
suppliers base. These factors could negatively impact qualities of the Company
products purchased by Maxtor in the future. Accordingly, in addition to the
expected shortfall in purchases by Maxtor during the third quarter of 1996,
there can be no assurance that Maxtor will order disks in sufficient quantity to
meet its contractual obligations with the Company.
Consolidation Within the Disk Drive Industry. Consolidation within the
disk drive industry has reduced the number of potential customers to whom the
Company could market its products. In addition to the Seagate acquisition of
Conner, Quantum Corporation ("Quantum") recently announced its intention to
close all of its manufacturing operations in the United States and overseas and
to transfer all manufacturing production to Matsushita Kotobuki Electronics of
Japan ("MKE"), its long-term contract manufacturing partner. While Quantum was a
customer of the Company in 1994, MKE has never been a significant customer of
the Company. Additionally, Maxtor was recently acquired by Hyundai which has
announced its intention to manufacture disks for Maxtor disk drives internally.
Given the relatively small number of independent hard disk drive manufacturers
who require an independent source of thin film disks, as well as the
consolidations and changes which have occurred and are continuing to occur in
the industry, there can be no assurance that the Company's efforts to diversify
its customer base will be successful. If they are not successful, the Company
will continue to be dependent on a relatively limited number of customers, the
loss of, or the reduction in orders by, any one of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Uncertainties Associated with Supply Agreement with Seagate. In June
1995, the Company entered into a Supply Agreement with Seagate (the "Seagate
Supply Agreement,") pursuant to which the Company has established the Dedicated
Facility in Singapore to manufacture disks for Seagate. The Company has expended
significant financial and management resources to construct and begin operations
at such facility. While Seagate will be required to purchase the disks
manufactured at the Dedicated Facility through March 31, 1999, each of the
products manufactured at the Dedicated Facility must be qualified by Seagate
before products can be delivered to Seagate. To date, the Company has qualified
two lines in the Dedicated Facility. Additionally, there is no requirement that
Seagate's purchases from the Dedicated Facility must be in addition to the level
of purchases presently being made by Seagate from the Company's other facilities
and the favorable pricing provisions of the Seagate Supply Agreement would
incentivize Seagate to shift its purchases to the Dedicated Facility. Seagate is
presently the Company's largest customer. To the extent that Seagate shifts the
manufacture of its current level of purchase orders to the Dedicated Facility
from the Company's other facilities, particularly as it increases its own
internal disk manufacturing capacity, the Seagate Supply Agreement and Dedicated
Facility may not result in increased sales to Seagate and could, absent
additional orders from other customers, result in significant excess capacity
for the Company with resulting adverse impacts on the Company's results of
operations. See "--Variability in Gross Margins and Operating Results."
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Variability in Gross Margins and Operating Results. The Company's
gross margins have fluctuated and will continue to fluctuate quarterly and
annually based upon a variety of factors such as the level of utilization of the
Company's production capacity, changes in product mix, average selling prices,
demand or manufacturing yields, increases in production and engineering costs
associated with initial production of new programs, changes in the cost of or
limitations on availability of materials and labor shortages. During 1995 and
the first half of 1996, the Company reported a gross margin of 27% and 28%,
respectively. The Company expects its gross margins to decline during the third
quarter of 1996 due to the expected reduction in sales to Maxtor and the
resulting under utilization of production capacity. Additionally, the purchase
price of disks under the Seagate Supply Agreement is calculated based upon a
pricing formula which results in gross margins that are generally lower than the
gross margins experienced by the Company in the first half of 1996. Accordingly,
to the extent the Dedicated Facility becomes fully operational in the third
quarter of 1996, the Company's overall gross margins are likely to decline. This
adverse impact will be exacerbated to the extent that Seagate shifts its
purchase orders to the Dedicated Facility from the Company's other facilities
rather than increases its level of purchases from the Company.
Generally, new products have higher average selling prices than more
mature products. Therefore, the Company's ability to introduce new products in a
timely fashion is an important factor in its ability to maintain gross and
operating margins. Moreover, manufacturing yields and production capacity
utilization impact the Company's gross margins. New products often initially
have lower manufacturing yields and generally are initially produced in lower
quantities than more mature products. Manufacturing yields generally improve as
the product matures and production volumes increase. The Company expects that a
substantial portion of its shipments in the third quarter of 1996 will be of new
products. Manufacturing yields also vary depending on the complexity and
uniqueness of product specifications. Because the thin film disk industry is
capital intensive and requires a high level of fixed costs, gross margins are
also extremely sensitive to changes in volume. Assuming fixed product prices,
small variations in manufacturing yields and productivity generally have a
significant impact on gross margins. Additionally, decreasing demand for the
Company's products generally results in reduced average selling prices and low
capacity utilization which, in turn, adversely affects gross margins and
operating results. The Company's business is also characterized by short term
orders and shipment schedules which typically can be modified or rescheduled
without significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, the Company typically plans its production and inventory
based on forecasts of customer demands, which often fluctuate substantially.
