<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
STORMEDIA INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3695 77-0373062
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
390 REED STREET
SANTA CLARA, CALIFORNIA 95050
(408) 327-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM J. ALMON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
STORMEDIA INCORPORATED
390 REED STREET
SANTA CLARA, CALIFORNIA 95050
(408) 327-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
JUDITH MAYER O'BRIEN, ESQ. WILLIAM L. HUDSON, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION SPEAR STREET TOWER
650 PAGE MILL ROAD ONE MARKET PLAZA
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CALIFORNIA 94105
(415) 493-9300 (415) 442-0900
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------------
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE FEE
- --------------------------------------------------------------------------------------------------
Class A Common Stock, $0.013 par
value........................... 5,175,000 $28.33 $146,607,750 $50,555
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Gives effect to the three-for-two split of the Registrant's Common Stock in
the form of a stock dividend the record date for which was May 13, 1996 and
the payment date for which is May 28, 1996. Includes 675,000 shares that the
Underwriters have the option to purchase to cover over-allotments, if any.
(2) The proposed maximum offering price per share is estimated pursuant to Rule
457(c) solely for the purpose of computing the amount of the registration
fee and is based on the average of the high and low prices for a share of
the Company's Class A Common Stock as reported on the Nasdaq National Market
on May 17, 1996 after giving effect to the three-for-two split in the form
of a stock dividend of the Registrant's Common Stock the record date for
which was May 13, 1996 and the payment date for which is May 28, 1996.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and the other to be used in connection with a concurrent
international offering (the "International Prospectus"). The two prospectuses
are identical except for the outside front cover page. The form of U.S.
Prospectus outside front cover page is included behind this explanatory note and
is followed by the differing outside front cover page to be used in the
International Prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to completion)
Issued May 22, 1996
4,500,000 Shares
LOGO
CLASS A COMMON STOCK
OF THE 4,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 3,600,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 900,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 3,600,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED BY THE U.S. UNDERWRITERS, 2,400,000 SHARES ARE BEING SOLD BY
THE COMPANY AND 1,200,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON STOCK OF
THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET, UNDER THE
SYMBOL "STMD." ON MAY 21, 1996, THE LAST SALE PRICE OF THE
CLASS A COMMON STOCK, AS REPORTED ON THE NASDAQ NATIONAL
MARKET WAS $41.50 PER SHARE OR $27.67 AS ADJUSTED FOR THE
COMPANY'S THREE-FOR-TWO STOCK SPLIT WHICH WILL BE
EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 28, 1996.
SEE "PRICE RANGE OF COMMON STOCK."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $300,000.
(3) Certain Selling Stockholders have granted the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
675,000 additional shares of Class A Common Stock, at the price to
public less the underwriting discounts and commissions for the purpose
of covering over-allotments, if any. If the U.S. Underwriters exercise
such option in full, the total price to public, underwriting discounts
and commissions and proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the
offices of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 1996
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to completion)
Issued May 22, 1996
4,500,000 Shares
LOGO
CLASS A COMMON STOCK
OF THE 4,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 900,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 3,600,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." OF THE 900,000 SHARES OF CLASS A COMMON STOCK BEING
OFFERED BY THE INTERNATIONAL UNDERWRITERS, 600,000 SHARES ARE BEING
SOLD BY THE COMPANY AND 300,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON STOCK OF
THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET, UNDER THE
SYMBOL "STMD." ON MAY 21, 1996, THE LAST SALE PRICE OF THE
CLASS A COMMON STOCK, AS REPORTED ON THE NASDAQ NATIONAL
MARKET WAS $41.50 PER SHARE OR $27.67 AS ADJUSTED FOR THE
COMPANY'S THREE-FOR-TWO STOCK SPLIT WHICH WILL BE
EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 28, 1996.
SEE "PRICE RANGE OF COMMON STOCK."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $300,000.
(3) Certain Selling Stockholders have granted the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
675,000 additional shares of Class A Common Stock, at the price to
public less the underwriting discounts and commissions for the purpose
of covering over-allotments, if any. If the U.S. Underwriters exercise
such option in full, the total price to public, underwriting discounts
and commissions and proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the
offices of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
International
MONTGOMERY SECURITIES
SMITH BARNEY INC.
, 1996
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference.......... 2
Prospectus Summary....................................... 3
Risk Factors............................................. 4
The Company.............................................. 12
Recent Developments...................................... 13
Use of Proceeds.......................................... 14
Dividend Policy.......................................... 14
Price Range of Common Stock.............................. 14
Capitalization........................................... 15
Selected Consolidated Financial Data..................... 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 17
<CAPTION>
PAGE
----
<S> <C>
Business................................................. 25
Management............................................... 35
Principal and Selling Stockholders....................... 37
Description of Capital Stock............................. 39
Shares Eligible for Future Sale.......................... 42
Underwriters............................................. 43
Legal Matters............................................ 45
Experts.................................................. 46
Available Information.................................... 46
Index to Consolidated Financial Statements............... F-1
</TABLE>
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-25796)
pursuant to the Exchange Act are incorporated herein by reference: (1) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, filed pursuant to Section 13 of the Exchange Act; (2) the Company's
Definitive Proxy Statement dated March 29, 1996 in connection with the Annual
Meeting of Stockholders held April 29, 1996, filed pursuant to Section 14 of the
Exchange Act; (3) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1996 filed pursuant to Section 13 of the Exchange Act; (4) the
description of the Company's Common Stock contained in its Registration
Statement on Form 8-A filed with the Commission on March 30, 1995; and (5) all
reports and other documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering.
Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in a Prospectus Supplement or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents which are
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such documents).
Requests for such documents should be directed to StorMedia Incorporated, 390
Reed Street, Santa Clara, California 95050-3118, or by calling (408) 327-8000.
------------------------
The StorMedia logo is a trademark of the Company. This Prospectus also
contains trade names and trademarks of companies other than the Company.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS."
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
StorMedia Incorporated (the "Company") is a leading independent supplier of
thin film disks for hard disk drives used in portable and desktop computers. The
Company designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2
inch sizes. Within each size, the Company provides a range of coercivities, fly
heights and disk thicknesses to meet specific customer requirements. The
Company's strategy is to combine leading disk technology with high volume
manufacturing expertise to serve the growing and technologically demanding hard
disk drive market. The Company collaborates with customers during the design
phase of new disk drives, enhancing its ability to bring new products to market
on a timely basis and increasing the likelihood that its disks will be designed
into customers' new disk drive products. The Company sells its disks primarily
to Seagate Technology, Inc. ("Seagate") and Maxtor Corporation ("Maxtor"), two
of the leading independent hard disk drive manufacturers. The Company was the
first and is the largest independent manufacturer of thin film disks in
Singapore where, according to the Singapore Economic Development Board, over 45%
of hard disks produced worldwide were manufactured in 1995.
RECENT DEVELOPMENTS. In the first quarter of 1996, the Company's net sales
were $61.2 million, gross profit was $17.1 million and earnings per share were
$0.52 as compared to net sales of $27.9 million, gross profit of $6.1 million
and earnings per share of $0.18 in the first quarter of 1995. This represented
an increase of 119% in net sales in the first quarter of 1996 as compared to the
same period in 1995. During the first quarter of 1996, the Company began
shipping disks from the first sputter line in its Singapore facility dedicated
to Seagate (the "Dedicated Facility"). On May 16, 1996, the Company announced it
had begun to establish a facility in Singapore (the "Substrate Facility") to
produce substrates for its media operations. The Substrate Facility is scheduled
to begin production in the third quarter of 1996 and to be fully operational by
year end.
THE OFFERING
<TABLE>
<S> <C>
U.S. Offering.......................................... 3,600,000 Shares
International Offering................................. 900,000 Shares
Total.............................................. 4,500,000 Shares (including 3,000,000 Shares by the Company and 1,500,000
Shares by the Selling Stockholders)(1)
Common Stock to be outstanding after the offering...... 20,226,889 Shares(1)
Use of proceeds........................................ Capital expenditures, primarily to establish the Substrate Facility in
Singapore and to further expand manufacturing capacity, working capital
and other general corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol.......................... STMD
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR PROFORMA ------------------------------------------
----------------------------------- PREDECESSOR/ THREE MONTHS
COMPANY ENDED
YEAR ENDED DECEMBER 31, COMBINED ---------------------------
----------------------------------- YEAR ENDED YEAR ENDED MARCH 31, MARCH 29,
1991 1992 1993(2) 12/31/94(3) 12/31/95 1995 1996
----------- ------- -------- ----------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.................... $ 22,476 $56,706 $ 77,145 $81,766 $161,455 $ 27,880 $ 61,156
Gross profit (loss).......... (13,460) 1,749 12,793 16,257 43,628 6,062 17,109
Operating earnings (loss).... (22,972) (9,022) (24,657) 7,364 28,924 3,362 11,351
Net earning (loss)........... (22,962) (9,022) (24,657) 3,895 21,158 2,036 9,469
Earnings per share........... $ 0.35 $ 1.38 $ 0.18 $ 0.52
Shares used in per share
computation................ 11,175 15,338 11,175 18,309
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 29, 1996
---------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................................................... $ 51,795 $132,245
Total assets...................................................................................... 198,679 279,129
Long-term debt, less current portion.............................................................. 32 32
Total equity...................................................................................... 143,778 224,228
</TABLE>
- ---------------
(1) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriters." Based on shares outstanding as of March 29, 1996. Excludes
2,179,482 shares issuable upon exercise of options outstanding as of that
date. Includes 12,761,265 shares of Class A Common Stock and 4,362,001 shares
of Class B Common Stock. See "Description of Capital Stock -- Class B Common
Stock."
(2) Results include a restructuring charge of $24.9 million principally
reflecting Nashua Corporation's ("Nashua") decision to sell its thin film
disk division. See "The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 4 of Notes to
Consolidated Financial Statements.
(3) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the period
from May 20, 1994 through December 31, 1994, as if the acquisition of the
thin film disk division (the "Acquisition") of Nashua had been consummated on
January 1, 1994. See "The Company" and Note 12 of Notes to Consolidated
Financial Statements.
(4) Adjusted to give effect to the sale of 3,000,000 shares of Class A Common
Stock offered by the Company hereby at an assumed public offering price of
$28.33 per share net of estimated underwriting discounts and commissions and
offering expenses. See "Use of Proceeds."
Unless otherwise indicated, all information contained in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised and gives
effect to the three-for-two split of the Common Stock in the form of a stock
dividend which will be paid on May 28, 1996 to stockholders of record as of May
13, 1996. See "Description of Capital Stock" and Note 14 of Notes to
Consolidated Financial Statements. "Common Stock" as used herein refers
collectively and without distinction to the Company's Class A Common Stock and
Class B Common Stock. The Company operates on a 13 week fiscal quarter basis and
a December 31, fiscal year end.
3
<PAGE> 7
RISK FACTORS
This Prospectus contains 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 elsewhere in this Prospectus. In evaluating the Company and its
business, prospective investors should carefully consider the following factors
in addition to the other information presented in this Prospectus before
purchasing shares of Class A Common Stock offered hereby.
Dependence on a Limited Number of Customers; Consolidation Within the Disk
Drive Industry. During 1995 and the three months ended March 29, 1996, the
Company sold its disks primarily to Seagate and Maxtor. Aggregate shipments to
Seagate and Maxtor in 1993, 1994, 1995 and the first three months of 1996
represented 52%, 91%, 99% and 99%, respectively, of net sales. Given the
relatively small number of high performance disk drive manufacturers, this
dependence on a few customers will continue in the future and the loss of one or
more of the Company's customers or potential 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.
Additionally, several of the Company's existing and potential customers are
expanding their ability to produce thin film disks internally and, as a result,
could reduce the level of purchases or cease purchasing from the Company or
could sell thin film disks in competition with the Company.
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.
The Company's other principal customer, Maxtor, was recently acquired by
Hyundai Electronics Industries Co. Ltd. ("Hyundai"). While in November 1995 the
Company entered into a multi-year Supply Agreement with Maxtor (the "Maxtor
Supply Agreement") pursuant to which the Company agreed to increase its supply
of disks to Maxtor significantly from current levels, and Hyundai has assumed
the Maxtor Supply Agreement, there can be no assurance that the Company will
continue to qualify new products in sufficient quantity to meet the unit volumes
agreed to in the agreement.
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. 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, particularly with respect to net sales and
gross margins, and financial condition.
4
<PAGE> 8
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 agreed to establish the Dedicated
Facility in Singapore by mid-1996 to manufacture disks for Seagate. The Company
has expended significant financial and management resources to construct and
begin operations at such facility. If the Company does not successfully complete
the facility by mid-1996, Seagate can elect to terminate the Supply Agreement
without any financial obligation to the Company. While construction of the
Dedicated Facility to date has been on schedule, there can be no assurance that
the Company will be able to complete the Dedicated Facility on a timely basis.
Even if the Company completes the Dedicated Facility on a timely basis,
while Seagate will be required to purchase the disks manufactured at the
Dedicated Facility through March 31, 1999, each new line in the Dedicated
Facility as well as the products manufactured on that line must be qualified by
Seagate before products can be delivered to Seagate. To date, the Company has
qualified one line 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. 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,
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 gross profit and results of operations.
Dependence on New Manufacturing Facilities for Future Growth. Because the
Company has been operating at close to full capacity, growth in the Company's
net sales in the near term depends on the successful expansion by the Company of
its manufacturing capacity. Although the Company has improved its productivity
in Santa Clara, California, there can be no assurance that it will be able to
continue to do so. The Company's expansion efforts have been, and in the
near-term will continue to be, focused on expanding its Singapore production
facilities. In this regard, growth in the near term will depend on successful
completion of the Dedicated Facility. While disks produced on the first sputter
line in the Dedicated Facility were shipped to Seagate in the first quarter of
1996, the facility is not yet fully operational and there can be no assurance
that it will become fully operational.
Rapid Technological Change. The thin film disk industry has been
characterized by rapid technological developments, 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 "Business -- StorMedia Solution and Strategy" and "-- Research and
Development."
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 quarter of 1996, the Company reported a gross margin of 27% and 28%,
respectively. Management does not believe that these gross margins are
sustainable. 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 Company's current gross margins. Accordingly, as the
Dedicated Facility becomes fully operational in the third quarter of 1996, the
Company's overall gross margins are likely to decline. 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.
5
<PAGE> 9
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. 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
substantially 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 operating results. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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,
pricing pressure, 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 believes that its competitors and certain of its
customers, including Seagate, 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
one or two years. To the extent these efforts result in industry capacity in
excess of levels of demand, the Company 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. See "Business -- Backlog."
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,
3% of the Company's unit sales were of 2 1/2 inch disks, whereas in the first
quarter of 1996, 15% 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,
there can be no assurance that Seagate and Maxtor will place orders beyond the
minimums required in such supply agreements. 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 a significant reduction in the level of orders, could
materially adversely affect the Company's business, operating results and
financial condition. See "Manage-
6
<PAGE> 10
ment's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations," "Business -- Customers and Marketing" and
"-- Competition."
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 operating results. See "Business -- StorMedia
Solution and Strategy."
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 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. 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, the Company runs the risk that other disk drive manufacturers,
such as Maxtor and 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 "-- Dependence on a Limited Number of Customers;
Consolidation Within the Disk Drive Industry" and "Business -- Competition."
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 this equipment vendor in
order to maintain a source for such equipment. Other components and materials,
including certifiers and glass/ceramic substrates, are purchased from a single
source. 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 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
quickly respond 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, operating results 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. See "Business -- Manufacturing."
7
<PAGE> 11
Shortage of Substrate Plating and Polishing Services. The Company's ability
to increase its volume in the future depends on the availability of plated and
polished substrates. The Company believes a shortage of plated and polished
substrates could occur in 1996. To address the shortage, the Company intends to
use a portion of the proceeds of this offering to establish a manufacturing
facility in Singapore to produce plated and polished substrates. In addition,
the Company has entered into a strategic relationship with one of its suppliers
of plated and polished substrates and is assisting this supplier to increase its
capacity to supply plated and polished substrates to the Company. The Company
has an option to acquire this supplier. If the Company is unable to increase its
supply of plated and polished substrates for any reason or if plated and
polished substrates are not available on favorable terms, the Company may not be
able to produce disks at its manufacturing facilities. In addition, such a
shortage could prevent the Company from accepting new orders or meeting delivery
obligations under existing contracts, including its supply agreements with
Seagate and Maxtor, which could materially and adversely affect the Company's
business, results of operations and financial condition. See
"Business -- Manufacturing."
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 facilitation 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 into 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 assurances that it
will be done in a timely 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
quarterly and annual operating results and its financial condition. See
"Business -- Manufacturing."
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
research and development. The Company expects to spend approximately $100
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 the proceeds of this offering, 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 would 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 operations and competitive position.
Conversely, failure to accurately predict future demand could have a material
adverse effect on the Company's future operating results and could cause
fluctuations in the Company's quarterly and annual operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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
8
<PAGE> 12
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 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 operation and financial condition. See "Business -- Employees."
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, 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 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 pending litigation 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. See "Business -- Intellectual Property and Proprietary
Rights."
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, handling, 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
9
<PAGE> 13
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. See
"Business -- Environmental Matters" and "-- Legal Proceedings."
Risks of International Sales and Manufacturing. In 1995 and in the first
quarter 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
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. In addition, the Company's efforts to expand its manufacturing
operations are concentrated in Singapore. This expansion requires the
implementation and monitoring of new systems, procedures and controls. In
addition, the Company's expansion in Singapore will require it 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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Manufacturing."
Control by Existing Stockholders and Anti-takeover Effects. Upon the
closing of the offering and based on shares outstanding at March 29, 1996,
directors, officers and holders of 5% or more of the outstanding shares of
Common Stock of the Company will own 27.3% of the outstanding shares of Common
Stock. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, Bylaws and Delaware law, including the provisions of Section 203
of the Delaware General Corporation Law, which restrict the ability of a major
stockholder to acquire the Company, may also discourage certain transactions
involving a change in control of the Company. In addition to the forgoing, the
ability of the board of directors to issue "blank check" preferred stock without
further stockholder approval could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
Volatility of Stock Price. The trading price of the Company's Class A
Common Stock has increased substantially since the Company's initial public
offering in May 1995 and has been and is likely to continue to
10
<PAGE> 14
be subject to wide fluctuations in response to a variety of factors, including
quarterly variations in operating results, announcements of new facilities, new
customers, volume purchase agreements, 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.
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. See
"Price Range of Common Stock."
Benefits of the Offering to Selling Stockholders. Existing stockholders
will be selling 1,500,000 shares of the Common Stock offered hereby. The price
per share paid by the Selling Stockholders for their shares is a fraction of the
proposed public offering price for the Common Stock offered hereby.
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Class A Common Stock in the public market after this offering could
adversely affect the market price of the Company's Class A Common Stock and the
Company's ability to raise additional capital at a price favorable to the
Company. See "Underwriters," "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
11
<PAGE> 15
THE COMPANY
StorMedia Incorporated is a leading independent supplier of thin film disks
for hard disk drives used in portable and desktop computers. The Company
designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2 inch
sizes. Within each size, the Company provides a range of coercivities, fly
heights and disk thicknesses to meet specific customer requirements. The Company
manufactures disks based on both aluminum and glass/ceramic substrates. The
Company's strategy is to combine leading disk technology with high volume
manufacturing expertise to serve the growing and technologically demanding hard
disk drive market. StorMedia seeks to address the competitive pressures of the
disk drive industry by providing advanced products at competitive prices,
developing new technologies and improving manufacturing efficiency. The Company
collaborates with customers during the design phase of new disk drives,
enhancing its ability to bring new products to market on a timely basis and
increasing the likelihood that its disks will be designed into customers' new
disk drive products. The Company sells its disks primarily to Seagate and
Maxtor, two of the leading independent hard disk drive manufacturers.
The Company currently employs a proprietary, multi-chamber sputtering
system to deposit multiple layers of magnetic material on a disk. This process
permits the Company to make frequent, rapid, discrete adjustments to the
materials sputtered on the disk, enhancing its ability to modify the coercivity
and other characteristics of its output in order to meet customer requirements.
The Company has developed a "modular" manufacturing strategy pursuant to
which it builds smaller scale production lines that can be installed, modified
or expanded comparatively quickly and inexpensively. This "modular" strategy
allows the Company to incrementally increase capacity, to rapidly adapt
manufacturing equipment to new product technology and to rapidly achieve high
volume manufacturing capabilities. The ability to implement new technology
processes quickly is critical to achieving the Company's goal of having its
products designed into its customers' products. This ability also allows the
Company to meet its customers' increasingly rapid time-to-market demands. In
addition, drawing upon its past experience as a high volume, low cost producer,
the Company has expended significant efforts on the internal development of
equipment and manufacturing processes which the Company believes provides it
with lower capital costs.
The Company has located its manufacturing facilities in Santa Clara,
California and Singapore, in close proximity to its customers. StorMedia was the
first and is the largest independent manufacturer of thin film disks in
Singapore, where, according to the Singapore Economic Development Board, over
45% of hard disk drives produced worldwide were manufactured in 1995. In
September 1995, the Company began construction of a second Singapore facility
dedicated to the manufacture of disks for Seagate. During the first quarter of
1996, the Company began shipping disks from its first sputter line in the
Dedicated Facility. The Company expects that this facility will become fully
operational by mid-1996.
To address an anticipated shortage of substrates, the Company announced in
May 1996 that it had begun to establish a substrate manufacturing facility in
Singapore. In addition, the Company has entered into a strategic relationship
with one of its substrate suppliers and is assisting this supplier in increasing
its capacity to supply substrates to the Company.
* * *
The Company was formed in May 1994 to acquire the thin film division (the
"Predecessor") of Nashua Corporation ("Nashua"). The Company purchased
substantially all of the assets (excluding certain accounts receivable) and
assumed certain liabilities (the "Acquisition") of the Predecessor. The
Company's principal offices are located at 390 Reed Street, Santa Clara,
California 95050 and its telephone number is (408) 988-1409. As used in this
Prospectus, the terms "Company" and "StorMedia" refer to StorMedia Incorporated,
a Delaware corporation, and, when the context so requires, its wholly-owned
subsidiaries, StorMedia International Ltd., a Cayman Islands corporation, and
StorMedia Foreign Sales Corporation, a U.S. Virgin Islands corporation, as well
as the business and operations of the Predecessor.
12
<PAGE> 16
RECENT DEVELOPMENTS
In the first quarter of 1996, the Company's net sales were $61.2 million,
gross profit was $17.1 million and earnings per share were $0.52 as compared to
net sales of $27.9 million, gross profit of $6.1 million and earnings per share
of $0.18 in the first quarter of 1995. This represented an increase of 119% in
net sales in the first quarter of 1996 as compared to the same period in 1995.
The increase in net sales was primarily due to an increase in unit volume and
secondarily due to an increase in average selling price. The principal factors
contributing to the increase in unit volumes were the additional capacity
provided by the initial manufacturing facility in Singapore and improved
utilization of production capacity. The increase in average selling price was
principally attributed to the introduction of new products and continued high
levels of demand for thin film disks.
During the first quarter of 1996, the Company began shipping disks from its
first sputter line in the Dedicated Facility. On May 16, 1996, the Company
announced it had begun to establish a facility in Singapore to produce
substrates for its media operations. This facility is scheduled to begin
production in the third quarter of 1996 and to be fully operational by year end.
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered by the Company hereby are estimated to be approximately $80.5 million
(after deducting estimated underwriting discounts and commissions and offering
expenses) assuming a public offering price of $28.33 per share. The Company will
not receive any proceeds from the sale of shares by the Selling Stockholders.
The Company expects to use the net proceeds received from this offering for
capital expenditures primarily to establish the Substrate Facility in Singapore
and to further expand manufacturing capacity. In addition to completing the
Dedicated Facility and further expanding production capacity at Tuas, the
Company is commencing construction of a third and larger manufacturing facility
in Singapore to secure space for future capacity expansion, as required. A
portion of the net proceeds may also be used for working capital and other
general corporate purposes. In addition, the Company considers acquiring or
expanding its operations into complementary businesses, products, assets or
technologies. Although currently there are no material agreements or
understandings with respect to any such activities, the Company may use a
portion of the proceeds to respond to any such opportunities as they arise.
Pending such uses, the Company intends to invest the net proceeds in
interest-bearing deposit accounts, certificates of deposit or similar short-term
investment grade financial instruments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never paid cash dividends on its Class A Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the payment of cash dividends by the Company to its stockholders is
currently prohibited by the Company's bank revolving line of credit. See Note 5
of Notes to Consolidated Financial Statements. On April 29, 1996, the Company
declared a three-for-two stock split in the form of a stock dividend payable on
May 28, 1996 to stockholders of record on May 13, 1996.
PRICE RANGE OF COMMON STOCK
The Company's Class A Common Stock has been traded on the Nasdaq National
Market under the symbol "STMD" since the Company's initial public offering on
May 4, 1995. The following table sets forth for the periods indicated the high
and low closing sale prices for the Class A Common Stock after giving effect to
the Company's three-for-two stock split effective May 28, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1995
Second Quarter (from May 4, 1995).................................. $21.00 $10.67
Third Quarter...................................................... 36.00 21.33
Fourth Quarter..................................................... 33.17 22.00
Fiscal Year Ending December 31, 1996
First Quarter...................................................... $24.33 $15.00
Second Quarter (through May 21, 1996).............................. 29.33 15.92
</TABLE>
On May 21, 1996, the closing price on the Nasdaq National Market for the
Company's Class A Common Stock was $41.50 per share or $27.67 per share after
giving effect to the Company's three-for-two stock split effective May 28, 1996.
As of April 24, 1996, there were approximately 70 holders of record of Common
Stock.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
29, 1996 on (i) an actual basis, and (ii) as adjusted to give effect to the sale
of 3,000,000 shares of Class A Common Stock offered by the Company hereby and
application of the net proceeds therefrom. This table should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 29, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term debt, less current portion(1)............................... $ 32 $ 32
Put options(2)........................................................ 12,363 12,363
Equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized, no
shares issued or outstanding..................................... -- --
Class A Common Stock, $0.013 par value; 50,000,000 shares
authorized; 12,761,265 shares issued and outstanding; 15,761,265
shares issued and outstanding as adjusted(3)..................... 170 210
Class B Common Stock, $0.013 par value; 5,000,000 shares authorized;
4,362,001 shares issued and outstanding and as adjusted(3)....... 58 58
Additional paid-in capital............................................ 109,907 190,317
Deferred compensation................................................. (9) (9)
Retained earnings 33,652 33,652
-------- -----------
Total equity................................................... 143,778 224,228
-------- -----------
Total capitalization........................................ $156,173 $ 236,623
======== =========
</TABLE>
- ---------------
(1) For information concerning the Company's indebtedness outstanding at March
29, 1996, see Note 6 of Notes to Consolidated Financial Statements.