These factors have caused and will continue to cause fluctuations in the
Company's gross margins and results of operations. See "--Uncertainties
Associated with Supply Agreement with Maxtor; Dependence on a Limited Number of
Customers.''
Dependence on Intensely Competitive Hard Disk Drive Industry; Risk of
Excess Industry Capacity. The demand for the Company's thin film disks depends
solely upon the demand for hard disk drives. This market is characterized by
short product life cycles and rapid technological change and has experienced
large fluctuations in product demand. The disk drive industry also has been
characterized by periods of oversupply, reductions in customer forecasts, price
erosion, and reduced production levels. The effect of these cycles on suppliers,
including thin film disk manufacturers, has been magnified by hard disk drive
manufacturers' practice of ordering components in excess of their needs during
periods of rapid growth, which increases the severity of the drop in the demand
for components during periods of contraction. A decline in demand for hard disk
drives would have a material adverse effect on the Company's business, operating
results and financial condition.
The effect of these cycles may be magnified by increased disk
production capacity. The Company's principal customers and many of its
competitors and potential customers are currently engaged in substantial efforts
to increase disk manufacturing capacity in light of the apparent imbalance
between current levels of demand for disks and existing industry capacity. These
efforts should result in significant additional capacity in the industry over
the next six to 18 months. To the extent these efforts result in industry
capacity in excess of levels of demand, the Company
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could experience increased levels of competition which could materially
adversely impact the Company's business, results of operations, and financial
condition. In addition, in the event of an oversupply of disks, customers who
have developed an internal supply of disks are likely to utilize their internal
capacity prior to purchasing disks from independent suppliers such as the
Company.
Rapid Technological Change. The thin film disk industry is
characterized by rapid technological change, short product life cycles, and
price erosion. Product lives are typically six to twelve months in duration.
Although the Company is continually developing new products and production
techniques, there can be no assurance that the Company will be able to
anticipate technological advances and develop products incorporating such
advances in a timely manner or to compete effectively against competitors' new
products. In addition, there can be no assurance that the Company's new products
can be produced in full volume at reasonable yields or that the Company will
develop new products or processes which ultimately are adopted by the industry.
The Company's operating results and financial condition could be materially
adversely affected if these efforts are not successful or if the technologies
that the Company has chosen not to develop prove to be competitive alternatives.
See "--Variability in Gross Margins and Operating Research."
Rapid Changes in Customer and Product Mix. Due to the rapid and
frequent development of new disk drive products, it is common in the industry
for the relative mix of customers and products to change rapidly, even from
quarter to quarter. For example, in the first quarter of 1995 sales to Seagate
and Maxtor represented approximately 41% and 55% of net sales, respectively,
while in the second quarter of 1995 sales to Seagate and Maxtor represented
approximately 68% and 31% of net sales, respectively. In addition, in the fourth
quarter of 1995 and the first and second quarter of 1996, 3%, 15% and 8%,
respectively, of the Company's unit sales were of 2 1/2 inch disks. At any one
time the Company typically supplies disks in volume for only five to ten disk
drive products, with the mix of such products shifting continually. While the
Company has entered into supply agreements with its two largest customers,
Maxtor has notified the Company that it does not intend to purchase the
quantities of disks required by the Maxtor Supply Agreement during the third
quarter of 1996 and there can be no assurance that Seagate will purchase the
quantities required by the Seagate Supply agreement, or that Seagate will place
orders in excess of the minimums required in such supply agreements. The Company
expects Maxtor's failure to purchase committed volumes to negatively impact its
results of operations at least in the third quarter of 1996. Alternatively, in
the event the Company cannot fulfill the requirements of the Seagate Supply
Agreement or the Maxtor Supply Agreement, Seagate and Maxtor, respectively, can
elect to terminate such agreements. Termination of either the Seagate Supply
Agreement or the Maxtor Supply Agreement or an additional significant reduction
in the level of orders by either Seagate or Maxtor could materially adversely
affect the Company's business, operating results and financial condition.