(2) As of April 29, 1996 the Company had settled all of its outstanding put
options through cash settlements at a cost of $1.7 million.
(3) Excludes (i) 2,179,482 shares of Class A Common Stock issuable upon exercise
of options outstanding as of March 29, 1996 and (ii) 1,736,413 shares of
Class A Common Stock reserved for future grant under the Company's 1994
Incentive Stock Option Plan, as amended, 1995 Director Option Plan and 1995
Employee Stock Purchase Plan, as amended, as of April 30, 1996. See Note 9
of Notes to Consolidated Financial Statements.
15
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1992, 1993, 1994 and 1995 have been derived from the audited consolidated
financial statements of the Company and the Predecessor included elsewhere in
this Prospectus. The selected financial data as of and for the year ended
December 31, 1991 have been derived from the Predecessor's unaudited accounting
records. In the opinion of management, all adjustments necessary for a fair
presentation of the information are set forth therein. The pro forma results of
operations for the year ended December 31, 1994 are based upon assumptions
deemed reasonable by management and are not necessarily indicative of results of
operations that would have been attained had the transactions described in
footnote (1) herein actually occurred on the dates indicated. The selected data
presented below for the three months ended March 31, 1995 and March 29, 1996 are
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, all necessary
adjustments (consisting of acquisition related adjustments and normal recurring
adjustments) for a fair presentation of the information are set forth therein.
The results of operations for the three months ended March 29, 1996 are not
necessarily indicative of the results to be expected for the full year. The data
set forth below are qualified in their entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------
COMPANY
--------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ----------------------
---------------------------------- DECEMBER 31, MARCH 31, MARCH 29,
1992 1993 1995 1995 1996
------- -------- ------------ --------- ---------
PRO FORMA
PREDECESSOR/
COMPANY
COMBINED
YEAR ENDED
1991 DECEMBER 31,
----------- 1994(1)
------------
(UNAUDITED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales.......................... $ 22,476 $56,706 $ 77,145 $ 81,766 $161,455 $27,880 $61,156
Costs of sales..................... 35,936 54,957 64,352 65,509 117,827 21,818 44,047
-------- ------- -------- ------- -------- ------- -------
Gross profit (loss).............. (13,460) 1,749 12,793 16,257 43,628 6,062 17,109
Operating Expenses:
Research and development......... 4,010 5,022 5,417 5,010 9,269 1,692 3,708
Selling, general and
administrative................. 5,502 5,749 7,117 3,883 5,435 1,008 2,050
Restructuring charge............. -- -- 24,916 -- -- -- --
-------- ------- -------- ------- -------- ------- -------
Total operating expenses... 9,512 10,771 37,450 8,893 14,704 2,700 5,758
-------- ------- -------- ------- -------- ------- -------
Operating earnings (loss).......... (22,972) (9,022) (24,657) 7,364 28,924 3,362 11,351
Interest income (expense), net..... 10 -- -- (1,083) 76 (567) 485
-------- ------- -------- ------- -------- ------- -------
Earnings (loss) before income tax
expense.......................... (22,962) (9,022) (24,657) 6,281 29,000 2,795 11,836
Income tax expense................. -- -- -- 2,386 7,842 759 2,367
-------- ------- -------- ------- -------- ------- -------
Net earnings (loss)................ $ (22,962) $(9,022) $(24,657) $ 3,895 $ 21,158 $ 2,036 $ 9,469
======== ======= ======== ======= ======== ======= =======
Earnings per share................. $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======== ======= =======
Shares used in per share
computation...................... 11,175 15,338 11,175 18,309
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------- COMPANY
--------------------------------------------
AS OF DECEMBER 31, AS OF DECEMBER 31,
----------------------------------- ----------------------------
1992 1993 1994 1995
------- ------- ------------ ------------ AS OF
MARCH 29,
1996
1991 -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................... $ 3,552 $ 8,442 $13,147 $ 1,736 $ 74,052 $ 51,795
Total assets.............................. 34,706 43,027 22,708 46,767 181,597 198,679
Long-term debt, less current portion...... -- -- -- 12,806 111 32
Redeemable preferred stock................ -- -- -- 4,750 -- --
Put options............................... -- -- -- -- 20,605 12,363
Total equity.............................. 31,492 36,011 18,405 3,599 132,614 143,778
</TABLE>
- ---------------
(1) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the
period May 20, 1994 through December 31, 1994, as if the Acquisition had
been consummated on January 1, 1994 and reflects for the period January 1,
1994 through May 19, 1994 an increase in interest expense for debt issued in
connection with the Acquisition and upon the initial capitalization of the
Company, a decrease in depreciation and charges by Nashua, and related pro
forma income tax effects. Net sales and net earnings for the Predecessor for
the period from January 1, 1994 through May 19, 1994 were $26,168 and $384,
respectively. Net sales, net earnings, and earnings per share for the
Company for the period from May 20, 1994 through December 31, 1994 were
$55,598, $3,393, and $0.30, respectively. See Note 12 of Notes to
Consolidated Financial Statements. The pro forma statement of operations may
not be indicative of future operating results.
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains trend analysis and other 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.
Actual results could differ materially from those set forth in such
forward-looking statements as a result of various factors including those set
forth under "Risk Factors" and elsewhere in this Prospectus and other risks
detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
OVERVIEW
The Company's business is focused on sales of disks to disk drive
manufacturers. The disk drive industry is characterized by short product life
cycles, rapid technological change, significant fluctuations in product demand,
periods of oversupply, reductions in customer forecasts, pricing pressures and
reduced production levels. The disk industry is also capital intensive. The
Company is expending significant capital to expand its operations. Failure to
accurately predict future demand could have a material adverse effect on the
Company's future operating results and could cause fluctuations in the Company's
quarterly and annual operating results. See "Risk Factors -- Dependence on
Intensely Competitive Hard Disk Drive Industry; Risk of Excess Industry
Capacity."
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. Generally, new products have higher average selling prices and,
assuming similar yields, higher gross margins than more mature products.
Therefore, the Company's ability to introduce new products on a timely basis is
an important factor in its ability to maintain gross and operating margins.
Manufacturing yields and production capacity utilization also 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. 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. 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 substantially noncancellable backlog, the Company typically
plans its production and inventory based on forecasts of customer demands, which
often fluctuate substantially. See "Risk Factors -- Variability in Gross Margins
and Operating Margins," "-- Rapid Technological Change," and "-- Future Capital
Needs."
Because the Company has been operating at close to full capacity, growth in
the Company's net sales in the near term depends on the successful expansion by
the Company of its manufacturing capacity. Although the Company has improved its
productivity in Santa Clara, California, its primary efforts to increase
capacity have been, and in the near term will continue to be, focused on its
Singapore production facilities. Manufacturing and other problems which occur in
connection with the commencement and expansion of operations at its existing
facilities could adversely affect the Company's quarterly and annual operating
results. See "Risk Factors -- Uncertainties for Future Growth Associated with
Supply Agreement with Seagate," "-- Dependence on New Manufacturing Facilities
for Future Growth," "-- Risks Associated With New Substrate Facility" and
"-- Shortage of Substrate Plating and Polishing Services."
In June 1995, the Company entered into the Supply Agreement with Seagate
under which the Company agreed to establish the Dedicated Facility in Singapore
by mid-1996 to manufacture disks for Seagate. The Company is bringing the new
Dedicated Facility on line in stages. The first line began producing disks for
Seagate in the first quarter of 1996 and the facility is scheduled to be
completed by mid 1996. The purchase
17
<PAGE> 21
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
Company's current gross margins. See "Risk Factors -- Uncertainties Associated
with Supply Agreement with Seagate."
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR/ COMPANY
COMPANY --------------------------------------
PREDECESSOR COMBINED THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 83.4 80.1 73.0 78.3 72.0
----- ----- ----- ----- -----
Gross profit..................... 16.6 19.9 27.0 21.7 28.0
Research and development........... 7.0 6.1 5.7 6.0 6.1
Selling, general and
administrative................... 9.2 4.8 3.4 3.6 3.3
Restructuring charge............... 32.3 -- -- -- --
----- ----- ----- ----- -----
Total operating
expenses............... 48.5 10.9 9.1 9.6 9.4
----- ----- ----- ----- -----
Operating earnings (loss).......... (31.9) 9.0 17.9 12.1 18.6
Interest, net...................... -- (1.3) 0.1 (2.1) 0.8
----- ----- ----- ----- -----
Earning (loss) before income tax
expense.......................... (31.9) 7.7 18.0 10.0 19.4
Income tax expense................. -- 2.9 4.9 2.7 3.9
----- ----- ----- ----- -----
Net earnings (loss)................ (31.9)% 4.8% 13.1% 7.3% 15.5%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 29, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1995.
Net Sales
Net sales increased 119.4% to $61.2 million for the three months ended
March 29, 1996 from $27.9 million for the three months ended March 31, 1995. The
increase in net sales was primarily due to an increase in unit volume and
secondarily due to an increase in average selling price. The principal factors
contributing to the increase in unit volumes were the additional capacity
provided by the initial manufacturing facility in Singapore and improved
utilization of production capacity. The increase in average selling price was
principally attributed to the introduction of new products and continued high
levels of demand for thin film disks.
Gross Profit
The Company's gross profit increased 182.2% to $17.1 million for the three
months ended March 29, 1996 from $6.1 million for the three months ended March
31, 1995. Gross profit as a percentage of net sales for the three months ended
March 29, 1996 was 28.0% as compared to 21.7% for the three months ended March
31, 1995. The principal factors contributing to the increase in gross profit
were increased unit volumes as a result of the additional capacity of the
Company's operations in Singapore and the improved utilization of production
capacity. The start-up expenses of the initial Singapore manufacturing facility
and of the Dedicated Facility have been expensed as incurred. Management does
not believe that the 1996 gross margin is sustainable. The purchase price of
disks under the Seagate Supply Agreement is calculated based on a pricing
formula which is expected to result in gross margins which are generally lower
than the Company's current gross margins.
18
<PAGE> 22
Research and Development
Research and development expenses increased 119.1% to $3.7 million for the
three months ended March 29, 1996 from $1.7 million for the three months ended
March 31, 1995, increasing as a percentage of net sales to 6.1% for the three
months ended March 29, 1996 from 6.0% for the comparable prior year three month
period. The principal factors contributing to the increase in research and
development expense were increased staffing and spending on development work
related to alternative substrates, new magnetic alloys and sputtering
techniques. The Company expects that research and development expenditures
generally will continue to increase on an absolute dollar basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 103.4% to $2.1
million for the three months ended March 29, 1996 from $1.0 million for the
three months ended March 31, 1995, declining as a percentage of net sales to
3.3% for the three months ended March 29, 1996 from 3.6% for the comparable
prior year three month period. The increase in selling, general and
administrative expense, on an absolute dollar basis, is due primarily to
increased staffing associated with expanded operations in Singapore. The
decrease, as a percentage of net sales, primarily was due to the higher net
sales level.
Interest, Net
Interest, net for the three months ended March 29, 1996 was $0.5 million
income as compared to $0.6 million expense for the three months ended March 31,
1995. The change was primarily attributable to decreased borrowing and increased
investments in cash and cash equivalents.
Income Tax Expense
The Company's effective tax rate (which includes federal and state income
tax expense) decreased to 20% for the three months ended March 29, 1996 from 27%
for the three months ended March 31, 1995 primarily due to increased earnings in
Singapore. The Company has been granted a seven year tax holiday in Singapore,
which expires in 1999, with the possibility of a three year extension. The
benefit of the Company's income tax holiday in Singapore is the primary factor
contributing to the lower effective tax rate. The Company expects its effective
tax rate to decrease in subsequent quarters as earnings in Singapore increase as
a percentage of consolidated earnings.
1995 COMPARED TO PRO FORMA 1994
The following discussion of 1994 is on a pro forma basis, combining the
operating results of the Predecessor during the period from January 1, 1994
through May 19, 1994 with the operating results of the Company for the period
from May 20, 1994 through December 31, 1994 as if the Acquisition had occurred
on January 1, 1994, comparing those results with those of the Company for the
year ended December 31, 1995. See Note 12 of Notes to Consolidated Financial
Statements.
Net Sales. Net sales increased 97.5% to $161.5 million in 1995 from $81.8
million in 1994. The increase in net sales was primarily due to a 76.2% increase
in unit volume. The principal factors contributing to the increase in unit
volumes were the additional capacity provided by the initial manufacturing
facility in Singapore and improved utilization of production capacity. Average
selling prices increased slightly in 1995 from 1994. The increase in average
selling prices was principally attributed to the introduction of new products.