Disk drive manufacturers demand a variety of thin film disks with
differing design, performance and cost characteristics. Thin film disk
suppliers, such as the Company, are required to work closely with such
manufacturers in order to develop products that will be used in the
manufacturers' designs. Thin film disk suppliers seek to have their products
"designed in" to a particular disk drive and to be qualified as a primary
supplier for new programs. The design-in process is ongoing and frequent and the
Company must compete for participation in each product program including those
of existing customers. In the event the Company's products do not become
designed into a particular disk drive program on a timely basis, the Company
could be excluded as a supplier of disks for such program entirely or could
become a secondary source of supply for such program, which typically results in
lower sales and lower gross margins. Consistent inability to become designed
into a disk drive program would have a material adverse effect on the Company's
results of operations.
Intense Competition. The disk drive industry and thin film disk
industry are both characterized by intense competition. The Company's primary
competitors are Komag Incorporated, HMT Technology Corporation, Akashic Memories
Corporation, Showa Denko K.K., Mitsubishi Kasei Corporation and Fuji Electric
Company Ltd. among independent disk manufacturers. With respect to disks based
on glass/ceramic substrates, the Company's principal
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competitor is Hoya Corp. Most of these companies have significantly greater
financial, technical and marketing resources than the Company. IBM and several
disk drive manufacturers, including Seagate and Western Digital, currently
produce thin film disks internally for their own use. Seagate's expressed
corporate strategy is to be a vertically integrated disk drive manufacturer and
to pursue sales to third parties of its disk drive components. Hyundai recently
announced its intention to develop and manufacture disks for use in Maxtor disk
drives. supplementing Maxtor's current supplier base. These companies could
increase their internal production to supply their requirements and cease
purchasing from independent disk suppliers. Moreover, these companies could make
their products available for distribution in the market as direct competitors of
the Company. Additionally, other disk drive manufacturers, such as Quantum, may
decide to produce disks for internal use. Any of these changes would reduce the
already small number of current and potential customers and increase competition
for the remaining market. Such competition could materially adversely affect the
Company's business and results of operations. In addition, because of the
limited number of potential customers in the disk drive industry, the loss of
one or more of its customers through consolidations, adverse financial
circumstances or otherwise could have a material adverse effect on the Company's
business, results of operations and financial condition. See "--Uncertainties
Associated with Supply Agreement with Maxtor; Dependence on a Limited Number of
Customers" and "Consolidation Within the Disk Drive Industry."
Dependence on Suppliers. The Company relies on a limited number of
suppliers and, in some cases, a sole supplier, for certain materials used in its
manufacturing processes, including glass/ceramic substrates, texturizers,
plating chemicals, tapes, slurries, certifier heads, sputter targets and certain
other materials. In addition, the Company relies on a single source to build and
supply some portions of its customized sputtering equipment. In the past, the
Company has had to provide financial assistance to equipment vendors in order to
maintain sources for such equipment. Shortages may occur in the future or
supplies could be available only with lead times of approximately three to six
months. Changing suppliers for certain materials such as the lube or buffing
tape used in the Company's products would require that the product be
requalified with each customer. Requalification could prevent early design-in
wins or could prevent or delay continued participation in disk drive programs
into which the Company's products have been qualified. In addition, long lead
times of three to six months are required to obtain many materials. Regardless
of whether these materials are available from established or new sources of
supply, these lead times could impede the Company's ability to respond quickly
to changes in demand. Any limitations on the supply of components, materials or
equipment could disrupt or limit the Company's production volume and could have
a material adverse effect on the Company's business, results of operations and
financial condition. Further, a significant increase in the price of one or more
of these components could adversely affect the Company's results of operations.
Risks Associated With New Substrate Facility. The Company has begun
establishing a substrate manufacturing operation in Singapore. This facility
requires the expenditure of significant financial and management resources. In
addition to the usual risks of establishing a new manufacturing facility, such
as the completion of the buildings, installation of equipment, implementation of
systems, procedures and controls and the hiring and training of qualified
personnel, there are unique risks associated with this facility. First, the
Company is vertically expanding its business to include the process of grinding
aluminum blanks which occurs prior to the nickel plating process. While the
Company believes it has the expertise to establish this process, this will be
the Company's first substrate facility and there can be no assurance that it
will be completed in a timely, cost-effective manner or that it will produce
high quality and low cost aluminum substrates. Second, the facility is being
established in Singapore and will be the first facility of this type in
Singapore. Manufacturing and other problems which occur in connection with the
commencement and expansion of operations at this facility could materially
adversely affect the Company's results of operations and financial condition.