As demand for personal computers increased during 1994, demand for hard disk
drives and disks also increased. During the last half of 1994, the Company's
U.S. facility operated at substantially full capacity. In response to this
increased demand, the Company established a manufacturing facility in Singapore
in late 1994, which became fully operational in late 1995. In June 1995, the
Company entered into the Seagate Supply Agreement under which the Company agreed
to establish the Dedicated Facility for Seagate by mid-1996. Seagate has
committed to purchase all of the disks manufactured at the new facility at a
formula price through March 31, 1999. Additionally, in November 1995, the
Company signed the multi-year Maxtor Supply Agreement, pursuant to which the
Company will significantly increase the number of disks which it supplies to
19
<PAGE> 23
Maxtor beginning in the second half of 1996. Because the Company has been
operating at close to full capacity, fulfillment of the Company's obligations
under these contracts depends on the successful expansion by the Company of its
manufacturing capacity and the completion of, and the successful commencement of
volume production at, the Dedicated Facility. Commencement of production at a
new facility involves numerous risks and uncertainties, including the
possibility of lower product yields, inability of the Company to implement new
systems and controls and difficulties of hiring a sufficient number of trained
employees to operate the facility. See "Risk Factors -- Dependence on a Limited
Number of Customers; Consolidation Within the Disk Drive Industry,"
"-- Uncertainties Associated with Supply Agreement with Seagate," "-- Dependence
on New Manufacturing Facilities for Future Growth," "-- Risks Associated With
New Substrate Facility," "-- Dependence on Intensely Competitive Hard Disk Drive
Industry; Risk of Excess Industry Capacity" and "-- Shortage of Substrate
Plating and Polishing Services."
Gross Profit. The Company's gross profit increased 168.4% to $43.6 million
in 1995 from $16.3 million in 1994, increasing as a percentage of net sales to
27.0% in 1995 from 19.9% in 1994. The principal factors contributing to the
increase in gross profit were increased unit volumes as a result of the
additional capacity of the Company's operations in Singapore and improved
utilization of production capacity.
Research and Development. Research and development expenses increased 85.0%
to $9.3 million in 1995 from $5.0 million in 1994, declining as a percentage of
net sales to 5.7% in 1995 from 6.1% in 1994. The increase in research and
development expense, on an absolute dollar basis, primarily is due to the
increased staffing and spending on development work related to alternative
substrates, new magnetic alloys and sputtering techniques. The decrease, as a
percentage of net sales, was due primarily to the higher net sales level.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40.0% to $5.4 million in 1995 from $3.9
million in 1994, declining as a percentage of net sales to 3.4% in 1995 from
4.8% in 1994. The increase in selling, general and administrative expense, on an
absolute dollar basis, is due primarily to increased staffing due to the
expanded operations in Singapore and higher professional fees. The decrease, as
a percentage of net sales, primarily was due to the higher net sales level.
Interest, Net. Interest, net for 1995 was $0.1 million income compared to
$1.1 million expense in 1994. The change was primarily attributable to decreased
borrowing and increased investments in cash and cash equivalents and short-term
investments.
Income Tax Expense. The Company's effective tax rate (which includes
federal and state income tax expense) decreased to 27% in 1995 from 38% in 1994
primarily due to increased earnings in Singapore. The benefit of the Company's
income tax holiday in Singapore is the primary factor contributing to the lower
tax rate.
PRO FORMA 1994 COMPARED TO 1993
The following discussion of 1994 is on a pro forma basis, combining the
operating results of the Predecessor during the period from January 1, 1994
through May 19, 1994 with the operating results of the Company for the period
from May 20, 1994 through December 31, 1994, as if the Acquisition had occurred
on January 1, 1994, and comparing those results with the historical results of
the Predecessor for the year ended December 31, 1993. See Note 12 of Notes to
Consolidated Financial Statements.
Net Sales. Net sales increased 6.0% to $81.8 million in 1994 from $77.1
million in 1993. The increase in net sales was primarily due to a 9.4% increase
in unit volume. The increased unit volume in 1994 was attributable primarily to
the introduction of new products, favorable market conditions and improved
utilization of manufacturing capacity partially offset by decreased yields.
Average selling prices fluctuated significantly throughout both years, although
on average they decreased slightly in 1994 from 1993. Although net sales
increased from 1993 to 1994, net sales during 1994 were negatively impacted by
the decision of Conner to commence manufacturing disks for its own consumption.
During 1993, sales to Conner represented 44% of net sales while during 1994, the
Company sold no products to Conner.
20
<PAGE> 24
Gross Profit. The Company's gross profit increased 27.1% to $16.3 million
in 1994 from $12.8 million in 1993, increasing as a percentage of net sales to
19.9% in 1994 from 16.6% in 1993. Both of these increases were primarily the
result of a reduction in depreciation expense due to the lower book value of the
fixed assets of the Company compared to the Predecessor, partially offset by
lower manufacturing yields and, to a lesser extent, the start-up expenses of the
new Singapore facility, which were expensed as incurred. Lower manufacturing
yields were primarily caused by the introduction of 2 1/2 inch products with
more fly height and magnetic specifications. While capacity utilization
fluctuated during both of the years, on an annualized basis, capacity
utilization had a minimal impact on the fluctuations in gross margin.
Research and Development. Research and development expenses decreased 7.5%
to $5.0 million in 1994 from $5.4 million in 1993, declining as a percentage of
net sales to 6.1% in 1994 from 7.0% in 1993. These decreases were primarily the
result of reduced depreciation related to the lower book value of the fixed
assets used in research and development reflected on the books of the Company as
compared to the value reflected on the books of the Predecessor and the
elimination of research charges from Nashua in 1994. This decline was partially
offset by increased staffing and spending on the development of alternative
substrate disks and new magnetic alloys during 1994.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 45.4% to $3.9 million in 1994 from $7.1 million in 1993,
declining as a percentage of net sales to 4.8% in 1994 from 9.2% in 1993. The
decrease was primarily due to the elimination of goodwill amortization charges
and administrative charges by Nashua to the Predecessor and legal expenses in
1993 related to the settlement of a patent claim. In addition, closing the Tokyo
sales office in June 1993 and consolidating the Singapore sales office into the
Singapore manufacturing facility in September 1994 decreased selling expenses.
Restructuring Charge. During 1993, the Predecessor incurred a one-time
restructuring charge of $24.9 million in connection with Nashua's decision to
sell the Predecessor and wrote down fixed assets by $18.7 million and goodwill
by $6.2 million to their net realizable value.
Interest, Net. Pro forma interest, net during 1994 reflected interest paid
to Nashua and its principal investor in connection with the debt incurred in the
Acquisition and the initial capitalization of the Company. Interest expense also
included interest paid to the Company's lender under its senior loan agreement
and, in the fourth quarter of 1994, charges for financing the start up of the
Singapore operation.
Income Tax Expense. Pro forma income tax expense for the results of
operations for the year ended December 31, 1994 is computed as if the
Acquisition had occurred on January 1, 1994. The Company's effective tax rate of
38% includes federal and state income tax expense. The benefit of the Company's
foreign sales corporation was offset by operating losses incurred in Singapore
which are not deductible due to the Company's tax holiday in Singapore. Income
tax expense for 1993 is computed as if the Company were a separate taxpayer
under the provisions of SFAS No. 109. No income tax benefit was recorded in 1993
because a full valuation allowance was necessary for all net deferred tax assets
existing at January 1, 1993 and generated during the year.
21
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the Company's quarters ended March 31, 1995, June 30, 1995,
September 30, 1995, December 31, 1995, and March 29, 1996. The Company believes
that this information includes all necessary adjustments (including those
incurred in connection with the Acquisition and normal recurring adjustments)
necessary for a fair presentation of the quarterly information. This information
should be read in conjunction with the financial statements included elsewhere
herein. The operating results for any quarter are not necessarily indicative of
results for any future period. See Note 13 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 29,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $27,880 $ 34,679 $45,954 $ 52,942 $61,156
Cost of sales.............................. 21,818 25,889 32,579 37,541 44,047
------- ------- ------- ------- -------
Gross profit..................... 6,062 8,790 13,375 15,401 17,109
------- ------- ------- ------- -------
Research and development................. 1,692 2,003 2,549 3,025 3,708
Selling, general and administrative...... 1,008 1,273 1,442 1,712 2,050
------- ------- ------- ------- -------
Total operating expenses......... 2,700 3,276 3,991 4,737 5,758
------- ------- ------- ------- -------
Operating earnings......................... 3,362 5,514 9,384 10,664 11,351
Interest income (expense), net............. (567) (594) 400 837 485
------- ------- ------- ------- -------
Earnings before income tax expense......... 2,795 4,920 9,784 11,501 11,836
Income tax expense......................... 759 1,332 2,647 3,104 2,367
------- ------- ------- ------- -------
Net earnings............................... $ 2,036 $ 3,588 $ 7,137 $ 8,397 $ 9,469
======= ======= ======= ======= =======
Earnings per share......................... $ 0.18 $ 0.26 $ 0.40 $ 0.45 $ 0.52
======= ======= ======= ======= =======
Shares used in per share computation....... 11,175 13,877 17,711 18,498 18,309
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 29,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 78.3 74.7 70.9 70.9 72.0
------- ------- ------- ------- -------
Gross profit..................... 21.7 25.3 29.1 29.1 28.0
Research and development................. 6.0 5.8 5.5 5.7 6.1
Selling, general and administrative...... 3.6 3.6 3.2 3.3 3.3
------- ------- ------- ------- -------
Total operating expenses......... 9.6 9.4 8.7 9.0 9.4
------- ------- ------- ------- -------
Operating earnings......................... 12.1 15.9 20.4 20.1 18.6
Interest, net.............................. (2.1) (1.7) 0.9 1.6 0.8
------- ------- ------- ------- -------
Earnings before income tax expense......... 10.0 14.2 21.3 21.7 19.4
Income tax expense......................... 2.7 3.9 5.8 5.8 3.9
------- ------- ------- ------- -------
Net earnings............................... 7.3% 10.3% 15.5% 15.9% 15.5%
======= ======= ======= ======= =======
</TABLE>
Net sales have increased each quarter during the last five quarters from
$27.9 million in the first quarter of 1995 to $61.2 million in the first quarter
of 1996. The increase was primarily attributable to increasing demand for new
products, favorable market conditions and increased manufacturing capacity
primarily associated with ramping up of production at the Company's first
Singapore production facility in Tuas and secondarily in the first quarter
production from the Seagate Dedicated Facility. Increased unit volume and, to a
lesser extent, higher average selling prices, contributed to improving gross
profits, partially offset by higher manufacturing costs associated with higher
substrate costs, depreciation and start-up expenses on the Seagate Dedicated
Facility during the fourth quarter of 1995 and the first quarter of 1996 which
were expensed as incurred.
22
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
On May 4, 1995, the Company sold 4,312,500 shares of its Class A Common
Stock in connection with its initial public offering ("IPO"). The net proceeds
of this offering were $41.9 million, after deducting underwriting discounts and
commissions and expenses of the offering. The Company used a portion of the net
proceeds from the IPO to repay $20.9 million of short-term borrowing and
long-term debt. A portion of the net proceeds were also invested in facilities
and capital equipment, primarily in Singapore. See Notes 5 and 6 of Notes to
Consolidated Financial Statements.
On July 26, 1995, the Company sold 2,775,000 of its Class A Common Stock in
a secondary public offering. The net proceeds of this offering were $76.2
million, after deducting underwriting discounts and commissions and expenses of
the offering. The Company used a portion of the net proceeds received from this
offering for capital expenditures, primarily to establish a new manufacturing
facility in Singapore dedicated to providing disks to Seagate, including
investment in facilities and equipment. A portion of the net proceeds is being
used for working capital, and other general corporate purposes.
During the year ended December 31, 1995, the Company generated $20.2
million in cash from operating activities. Sources included net earnings of
$21.2 million and a $11.5 million increase in accounts payable and accrued
liabilities, offset by increases of $14.4 million in accounts receivable and
$4.2 million in inventories. The increase in accounts receivable is primarily
due to increased sales levels. The increase in inventories is primarily
attributable to the increased sales level and the establishment of the
operations in Singapore. The increase in accounts payable and accrued
liabilities is primarily attributed to the increased deposits placed for the
continuation and completion of facilities expansion, principally in Singapore
including deposits for equipment for Company's prospective substrate facility.
See Notes 5 and 6 of Notes to Consolidated Financial Statements.
The Company used $78.8 million in investing activities during the year
ended December 31, 1995. Investments consisted primarily of short-term
investments of $18.3 million and capital expenditures for facilities expansion
for its Singapore and Santa Clara, California operations of $60.5 million. In
addition, the Company acquired equipment under capital leases and short-term
borrowing totaling $3.6 million. The Company had $32.2 million of noncancellable
purchase commitments for plant and equipment outstanding at December 31, 1995.
Cash and cash equivalents and short-term investments of $37.3 million as of
March 29, 1996, decreased $18.5 million from December 31, 1995, primarily due to
changes in working capital, acquisition of plant and equipment, repurchase of
Class A Common Stock and settlement of put options.
During the three months ended March 29, 1996, the Company generated $17.0
million from operating activities. Sources included net earnings of $9.5 million
and a $12.8 million increase in accounts payable and accrued liabilities, offset
by an increase of $9.3 million in accounts receivable. The increase in accounts
receivable is primarily due to increased revenue levels. The increase in
accounts payable and accrued liabilities is primarily attributed to the
increased deposits placed on the continuation and completion of facilities
expansion, principally in Singapore, including deposits for equipment for the
Company's prospective substrate facility.
The Company used $15.3 million in investing activities during the three
months ended March 29, 1996. Investing activities consisted primarily of
investments of $27.9 million for capital expenditures for facilities expansion
for its Singapore operations, offset by the sale of short-term investments of
$12.6 million. The Company had $30.7 million of noncancellable purchase
commitments for plant and equipment outstanding at March 29, 1996.
In October 1995, the Company's Board of Directors authorized a share
repurchase program. Pursuant to this program, the Company sold put options in
private placements during October 1995. The put options grant the holder the
right to require the Company to repurchase beginning in January 1996 up to
750,000 shares of its Class A Common Stock at an aggregate price of $20.6
million, of which the Company repurchased 262,500 shares at an aggregate cost of
$7.2 million and closed 37,500 put options by cash settlement at an aggregate
cost of $0.3 million during the three months ended March 29, 1996. In April, the
Company closed 450,000 put
23
<PAGE> 27
options by cash settlement at an aggregate cost of $1.7 million. As of April 29,
1996, the Company had no put options outstanding.
The Company's principal sources of liquidity at March 29, 1996 consisted of
$31.6 million in cash and cash equivalents, $5.7 million in short-term
investments, and $20.0 million of funds available under the Company's credit
facility. Capital expenditures are expected to approximate $100 million 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 the
proceeds of this offering, 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 would 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.
24
<PAGE> 28
BUSINESS
StorMedia Incorporated is a leading independent supplier of thin film disks
for hard disk drives used in portable and desktop computers. The Company
designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2 inch
sizes. Within each size, the Company provides a range of coercivites, fly
heights and disk thicknesses to meet specific customer requirements. The Company
manufactures disks based on both aluminum and glass/ceramic substrates. The
Company's strategy is to combine leading disk technology with high volume
manufacturing expertise to serve the growing and technologically demanding hard
disk drive market. StorMedia seeks to address the competitive pressures of the
disk drive industry by providing advanced products at competitive prices,
developing new technologies and improving manufacturing efficiency. The Company
collaborates with customers during the design phase of new disk drives,
enhancing its ability to bring new products to market on a timely basis and
increasing the likelihood that its disks will be designed into customers' new
disk drive products. The Company sells its disks primarily to Seagate and
Maxtor, two of the leading independent hard disk drive manufacturers.
INDUSTRY BACKGROUND
The Disk Drive Market
Market demand for disks and disk drives is growing rapidly, generated
primarily by demand for new personal computers and, to a lesser extent,
replacement disk drives. The introduction of more powerful microprocessors and
software, combined with the development and growth of multimedia computing
applications, has stimulated demand for personal computers ("PCs") in both the
home and business markets. According to International Data Corporation ("IDC"),
worldwide shipments of PCs reached 58.2 million in 1995, up from 38.2 million in
1993 and are expected to reach 80.9 million in 1997. Additionally, the trend in
the PC industry toward greater processing power, larger databases and more
sophisticated operating systems and applications requires greater storage
capacity and performance in hard disk drives.
Demand from the PC market has contributed to strong growth in unit
shipments of disk drives. According to IDC, worldwide shipments of hard disk
drives were 50 million units in 1993 and 89 million units in 1995 and are
projected to reach 135 million units in 1997. IDC also estimates that the
worldwide market for hard disk drives was $21 billion in 1995. As a result, the
demand for thin film disks has increased as well, with additional growth coming
from an increase in both the number of drives per PC and the number of disks per
drive. According to Trend Focus, the number for thin film disks produced in 1993
was 134 million and was 256 million in 1995 and is projected to reach 416
million in 1997. The worldwide market for thin film disks is estimated by Trend
Focus to have been $3.2 billion in 1995.
The disk drive industry is also characterized by short product lives and
frequent technology advances. The Company believes that at the present time disk
drive manufacturers typically market a hard disk drive product for an average of
nine to twelve months. Due to shortening product life cycles and steepening
production ramps, the Company believes leading disk drive manufacturers, which
in the past have typically used multiple suppliers, are increasingly relying on
one primary supplier for a particular disk drive product. Storage capacity has
increased from a median range of 30 to 59 megabytes in 1989 to a median range of
500 to 999 megabytes in 1995. According to industry sources, storage capacity
has been increasing at a rate of 60% annually since 1992. While the disk drive
industry's growth historically has been very strong, the growth has also been
cyclical, with periods of strong growth followed by downturns or no growth
periods.
25
<PAGE> 29
Thin Film Disk Technology
LOGO
The principal components of computer hard disk drives are disks, heads,
mechanics and electronics. Each disk drive contains from one to ten disks which
are attached to a spindle/motor assembly. This assembly rotates the disk at high
speed within a sealed enclosure. The electronics control the spinning of the
disk, the positioning of the head and the writing and reading of stored data.
The head is a small magnetic transducer which, when the disk is spinning,
"flies" just above the disk surface. Data is written when the electronic channel
sends current pulses to the head. The head converts these pulses to magnetic
fields which cause the magnetic layer within the disk and under the recording
head to become magnetized, oriented in the direction of the head's magnetic
field. Reversing the current in the head reverses the magnetized orientation in
the media. During the read-back process, as the head scans over the disk,
magnetic flux from the disk's magnetic layer is picked up by the head and
converted into voltage, which is then converted into digital data by the read
channel electronics.
The most significant challenges influencing disk technology today are the
demand for increasing storage capacity and durability requirements. The
effective implementation of thin film technology requires solutions to several
factors, including magnetics, fly height, durability and static friction.
- Magnetics. Coercivity is the fundamental measure of the magnetic strength
of the disk, as measured by oersted ("oe"). Advanced drive designs
require increasingly higher coercivities without loss of signal strength.
Currently, advanced disk drive designs require coercivities ranging from
1800 to 2200 oe.
- Fly Height. The smaller magnetic regions used when recording at higher
density result in weaker magnetic fields which can be read only if the
head flies lower over the surface of the disk. Effective fly height
depends on the smoothness and flatness of the disk surface as well as the
thickness of the protective overcoat deposited above the magnetic layer
on the disk. The Company expects that fly heights will decrease from the
current level of 1.3 microinches.
- Durability. In most hard disk drives, the head and disk come into contact
when the disk drive is turned on or off. To prevent wear on the disk, a
protective overcoat is deposited over the magnetic layer of the disk.
However, the thickness of this overcoat must be minimized because this
layer uses up a portion of the available fly height. Customer
specifications typically require 50,000 start/stop
26
<PAGE> 30
cycles for desktop PCs and a larger number in portable PCs where power
saving mechanisms automatically turn off the disk drive if the computer
is not used for a certain period of time.
- Static Friction ("Stiction"). An extremely smooth disk surface enables
lower fly heights and can enhance a disk's durability by reducing the
friction which occurs when the head contacts the disk. However, if a disk
is too smooth, stiction will cause the head to adhere to the disk surface
when the drive is turned on and off. This problem is primarily addressed
through texturizing the surface of the disk.
STORMEDIA SOLUTION AND STRATEGY
The Company's strategy is to combine leading disk technology with high
volume manufacturing expertise to serve the growing and technologically
demanding hard disk drive market. The Company seeks to address the competitive
pressures of the disk drive industry by providing advanced products at
competitive prices, developing new technologies and improving manufacturing
efficiency.
Advanced Product Technology
The Company continues to focus its development efforts on increasing
storage capacity and disk durability to meet the requirements of advanced disk
drives. Efforts to increase storage capacity include enhancing magnetics and
reducing fly heights. The manufacturing of thin film disks involves the
deposition of extremely thin, uniform layers of magnetic film onto a disk
substrate using a vacuum sputtering process. The Company's multi-chamber
sputtering system permits the deposition on disks of multiple layers of magnetic
material. This multi-layer technology reduces magnetic noise, thereby improving
signal to noise ratios. In addition, the Company has developed various magnetic
alloys of cobalt, chromium, platinum and tantalum designed to optimize the
particular magnetic recording parameters required by the Company's customers.
Over the past few years the market for 2 1/2 inch disks, the predominant disk
used in portable and notebook computers, has transitioned to glass/ceramic
substrates, which have durability characteristics superior to nickel plated
aluminum substrates. The Company has developed disks based on glass/ceramic and,
in the first quarter of 1996, began shipping glass/ceramic disks in volume.
Design-In Focus
An important component of the Company's strategy is to develop close
relationships with the major hard disk drive manufacturers and to collaborate
with them during the design phase of new disk drives. By forming close
relationships with its customers, understanding customers' product requirements
and rapidly developing the technology capable of meeting these requirements, the
Company believes it can effectively respond to customer needs and bring advanced
new products to market on a timely basis.
Manufacturing Processes and Equipment
The Company has developed a "modular" manufacturing strategy pursuant to
which it builds smaller scale production lines that can be installed, modified
or expanded comparatively quickly and inexpensively. This "modular" strategy
allows the Company to incrementally increase capacity, to rapidly adapt
manufacturing equipment to new product technology and to rapidly achieve high
volume manufacturing capabilities. The ability to implement new technology
processes quickly is critical to achieving the Company's goal of having its
products designed into its customers' products. This ability also allows the
Company to meet its customers' increasingly rapid time-to-market demands. In
addition, drawing upon its past experience as a high volume, low cost producer,
the Company has expended significant efforts on the internal development of
equipment and manufacturing processes which the Company believes provides it
with lower capital costs.
Strategic Manufacturing Expansion
The Company's strategy is to locate its manufacturing and marketing
resources in close proximity to its customers and sources of supplies in
Singapore. While other manufacturers, including Seagate, have announced their
intention to establish disk manufacturing facilities in Singapore, the Company
was the first
27
<PAGE> 31
and is the largest independent manufacturer of thin film disk in Singapore,
where, according to the Singapore Economic Development Board, in 1995, over 45%
of hard disk drives produced worldwide were manufactured.
PRODUCTS
The Company supplies thin film disks in 2 1/2 and 3 1/2 inch sizes which
are used in different disk drive products contained in mobile computers such as
notebooks and laptops as well as stationary computers such as desktop computers,
servers and workstations. Within each disk size, the Company offers disks with a
range of coercivities, fly heights and disk thickness to meet specified customer
requirements. During 1996, the Company launched its first laser-textured
product, which provides more controlled and consistent surface finish than
mechanical textured disks hence enabling lower fly heights. Such capabilities
are particularly useful with magnetoresistive heads. In addition, it began
volume shipment of disks based on glass/ceramic substrates. Substantially all of
the disks shipped by the Company during 1996 had coercivity of 1800 oe or above.
Today's computer applications require large amounts of data storage and the
demand for greater data storage is increasing as new applications arise. This
dynamic requires the continuous introduction of new products which address these
increasing storage requirements. The Company has structured its sales and
marketing and research and development activities to respond to these rapid
product transitions.
Also, the Company considers acquiring or expanding its operations into
complementary businesses, products, assets or technologies, and although
currently there are no material agreements or understandings with respect to any
such activities, the Company will respond to any such opportunities as they
arise.
CUSTOMERS AND MARKETING
The Company sells its products to independent OEM disk drive manufacturers
for incorporation into hard disk drives which are marketed under the
manufacturers' own labels. During 1994 and 1995, and the three months ended
March 29, 1996, the Company shipped thin film disks to four customers, Seagate,
Maxtor, Western Digital and Quantum. During 1995, sales to Seagate and Maxtor
represented 54% and 45% of net sales, respectively. During 1994, sales to
Seagate and Maxtor represented 66% and 25% of net sales, respectively. Given the
rapid development of new disk drive products, it is common in the industry for
the relative mix of customers to change rapidly, even from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company believes that close technical collaboration with its customers
during the design phase of new disk drives facilitates integration of the
Company's products into new disk drives, enhances the likelihood that the
Company will become a primary supplier of thin film disks for new disk drive
programs and improves the Company's ability to rapidly reach high volume
manufacturing. However, the design-in process is ongoing and frequent and the
Company must compete for participation in each product program, even those of
existing customers.
In June 1995, the Company entered into the Seagate Supply Agreement
pursuant to which the Company agreed to establish the Dedicated Facility in
Singapore by mid-1996. Seagate has committed to purchase all the disks
manufactured at the new facility at a formula price through March 31, 1999.
While disks from the first sputter line in the Dedicated Facility were shipped
to Seagate in the first quarter of 1996, the plant is not yet fully operational.
See "Risk Factors -- Dependence on a Limited Number of Customers; Consolidation
Within the Disk Drive Industry" and "-- Uncertainties Associated with Supply
Agreement with Seagate."
In November 1995, the Company entered into a multi-year Supply Agreement
with Maxtor ("Maxtor Supply Agreement") pursuant to which the Company will
significantly increase the number of disks which it supplies to Maxtor beginning
in the second half of 1996. Maxtor was recently acquired by Hyundai and Hyundai
assumed the Maxtor Supply Agreement. See "Risk Factors -- Dependence on a
Limited Number of Customers; Consolidation Within the Disk Drive Industry."
While the Company has strengthened its relationship with Seagate and Maxtor
by entering into such supply agreements in 1995, it has also obligated
substantially all of the Company's manufacturing output to
28
<PAGE> 32
these two customers. Nevertheless, the Company is continuing its efforts to
broaden its customer base. However, given the small number of independent 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 the Company's efforts are not
successful, it 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,
particularly with respect to net sales and gross margins, and financial
condition.
In each of 1995 and the three months ended March 29, 1996, over 95% of the
Company's net sales were derived from sales to the Far East operations of its
U.S. customers. Foreign sales are subject to certain risks common to all export
activities, such as government regulation and the imposition of tariffs,
licensing or requirements or other trade barriers. See "Risk Factors -- Risks of
International Sales and Manufacturing" and Note 11 of Notes to Consolidated
Financial Statements.