Future Capital Needs. The Company believes that in order to achieve its
expansion objectives, it will need significant additional financial resources
over the next several years for capital expenditures, working capital and
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research and development. The Company expects to spend approximately $85 million
on capital expenditures during 1996 for expansion of its facilities including
investments in the Dedicated Facility, the Substrate Facility and other capital
expenditures. The Company believes it will be able to fund these expenditures
from a combination of debt financing, existing cash balances and cash from
operations. If the Company decides to expand its facilities further or sooner
than presently contemplated or requires capital for other purposes, it will
require additional debt or equity financing. There can be no assurance that such
additional funds will be available to the Company or, if available, will be
available on favorable terms. If the Company is unable to obtain sufficient
capital, it could be required to curtail its capital equipment, working capital
and research and development expenditures which could adversely affect the
Company's future years' operations and competitive position. Conversely,
overexpansion due to the failure to accurately predict future demand for its
products could have a material adverse effect on the Company's future operating
results and could cause fluctuations in the Company's results of operations.
Dependence on Personnel. The Company's future operating results depend
in significant part upon the continued contributions of its officers and
personnel, many of whom would be difficult to replace. At present the Company
does not have employment agreements with any employee. The Company maintains a
$4.0 million key person life insurance policy (with $3.0 million of proceeds
payable to the Company) on the life of its Chairman of the Board and Chief
Executive Officer, William J. Almon, but not on the lives of other key persons.
The loss of any of its officers or other key personnel could have a material
adverse effect on the business, financial condition and results of operations of
the Company. In addition, the production of thin film disks requires employees
skilled in highly technical and precise production processes with expertise
specific to thin film disk production. The Company's future operating results
depend in part upon its ability to attract, train, retain and motivate other
qualified management, technical, manufacturing, sales and support personnel for
its operations both in California and in Singapore. Competition for such
personnel is intense, especially since many of the Company's competitors are
located near the Company's facilities in Santa Clara, California. There can be
no assurance that the Company will be successful in attracting or retaining such
personnel. Hiring qualified personnel in Singapore is made more difficult
because Singapore has substantially full employment at the present time and
because the Company was the first manufacturer of thin film disks and will be
the first manufacturer of substrates with operations in Singapore. The loss of
the services of existing personnel as well as the failure to recruit, train and
retain additional personnel in a timely manner could have a material adverse
effect on the Company's business, results of operations and financial condition.
Intellectual Property and Proprietary Rights. The Company regards
elements of its manufacturing process, product design and equipment as
proprietary and seeks to protect its proprietary rights through a combination of
employee and third party non-disclosure agreements, internal procedures and,
increasingly, patent protection. The Company has had four U.S. patents issued to
it has an additional application allowed and has twelve additional patent
applications (five of which are provisional applications) pending in the United
States. The Company intends to file additional U.S. applications as appropriate
for patents covering its products and manufacturing processes. There can be no
assurance that patents will be issued with respect to any of the Company's
allowed patent applications, that patents will be issued or be allowed with
respect to any of the Company's other pending applications, or that claims
allowed on any existing or future patents will be sufficiently broad to protect
the Company's technology. There can also be no assurance that any patents now or
hereafter held by the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. In addition, the laws of certain foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States. Although the Company continues to implement
protective measures and intends to defend its proprietary rights, there can be
no assurance that these measures will be successful. The Company believes,
however, that, because of the rapid pace of technological change in the disk and
disk drive industries, the legal
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protections for its products are less significant factors in the Company's
success than the innovative skills, experience and technical competence of its
employees.
The Company has from time to time been notified of, or has otherwise
been made aware of, claims that it may be infringing upon patents or other
proprietary intellectual property owned by others. If it appears necessary or
desirable, the Company may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses, no
assurance can be given that licenses under such patents or proprietary
intellectual property will be offered or that the terms of any offered licenses
will be acceptable to the Company. The Company has been contacted by IBM
concerning the Company's interest in licensing a patent. Based upon an opinion
of its patent counsel, the Company believes that no license is required because
the Company does not believe that it is practicing any invention covered by the
IBM patent. There can be no assurance, however, that IBM will not pursue its
claim. The Company is also aware of a settlement agreement between Virgle L.