RESEARCH AND DEVELOPMENT
The Company believes that its continued commitment to develop new
technologies is critical to remain competitive in the industry. The Company has
focused its research and development efforts on enhancing existing product
designs and developing next-generation products and the materials and process
technologies necessary to produce them. The Company's development group
continues to investigate improvements in the composition of the magnetic layer,
the use of new protective overcoat materials and disks based on glass/ceramic
substrates which it began shipping in volume in the first quarter of 1996. The
Company's development programs are targeted at increasing storage capacity
through lower fly heights and improved magnetics, and satisfying increased
durability and friction requirements. There can be no assurance that the Company
will be able to anticipate new technological developments, to develop products
incorporating such advances in a timely manner, or to compete effectively
against competitor's new products. 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.
During 1994, 1995 and the three months ended March 29, 1996, the Company
incurred $5.0 million, $9.3 million and $3.7 million, respectively, of research
and development expenses. The Company believes that its future success depends
on its ability to continue to enhance its existing products and to develop new
products. Accordingly, the Company intends to continue to increase its
expenditures for research and development.
MANUFACTURING
The Company's operating results are highly dependent on its ability to
produce large volumes of thin film disks at acceptable yields. The manufacturing
of thin film disks is a multistep process using processes similar to the
production of silicon wafers. The process involves the deposition of extremely
thin, uniform layers of magnetic film onto a disk substrate using a vacuum
sputtering process, similar to that used to coat semiconductor wafers. The basic
process consists of many interrelated steps, and requires an extremely clean
environment with certain steps being performed in class 10 and class 100
cleanrooms and tolerances of material structures at atomic levels. Minor
deviations in the manufacturing process, minute impurities in materials used,
particulate contamination or other problems can cause significant numbers of
disks to be rejected, thereby causing significant yield loss. Impurities in the
water supply, such as organic build-up, can cause a reduction in production
yields and, in extreme cases, result in suspension of production.
The Company believes that its internally developed manufacturing processes
and equipment allow it to both develop new proprietary processes in response to
customers' increasing product requirements and to quickly implement such new
technologies into the manufacturing process. Developing the ability to design
and modify manufacturing equipment has enabled the Company to build smaller
scale production lines that can be installed, modified or expanded relatively
quickly and comparatively inexpensively. This modular strategy
29
<PAGE> 33
allows the Company to incrementally increase capacity, to rapidly adapt
manufacturing equipment to utilize new proprietary processes and to rapidly
achieve high volume manufacturing capabilities.
The Company has also designed its own in-house data collection process
control device to rapidly provide production information on each machine and
monitor yields and the certification processes. The Company's ability to measure
quality at each phase of the manufacturing process is critical to correcting any
changes in yield or product quality.
The Manufacturing Process
The Company's manufacturing process is briefly summarized as follows:
Plating, Polishing and Texturizing Substrate. The initial input to the
production of a thin film disk is a substrate. Aluminum substrates are plated
with electro-less nickel. This coating is a non-magnetic layer critical to
corrosion resistance and serves to strengthen the disk and improve durability.
Disks are then polished to produce a mirror smooth surface. Polishing enhances
the nickel surface reducing its roughness and minimizing edge rolloff, while
maintaining the overall flatness of the disk. The texturizing process is a
method of producing a controlled roughness on the disk's surface to improve its
friction characteristics. Glass/ceramic substrates do not presently require
plating, polishing or mechanical texturizing.
Sputtering and Lube. The sputter process uses equipment and a process
similar to that used in silicon wafer fabrication, in which layers of materials
are deposited on the disk through a vacuum sputtering process. The initial
layers are various alloys including cobalt, chrome, platinum and tantalum, which
produce the magnetic qualities of the disk. The final layer is a protective
overcoat. The layers are of various thicknesses but are all very thin, and are
controlled to a molecular level. After sputtering, a microscopic layer of
lubrication is applied to the disk's surface to improve durability and reduce
surface friction.
Test and Certification. In the test and certification process each disk is
electronically screened and certified as acceptable based on the customer's
specification. A robotically controlled tester electronically writes information
onto the disk, reads it back and erases it, simulating performance in the
customer's disk drive. The disk is tested for parametrics, errors in the
read/erase process, surface defects and glide performance.
Over the past few years the market for 2 1/2 inch disks, the predominant
disk used in portable and notebook computers, has transitioned to glass/ceramic
substrates, which have durability characteristics superior to nickel plated
aluminum substrates. The Company has developed disks based on glass/ceramic
substrates and, in the first quarter of 1996, began volume shipments of
glass/ceramic disks.
Facilities
The Company currently has three manufacturing facilities and anticipates
that its third manufacturing facility will become fully operational in mid-1996.
The original production site is located in Santa Clara, California on the same
site as its research, development, marketing and administrative functions. This
facility became ISO 9001 registered for the design and manufacturing of thin
film disks in February 1995. The Company's first manufacturing site located in
Singapore was ISO 9002 registered in February 1996. The Company's second
manufacturing site is located in Singapore and became fully operational in
November 1995. The third manufacturing site, the Dedicated Facility, is also
located in Singapore and is being brought on line in stages through mid-1996.
During the first quarter of 1996, the Company's Dedicated Facility in Singapore
began shipping disks to Seagate. In addition to completing the Dedicated
Facility and further expanding production capacity at its first Singapore
facility, the Company is commencing construction of a third and larger
manufacturing facility in Singapore to secure space for future capacity
expansion, as required. Singapore was selected for its proximity to customers,
its highly skilled and motivated work force and incentives provided by the
Singapore government. The Singapore government has granted the Company a seven
year tax holiday, with the possibility of a three year extension. The production
of thin film disks requires workers who are highly skilled in technical, precise
production processes. However, the existing Singapore facility has been staffed
and the Dedicated Facility is being staffed with personnel inexperienced in
manufacturing thin film disks. The Company has attempted to minimize this risk
by training its new personnel
30
<PAGE> 34
both in its United States facility and, in the case of its Dedicated Facility,
hiring personnel with related technical experience and assigning U.S.
engineering personnel to assist in the start-up of these facilities. Continued
rapid expansion of the Company's operations, especially overseas, has and will
continue to strain the capacity of current management and require continued
implementation of new financial and management systems and controls.
Sources of Supply
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, certifiers, sputter targets and certain other
materials. In addition, the Company relies on a single source to build and
supply some of its customized sputtering equipment. These suppliers work closely
with the Company to optimize the Company's production processes. The Company's
reliance on a limited number of suppliers, or sole suppliers, entails some risk.
If such materials were to become unavailable or available in reduced quantities,
it could significantly impact the Company's production capacity. However, the
Company believes that the advantages of working closely with these suppliers is
necessary to ensure a reliable source of supply. Changing suppliers for certain
materials such as lube would require that the product be requalified with the
customer. Requalification could prevent an early design-in win or could prevent
or delay continued participation in a disk drive program into which the
Company's product has been qualified. 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. Although
the Company has not experienced significant limitations on the availability of
these materials, shortages could occur in the future. Any limitations on supply
of components, materials or equipment could disrupt the Company's production
volume and could have an adverse effect on the Company's business, operating
results and financial condition. Further, a significant increase in the price of
one or more of these components would adversely affect the Company's results of
operations.
Substrates. The Company's ability to increase its volume in the future
depends on the availability of plated and polished substrates. The Company
believes a shortage of plated and polished substrates could occur in 1996. To
address the shortage, the Company intends to use a portion of the proceeds of
this offering to establish a manufacturing facility in Singapore to produce
plated and polished substrates. The process of manufacturing substrates entails
taking a raw aluminum blank, resurfacing and sizing it through grinding,
chemical etching, computerized lathing, and heat treatment processes to meet
precise size, flatness and strength requirements. The substrate is then plated
and polished. In addition, the Company has entered into a strategic relationship
with one of its suppliers of plated and polished substrates and is assisting
this supplier in increasing its capacity to supply substrates to the Company.
The Company has an option to acquire this supplier. If the Company is unable to
increase its supply of plated and polished substrates for any reason or if they
are not available on favorable terms, the Company may not be able to produce
disks at its manufacturing facilities. In addition, such a shortage could
prevent the Company from accepting new orders or meeting delivery dates for
existing contracts, including its supply agreements with Seagate and Maxtor,
which could materially and adversely affect the Company's business, results of
operations and financial condition. See "Risk Factors -- Shortage of Substrate
Plating and Polishing Services."
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 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
31
<PAGE> 35
drive components. In July 1995, Seagate announced its intention to double its
internal capacity by the end of 1997 and that it was building a 160,000 square
foot disk manufacturing plant in Singapore. Additionally, in February 1996,
Seagate completed its merger with Conner and acquired Conner's internal capacity
to produce disks in Santa Clara, California and its factory expansion in
Singapore, currently scheduled to begin volume production in the second half of
1996. 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, the Company runs the
risk that other disk drive manufacturers, such as Maxtor and 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 "Risk
Factors -- Dependence on a Limited Number of Customers; Consolidation Within the
Disk Drive Industry" and "-- Intense Competition."
The Company believes that its competitors and certain of its customers,
including Seagate, 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 within the next one to two
years. To the extent these efforts result in industry capacity in excess of
levels of demand, the Company could experience increased levels of competition
which could materially adversely impact the Company's business, results of
operations and financial condition.
The principal competitive factors in the film disk market which the Company
addresses are rapidly advancing technology, product performance and quality,
volume manufacturing, responsiveness to customers and price. The Company
believes that it competes favorably with respect to these factors, but there can
be no assurance that it will continue to be able to do so.
BACKLOG
The Company's sales are generally made pursuant to purchase orders which
are subject to modification or rescheduling without significant penalty. The
Company's backlog of purchase orders requesting delivery in the following
quarter was approximately $38 million as of March 29, 1996. The Company
believes, however, that it is common practice for disk drive manufacturers to
place orders in excess of actual requirements when there is a shortage of supply
capacity. Because these purchase orders may be modified or rescheduled by
customers on short notice and without penalty, the Company does not believe that
its backlog as of any particular date should be considered indicative of sales
for any future period.
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 or be allowed
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
32
<PAGE> 36
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
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,
Lahive & Cockfield, 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 pending litigation 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 would
have a material adverse effect on the Company's business, results of operation
and financial condition. See "Risk Factors -- Intellectual Property and
Proprietary Rights" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EMPLOYEES
As of March 29, 1996, the Company had approximately 735 employees located
in California, with approximately 610 in manufacturing, 100 in research and
development and approximately 25 in administration and marketing, and
approximately 400 employees located in Singapore. The Company believes it has
good relations with its employees. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage. The Company believes that attracting and motivating skilled technical
talent is vital to its success. See "Risk Factors -- Dependence on Personnel"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ENVIRONMENTAL MATTERS
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, handling, 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,
33
<PAGE> 37
restrictions on expansion at its present locations or the acquisition of costly
equipment. See "-- Legal Proceedings."
The Company uses a significant amount of water in its manufacturing
process. During periods of drought in California, water use restrictions have
been imposed on many manufacturers in the state. During past droughts, the
Company was able to obtain sufficient water supplies without significant
increasing costs. The Company is currently considering the implementation of a
recycling program which would reduce the Company's water intake from external
sources. However, if a drought reoccurs and reductions in the Company's water
usage allocation are mandated by the government, there can be no assurances that
such water use restrictions would not subject the Company to significant
expenses or a reduction in its level of production in California which could
cause a material adverse affect on the Company's business, operating results and
financial condition. See "Risk Factors -- Environmental Issues" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PROPERTIES
The Company currently leases all of its facilities, including 116,100 feet
in Santa Clara, California. These buildings house manufacturing, and development
and the Company's headquarter offices. The primary leases for these properties
have various expiration dates from April 1996 through June 1997. Each lease has
a renewal option with durations of two through six years.
The Company leases two facilities in Singapore, a 52,000 square foot
manufacturing facility the lease for which expires in June 1997 (subject to
renewal options through June 2000) and a 54,400 square foot manufacturing
facility, the lease for which expires in December 1998. In addition the Company
is currently negotiating a lease on land and buildings for its new substrate
facility.
LEGAL PROCEEDINGS
On December 4, 1995, the Company and the Bay Area Air Quality Management
District (the "District") agreed in principle upon the terms of a stipulated
conditional abatement order to be issued by the District with respect to the
Company's luber equipment. The stipulation requires the Company to conduct a
thorough evaluation of the optimum operating parameters for the luber to assist
the District in determining the best available control technology to be applied
to reduce volatile organic emissions from such equipment. The Company believes
that neither the evaluation nor its results will adversely affect its operations
or financial results.
34
<PAGE> 38
MANAGEMENT
OFFICERS AND DIRECTORS
Officers and directors of the Company and their ages as of April 30, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------- --- -------------------------------------
<S> <C> <C>
William J. Almon..................... 63 Chairman of the Board of Directors
and Chief Executive Officer
Michael E. Oxsen..................... 45 President and Chief Operating Officer
Atef Eltoukhy........................ 45 Senior Vice President and Chief
Technical Officer
Stephen M. Abely..................... 39 Vice President, Chief Financial
Officer and Assistant Secretary
Sherman Silverman.................... 54 Vice President, Sales and Marketing
John A. Downer(1)(2)................. 38 Director
Francis J. Lunger(1)................. 50 Director
Mark S. Rossi(2)..................... 39 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
William J. Almon has served as Chairman of the Board of Directors and Chief
Executive Officer since the Company's organization in May 1994. Mr. Almon served
as the Company's President from the Company's organization in May 1994 until May
1995 when Michael E. Oxsen was appointed to succeed Mr. Almon as President of
the Company. Prior to joining the Company, Mr. Almon served as an independent
consultant from February 1993 until May 1994 and as President, Chief Operating
Officer and a director of Conner Peripherals, Inc., an independent disk drive
manufacturer, from December 1988 to February 1993. From 1958 to 1987, Mr. Almon
served in various management positions with IBM Corporation, most recently as
Vice President, Low End Storage Products. Mr. Almon holds a B.S. in Engineering
from the U.S. Military Academy, West Point. Mr. Almon also serves as a director
of Read-Rite Corporation and Sigma Designs Corporation.