Hedgcoth and Mitsubishi Kasei Corporation regarding certain disk preparation
techniques allegedly patented by Mr. Hedgcoth (the "Hedgcoth Patents"). These
disk preparation techniques are used by most disk manufacturers, including the
Company. The Company believes that the Hedgcoth Patents are not valid because of
prior commercial activities by other companies utilizing the technology covered.
However, should Mr. Hedgcoth prevail in such litigation and elect to pursue the
Company, the Company would be forced to either litigate any infringement claims,
execute a license, if available, or design around the patents, which the Company
believes is possible. The failure to obtain a key patent license or a license to
key proprietary intellectual property from a third party could cause the Company
to incur substantial liabilities and possibly to suspend the manufacture of the
products utilizing the patented or proprietary invention either of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Environmental Issues. The Company's operations and manufacturing
processes are subject to certain federal, state, local and foreign environmental
protection laws and regulations. These laws and regulations relate to the
Company's use, handing, storage, discharge and disposal of certain hazardous
materials and wastes, the pre-treatment and discharge of process waste waters,
and the control of process air pollutants. The Company has from time to time
been notified of minor violations concerning its waste water discharge permits,
air quality regulations and hazardous material regulations. The Company has
implemented corrective action plans to remedy these violations and has put in
place procedures to effectuate continued compliance with these laws and
regulations. The Company has also initiated safety programs and training of
personnel on safe storage and handling of hazardous materials and wastes. The
Company believes that it is in compliance in all material respects with
applicable environmental regulations and does not anticipate any material
capital expenditures for environmental related matters. Environmental laws and
regulations, however, may become more stringent over time and there can be no
assurances that the Company's failure to comply with either present or future
regulations would not subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion at its present
locations or the acquisition of costly equipment.
The Company's Santa Clara, California facility is located near major
earthquake faults. Disruption of operations at any of the Company's production
facilities for any reason, including work stoppages or natural disasters such as
fire, floods or earthquakes, would cause delays in or an interruption of
production and shipment of products and would negatively affect the Company's
business, results of operations and financial condition.
Risks of International Sales and Manufacturing. In 1995 and in the
first half of 1996, international sales (sales delivered to customers in the Far
East, including foreign subsidiaries of domestic companies) accounted for over
95% of the Company's net sales, and the Company anticipates that international
sales will continue to represent the substantial majority of its net sales.
Accordingly, the Company's operating results are subject to the risks inherent
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in international sales, including compliance with or changes in the law and
regulatory requirements of foreign jurisdictions, fluctuations in exchange
rates, tariffs or other barriers, exposure to taxes in multiple jurisdictions
and transportation delays and interruptions. Although presently all of the
Company's sales are made in U.S. dollars, including sales from its Singapore
facility, a portion of the Company's expenses must be paid in Singapore dollars.
Future international sales may be denominated in foreign currencies. Gains and
losses on the conversion to U.S. dollars of accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
the Company's results of operations. Additionally, the Company's international
business may be materially adversely affected by fluctuations in currency
exchange rates, increases in duty rates, exchange or price controls or other
restrictions on foreign currencies and difficulties in obtaining export
licenses. Moreover, the Company's efforts to expand its manufacturing operations
are concentrated in Singapore. This expansion requires the Company to implement
and monitor new systems, procedures and controls and to attract, train, motivate
and manage qualified employees effectively. These risks are exacerbated by the
distance of the Singapore facilities from the Company's California headquarters,
the fact that the Company was the first thin film disk manufacturer and will be
the first substrate manufacturer with a facility in Singapore and the fact that
Singapore has substantially full employment. These risks will increase as
production increases at the Singapore facilities. Due to the anticipated
expansion of the Company's manufacturing operations in Singapore, the impact of
the foregoing factors on the Company's business, results of operations and
financial condition could be material and adverse.
Volatility of Stock Price. The trading price of the Company's Class A
Common Stock has been volatile since the Company's initial public offering in
May 1995 and has been and is likely to continue to be subject to wide
fluctuations in response to a variety of factors, including quarterly variations
in operating results, volume purchase agreements, announcements of new
facilities, new customers, consolidations in the industry, technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights, general conditions in the
computer industry, revised earnings estimates, comments or recommendations
issued by analysts who follow the Company, its competitors or the disk drive
industry and general economic and market conditions. In addition, it is possible
that in some future period the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Class A Common Stock could be materially adversely affected.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market prices
of many technology companies for reasons unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations could
have a significant impact on the market price of the Class A Common Stock.
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