Michael E. Oxsen has served as President of the Company since May 1995,
prior thereto having served as Vice President and Chief Operating Officer since
May 1994. From October 1991 to May 1994, Mr. Oxsen served in various capacities
at the Predecessor, most recently as Vice President of Manufacturing Operations
and Director of Manufacturing Engineering. From December 1977 to October 1991,
Mr. Oxsen served in various engineering and management positions with IBM
Corporation, most recently as a manager in the thin film disk operations unit.
Mr. Oxsen holds a B.S. in Chemistry from San Jose State University.
Atef Eltoukhy has served as Senior Vice President and Chief Technical
Officer since May 1995, acting as an independent consultant to the Company from
May 1994 until September 1994. In September 1994, the Board of Directors
appointed Dr. Eltoukhy Vice President of Research and Development and Chief
Technical Officer. From September 1991 until May 1994, Dr. Eltoukhy served as
Vice President and Chief Technical Officer of the Predecessor. From June 1983 to
September 1991, Dr. Eltoukhy served as Senior Vice President of Research and
Development for HMT Technology Corporation and its predecessor, Xidex
Corporation. Xidex Corporation acquired Trimedia, a company of which Dr.
Eltoukhy was a founder and chairman of the board of directors. Dr. Eltoukhy
holds a Ph.D. in Material Science from the University of Illinois, an M.S. in
Material Science from the American University in Cairo, and an M.S. in
Metallurgical Engineering from Cairo University.
Stephen M. Abely has served as Vice President, Chief Financial Officer and
Assistant Secretary since May 1994. From August 1983 until May 1994, Mr. Abely
served in various capacities at Nashua Corporation,
35
<PAGE> 39
an office supply and paper company, most recently as Controller of the
Predecessor. Mr. Abely holds a B.S. in Business Administration from Northeastern
University.
Sherman Silverman has served as Vice President, Sales and Marketing since
May 1994. From September 1969 until May 1994, Mr. Silverman served in various
capacities at the Predecessor, most recently as Vice President, Marketing and
Sales. Mr. Silverman holds a B.A. in Economics from Tulane University.
John A. Downer has served as a director of the Company since May 1994.
Since July 1989, Mr. Downer has served as a Vice President of Prudential Equity
Investors, Inc., the general partner of Prudential Private Equity Investors III,
L.P., a private equity fund. Mr. Downer also serves as a director of several
private companies. Mr. Downer served as a director of Auspex Systems, Inc. from
January 1992 to December 1995 and Medaphis Corporation from November 1989 to May
1996.
Francis J. Lunger has served as a director of the Company since May 1994.
Since November 1995 Mr. Lunger has served as Senior Vice President and Chief
Financial Officer of Oak Industries Inc., a component supplier to the
telecommunications industry. From March 1994 until August 1995 Mr. Lunger served
as Chief Administrative Officer, and from August 1995 until November 1995,
Acting Chief Executive Officer of Nashua Corporation, a manufacturer of office
products. From January 1983 until March 1994, Mr. Lunger served as a Vice
President of Raychem Corporation, a diversified materials science company, most
recently serving as Vice President and General Manager of the Interconnect
Components and Medical Division.
Mark S. Rossi has served as a director of the Company since May 1994. Since
March 1984, Mr. Rossi has served as President or Vice President of Prudential
Equity Investors, Inc., the general partner of Prudential Private Equity
Investors III, L.P., a private equity fund. Mr. Rossi also serves as a director
of several private companies and until February 1996, served as a director of
Conner Peripherals, Inc., a disk drive manufacturer.
36
<PAGE> 40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1996 and as adjusted to
give effect to the sale of the 4,500,000 shares of Class A Common Stock offered
hereby, by (i) each person (or group of affiliated persons) known to the Company
to be the beneficial owner of more than 5% of the Company's Common Stock, (ii)
each director, (iii) each of the Company's executive officers, (iv) each Selling
Stockholder, and, (v) all of the Company's directors and officers as a group.
See "Risk Factors -- Control By Existing Stockholders and Anti-takeover Effects"
and "-- Benefits of the Offering to Selling Stockholders."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)
-------------------- SHARES --------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Prudential Private Equity Investors III,
L.P. ("PPEI")(2).......................... 5,737,499 33.3% 1,180,000 4,557,499 22.5%
717 Fifth Avenue
New York, NY 10022
William J. Almon(3)......................... 1,295,122 7.3 295,000 1,000,122 4.8%
c/o StorMedia Incorporated
390 Reed Street
Santa Clara, California 95050
Mark S. Rossi (4)........................... 5,737,499 33.3 1,180,000 4,557,499 22.5
John A. Downer (4).......................... 5,737,499 33.3 1,180,000 4,557,499 22.5
Francis J. Lunger (5)....................... 4,000 * -- 4,000 *
Stephen M. Abely (6)........................ 30,692 * -- 30,692 *
Michael E. Oxsen (7)........................ 38,331 * 12,500 25,831 *
Atef Eltoukhy (8)........................... 3,285 * -- 3,285 *
Sherman Silverman (9)....................... 41,391 * 12,500 28,891 *
All directors and executive officers as a
group (8 persons)(2)(4)(10)............... 7,150,320 40.4 1,500,000 5,650,320 27.3
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Options to
purchase shares of Class A Common Stock which are currently exercisable or
will become exercisable within 60 days of April 30, 1996, are deemed to be
outstanding for purposes of computing the percentage of the shares held by
an individual but are not outstanding for purposes of computing the
percentage of any other person. Except as indicated otherwise in the
footnotes below, and subject to community property laws where applicable,
the persons named in the table above have sole voting and investment power
with respect to all shares of Class A Common Stock shown as beneficially
owned by them.
(2) At April 30, 1996, PPEI owned 1,375,498 shares of Class A Common Stock and
4,362,001 shares of non-voting Class B Common Stock. Following this
offering PPEI will own 195,498 shares of Class A Common Stock and 4,362,001
shares of the Class B Common Stock.
(3) Includes 431,250 shares subject to stock options which are exercisable
within 60 days of April 30, 1996.
(4) Messrs. Rossi and Downer are the President and Vice President,
respectively, of the general partner of PPEI and, as such, may be deemed to
beneficially own the 5,737,499 shares owned by such partnership. Mr. Rossi
and Mr. Downer each disclaim personal beneficial ownership of any or all of
these shares except to the extent of their respective individual
proportionate ownership interests therein.
37
<PAGE> 41
(5) Includes 4,000 shares subject to stock options which are exercisable within
60 days of April 30, 1996.
(6) Includes 18,891 shares subject to stock options which are exercisable
within 60 days of April 30, 1996.
(7) Includes 11,531 shares subject to stock options which are exercisable
within 60 days of April 30, 1996.
(8) Includes 3,285 shares subject to stock options which are exercisable within
60 days of April 30, 1996.
(9) Includes 7,641 shares subject to stock options which are exercisable within
60 days of April 30, 1996.
(10) Includes an aggregate of 476,598 shares subject to stock options which are
exercisable within 60 days of April 30, 1996. See footnotes 2, 3, 4, 5, 6,
7, 8 and 9.
38
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Class A Common Stock, $0.013 par value, 5,000,000 shares of Class B Common
Stock, $0.013 par value and 1,000,000 shares of Preferred Stock, $0.01 par
value. On April 30, 1996, there were outstanding 12,864,888 shares of Class A
Common Stock, 4,362,001 shares of Class B Common Stock, and no shares of
Preferred Stock.
Class A Common Stock
The holders of Class A Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor, subject to the simultaneous payment of dividends to
the holders of Class B Common Stock. See "Class B Common Stock" below. Holders
of shares of Class A Common Stock are entitled to one vote per share. Cumulative
voting of shares is not permitted. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Class A
Common Stock are entitled to receive and share ratably, along with the holders
of Class B Common Stock, in all assets remaining available for distribution to
stockholders, after payment of any preferential amounts, if any, to which the
holders of Preferred Stock may be entitled. The Class A Common Stock has no
preemptive rights and is not redeemable, assessable or entitled to the benefits
of any sinking fund. Shares of Class A Common Stock held by PPEI, Prudential
Insurance Company of America or any of their affiliates may be converted at the
option of the holder thereof, into an equal number of fully paid and
nonassessable shares of Class B Common Stock. All outstanding shares of Class A
Common Stock are, and the Class A Common Stock to be issued in this offering
will be, validly issued, fully paid and nonassessable.
Class B Common Stock
The holders of Class B Common Stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors and paid out of funds
legally available therefor. In the event that the holders of Class A Common
Stock receive a dividend payable in shares of Class A Common Stock, the holders
of Class B Common Stock are entitled to receive a proportionate number of shares
of Class B Common Stock. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Class B
Common Stock are entitled to receive and share ratably, along with the holders
of Class A Common Stock, in all assets remaining available for distribution to
stockholders, after payment of any preferential amounts to which the holders of
Preferred Stock may be entitled. The Class B Common Stock has no preemptive
rights and is not redeemable or assessable, or entitled to the benefits of any
sinking fund. All outstanding shares of Class B Common Stock are validly issued,
fully paid and nonassessable.
Holders of Class B Common Stock have no rights to vote except upon the
occurrence of a Voting Event (as defined by the Company's Amended and Restated
Certificate of Incorporation) and then vote as a single class with the Class A
Common Stock, or as expressly provided by law. Each share of Class B Common
Stock shall have a number of votes equal to the number of shares of Class A
Common Stock into which it is then convertible, which, as of the date of this
Prospectus, was one for one. The Voting Events include (i) amendments to the
Company's Amended and Restated Certificate of Incorporation; (ii) the
liquidation, dissolution, winding-up or bankruptcy of the Company or
reclassification of its capital stock; and (iii) the consolidation, merger or
other business combination of the Company or its subsidiaries, requiring
submission for approval to the stockholders of the Company or the sale of all or
substantially all of its assets. Holders of Class B Common Stock have the right
to convert any such shares to Class A Common Stock following notice of a
conversion event. PPEI and its affiliates also have the right to convert any
such shares to the extent they own less than 19.9% of the Class A Common Stock,
provided that at the time of such conversion either (i) William J. Almon, his
spouse and lineal descendants, or any trust or partnership controlled by such
persons, taken together, or (ii) at least one stockholder not affiliated with
Prudential or PPEI owns a larger percentage of Class A Common Stock than PPEI,
Prudential and its affiliates taken together. Conversion events include (i) sale
of substantially all of the Company's assets, or any acquisition of the Company
by merger or stock acquisition; (ii) the Company's suffering of two consecutive
quarterly net losses from
39
<PAGE> 43
operations; (iii) transfer of shares of Class B Common Stock to an unaffiliated
party by the holder; (iv) the resignation or replacement during any twelve-month
period of more than 30% of the Company's directors; (v) default by the Company
on any indebtedness for borrowed money as to which the Class B Common
stockholder is not a holder; (vi) if PPEI believes conversion is necessary as a
result of any tax, accounting or legal consideration; and (vii) at such time
William J. Almon, his spouse and lineal descendants, or any trust or partnership
controlled by any one of them, taken together, own less than 282,000 shares of
Class A Common Stock. PPEI intends to periodically convert a number of shares of
Class B Common Stock into Class A Common Stock such that it owns the maximum
number of shares of Class A Common Stock permissible under the Company's Amended
and Restated Certificate of Incorporation which maximum number of shares is
currently one share less than the number of shares owned by William J. Almon,
his spouse and lineal descendants or any trust or partnership controlled by such
persons, taken together.
Preferred Stock
The Board of Directors of the Company is authorized, without further
stockholder action, to authorize and issue any of the 1,000,000 undesignated
shares of Preferred Stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions and certain other
rights and preferences of such shares of the Preferred Stock. The voting and
conversion rights of any class or series of Preferred Stock issued by the
Company could adversely affect the voting power of the holders of Common Stock
and may have the effect of delaying, deferring or preventing a change in control
of the Company. The Company has no present plans to issue any of the Preferred
Stock.
REGISTRATION RIGHTS
PPEI and William J. Almon are entitled to certain rights with respect to
the registration under the Securities Act of their shares of Class A Common
Stock held by them or issuable upon conversion of Class B Common Stock pursuant
to an agreement among the Company and such holders. Under the terms of such
agreement, if the Company proposes to register any of its securities under the
Securities Act, PPEI and Mr. Almon are entitled to notice of such registration
and are entitled to include their shares of Class A Common Stock therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of such shares included in such registration.
In addition, PPEI may require the Company, beginning 180 days after the date of
this Prospectus to file a registration statement under the Securities Act with
respect to such shares, and the Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations. PPEI,
however, has signed a Lock-Up Agreement with the Underwriters for this Offering
pursuant to which it has agreed not to sell any shares of Common Stock prior to
90 days after the effective date of the offering being made pursuant to this
Prospectus. Further, the holders may require the Company to register, subject to
certain conditions and limitations, all or a portion of their shares on a
Registration Statement on Form S-3. The holders may request up to three demand
registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Class A Common Stock is
First Interstate Bank of California, San Francisco, California. Its telephone
number is (800) 522-6645. Effective June 3, 1996, the transfer agent and
registrar for the Company's Class A Common Stock will be the First National Bank
of Boston, Canton, Massachussetts. Its telephone number is (800) 730-6001.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the DCL. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
40
<PAGE> 44
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of a corporation's voting stock. The
statute could have the effect of delaying, deferring or preventing a change in
control of the Company.
Additionally, the Bylaws of the Company provide that special meetings of
stockholders may only be called by two or more board members or the holders of
at least 50% of any class or series of the Company's outstanding capital stock.
In addition to the foregoing, the ability of the Board of Directors to
issue "blank check" preferred stock without further stockholder approval could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue Preferred Stock.
LISTING
The Company's Class A Common Stock is listed on the Nasdaq National Market
under the trading symbol "STMD." The Company has not applied to list its Common
Stock on any other exchange or quotation system.
41
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock of the Company in the
public market could adversely affect the prevailing market price of the Common
Stock. Upon completion of the offering, the Company will have 15,864,888 shares
of Class A Common Stock and 4,362,001 shares of Class B Common Stock
outstanding. All of the 4,500,000 shares of Class A Common Stock sold in this
offering (assuming no exercise of the Underwriters' over-allotment option) will
be freely tradeable without restriction or registration under the Securities
Act, except for any shares purchased by affiliates of the Company. All of the
Company's officers and directors as well as PPEI (who will own after the
offering 1,288,319 shares of Class A Common Stock and 4,362,001 shares of Class
B Common Stock) have signed lock-up agreements with the Underwriters agreeing
not to sell any shares of Common Stock owned by them or acquired on exercise of
options for 90 days after the effective date of this offering (the "Effective
Date") without the prior approval of Morgan Stanley & Co. Incorporated. All of
these shares of Common Stock are restricted shares and will be eligible for
immediate sale in the public market upon expiration of such lock-up agreements,
subject to volume and certain other restrictions under Rule 144.
As of April 30, 1996, there were a total of 2,223,887 shares of Common
Stock subject to outstanding options under the 1994 Incentive Stock Option Plan
and 1995 Director Option Plan (the "Option Plans"), of which 572,887 were
exercisable. All options held by officers and directors of the Company are
subject to the 90-day lock-up agreement with the Underwriters. Shares issuable
upon exercise of all other options will, upon exercise, be eligible for
immediate sale pursuant to the Company's Registration Statement on Form S-8. The
Company has filed a Registration Statement on Form S-8 under the Securities Act
to register all of the shares of Common Stock reserved for issuance under the
1995 Employee Stock Purchase Plan and the Option Plans. Shares purchased upon
exercise of options granted pursuant to the Option Plans or purchased pursuant
to the 1995 Employee Stock Purchase Plan generally will be immediately available
for resale in the public market.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed "affiliates",
who has beneficially owned restricted shares for at least two years (as computed
under Rule 144) is entitled to sell in "broker's transactions" or to market
makers, within any three-month period, a number shares that does not exceed
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock (approximately 202,300 shares immediately after this offering) or
(ii) the average weekly trading volume in the Class A Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain requirements as to manner
of sale, the filing of a notice, and the availability of public information
concerning the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the three-month period preceding a
sale and who has beneficially owned the restricted shares proposed to be sold
for at least three years (including the contiguous holding period of any prior
owner except an affiliate), would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations and certain other requirements
described above. Restricted shares and options to purchase Common Stock sold by
the Company to, among others, its employees, officers and directors pursuant to
written compensation plans or contracts and in reliance on Rule 701 under the
Securities Act, may be resold in reliance on Rule 144 by such persons who are
not affiliates subject only to the provisions of Rule 144 regarding manner of
sale, and by such persons who are affiliates without complying with the Rule's
holding period requirements.
The Company has granted to PPEI and William J. Almon registration rights
with respect to shares of Class A Common Stock owned by them, including shares
of Class A Common Stock issuable upon conversion of Class B Common Stock. Under
the terms of the registration rights agreement, if the Company proposes to
register any of its securities under the Securities Act, whether for its own
account or otherwise, such persons are entitled to notice of such registration
and are entitled to include their shares therein, subject to certain conditions
and limitations. In addition, such persons may require the Company to effect the
registration of their registrable shares for sale to the public, subject to
certain conditions and limitations. See "Description of Capital
Stock -- Registration Rights."
The Company has also agreed that it will not, without the prior written
consent of Morgan Stanley & Co. Incorporated, offer, sell, contract to sell or
otherwise dispose of any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock for a
period of 90 days after the Effective Date subject to certain exceptions.
42
<PAGE> 46
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the U.S. Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Montgomery Securities, and Smith Barney Inc.
are acting as U.S. Representatives, have severally agreed to purchase, and the
Company and Selling Stockholders have agreed to sell to them, and the
International Underwriters named below, for whom Morgan Stanley & Co.
International Limited, Montgomery Securities and Smith Barney Inc. are acting as
International Representatives (collectively with the U.S. Representatives, the
"Representatives"), have severally agreed to purchase, and the Company and the
Selling Stockholders agreed to sell to them, the respective number of shares of
the Company's Class A Common Stock set forth opposite their respective names
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.......................................
Montgomery Securities...................................................
Smith Barney Inc........................................................
---------
Subtotal........................................................ 3,600,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited..............................
Montgomery Securities...................................................
Smith Barney Inc. ......................................................
---------
Subtotal........................................................ 900,000
---------
Total......................................................... 4,500,000
=========
</TABLE>
The U.S. Underwriters and International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Class A Common Stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the shares of Class A
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (a) it is not purchasing any shares of Class A Common Stock being
sold by it (the "U.S. Shares") for the account of anyone other than a United
States or Canadian Person (as defined below) and (b) it has not offered or sold,
and will not offer or sell, directly or indirectly, any U.S. Shares or
distribute this Prospectus outside the United States or Canada or to anyone
other than a United States or Canadian Person. Pursuant to the Agreement Between
U.S. and International Underwriters, each International Underwriter has
represented and agreed that, with certain
43
<PAGE> 47
exceptions set forth below, (a) it is not purchasing any shares of Class A
Common Stock being sold by it (the "International Shares") for the account of
any United States or Canadian Person and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any International Shares or
distribute this Prospectus within the United States or Canada or to any United
States or Canadian Person. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement Between U.S. and International Underwriters. With respect to
Montgomery Securities and Smith Barney Inc., the foregoing representations or
agreements (i) made by each of them in their capacity as a U.S. Underwriter
shall apply only to shares of Class A Common Stock purchased by each of them in
their capacity as a U.S. Underwriter, (ii) made by each of them in their
capacity as an International Underwriter shall apply only to shares of Class A
Common Stock purchased by each of them in their capacity as an International
Underwriter and (iii) shall not restrict either of their abilities to distribute
the Prospectus to any person. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside of the United States and Canada of
any United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person and
"United States" means the United States of America, its territories, its
possessions and all areas subject to its jurisdiction.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Class A Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Class A Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
Class A Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send to
any dealer who purchases from it any shares of Class A Common Stock a notice
stating in substance that, by purchasing such shares such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares in Canada or to, or for the benefit of, any
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of Class A Common
Stock in Canada will be made only pursuant to an exemption from the requirement
to file a prospectus in the province or territory of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Class A Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and will not offer or sell any shares of Class A Common Stock to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995
(the "Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares of Class A Common Stock in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of Class A
Common Stock if that person is of a kind described in Article II(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock offered hereby directly to the public at the public offering price
set forth on the cover page hereof and part to certain dealers
44
<PAGE> 48
at a price that represents a concession not in excess of $ per share
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other
Underwriters or to certain other dealers.
Pursuant to the Underwriting Agreement, certain of the Selling Stockholders
have granted to the U.S. Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 675,000 additional shares of
Class A Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in the sale of the shares of Class A Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Class A
Common Stock offered hereby to the U.S. Underwriters.
Pursuant to regulations promulgated by the Securities and Exchange
Commission, market makers in the Common Stock who are Underwriters or
prospective underwriters ("passive market makers") may, subject to certain
limitations, make bids for or purchases of shares of Class A Common Stock until
the earlier of the time of commencement (the "Commencement Date") of offers or
sales of the Class A Common Stock contemplated by this Prospectus or the time at
which a stabilizing bid for such shares is made. In general, on and after the
date two business days prior to the Commencement Date (1) such market maker's
net daily purchases of the Class A Common Stock may not exceed 30% of its
average daily trading volume in such stock for the two full consecutive calendar
months immediately preceding the filing date of the registration statement of
which this Prospectus forms a part, (2) such market maker may not effect
transactions in, or display bids for, the Class A Common Stock at a price that
exceeds the highest bid for the Class A Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.
See "Shares Eligible for Future Sale" for a description of certain
arrangements pursuant to which certain stockholders and all officers and
directors have agreed that they will not, without the prior written consent of
Morgan Stanley & Co. Incorporated, offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of any Common Stock of the Company until
90 days after the Effective Date. The Company has agreed in the Underwriting
Agreement that it will not, without the prior written consent of Morgan Stanley
& Co. Incorporated, offer, sell, contract to sell or otherwise dispose of any
shares of Class A Common Stock or any securities convertible into or
exchangeable for Class A Common Stock for a period of 90 days after the
Effective Date, provided that the Company may issue shares under its stock
option plans during such 90 day period.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Prior to the offering, PPEI owned 1,375,498 shares of Class A Common Stock
and 4,362,001 shares of Class B Common Stock. PPEI has certain rights to convert
Class B Common Stock into Class A Common Stock. See "Description of Capital
Stock." Prudential Equity Investors, Inc. ("PEI"), the general partner of PPEI,
is a wholly-owned subsidiary of Prudential Insurance Company of America, which
is the controlling shareholder of Prudential Securities Incorporated, a member
of the National Association of Securities Dealers, Inc. (the "NASD").
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company by Wilson, Sonsini, Goodrich &
Rosati, P.C., Palo Alto, California. Judith M. O'Brien, a member of Wilson,
Sonsini, Goodrich & Rosati, is Secretary of the Company. As of the date of this
Prospectus, Mrs. O'Brien and certain attorneys employed by Wilson, Sonsini,
Goodrich & Rosati, P.C., own 3,750 shares of the Company's Class A Common Stock.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP San Francisco, California.
45
<PAGE> 49
EXPERTS
The consolidated financial statements and related schedule of the Company
and its subsidiaries as of December 31, 1994 and 1995 and for the period from
May 20, 1994 through December 31, 1994 and the year ended December 31, 1995 and
the financial statements and related schedule of the Predecessor as of December
31, 1993 and for the year ended December 31, 1993 and for the period from
January 1, 1994 through May 19, 1994 have been included herein or incorporated
herein by reference and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Intellectual Property and Proprietary Rights" and
"Business -- Intellectual Property and Proprietary Rights" have been reviewed
and approved by Lahive & Cockfield, special intellectual property counsel to the
Company, as experts in such matters, and are included herein in reliance upon
such review and approval.
AVAILABLE INFORMATION
StorMedia Incorporated (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy and information
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy and information statements and other
information filed by the Company with the Commission pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material also can be obtained
from the Public Reference Branch of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy and information
statements and other information can also be inspected at the offices of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
46
<PAGE> 50
STORMEDIA INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Equity..................................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
StorMedia Incorporated:
We have audited the accompanying consolidated balance sheets of StorMedia
Incorporated (the Company) and its subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, equity and cash
flows for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994, and the accompanying statements of operations, equity
and cash flows for the period from January 1, 1994 through May 19, 1994 and for
the year ended December 31, 1993 of the thin film division (the Predecessor) of
Nashua Corporation. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
As described in Note 1 of the notes to consolidated financial statements,
the Company acquired certain assets of the Predecessor in return for notes
payable and assumption of certain liabilities on May 20, 1994 in a transaction
which was accounted for as a purchase. Accordingly, the consolidated financial
statements of the Company and its subsidiaries are presented on a different cost
basis than the financial statements of the Predecessor and therefore, are not
comparable.
In our opinion, the consolidated financial statements of the Company and
its subsidiaries referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 1995 and 1994, and the results of their operations and their cash
flows for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994, in conformity with generally accepted accounting
principles.
In our opinion, the financial statements of the Predecessor referred to
above present fairly, in all material respects, the results of operations and
cash flows of the Predecessor for the period from January 1, 1994 through May
19, 1994 and for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Palo Alto, California
January 17, 1996
F-2
<PAGE> 52
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(INFORMATION AS OF MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 29,
1996
DECEMBER 31, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2,355 $ 37,407 $ 31,624
Short-term investments........................................... -- 18,421 5,700
Accounts receivable, less allowances of $253, $1,555, and $1,084,
at December 31, 1994 and 1995 and March 29, 1996,
respectively.................................................. 15,709 30,114 39,365
Inventories...................................................... 5,616 9,811 10,357
Prepaid expenses................................................. 2,861 4,551 5,240
Deferred income taxes............................................ 807 2,015 2,015
-------- ------- --------
Total current assets..................................... 27,348 102,319 94,301
Plant and equipment, net........................................... 17,976 77,856 102,737
Deferred income taxes.............................................. 1,172 576 576
Deposits and other assets.......................................... 271 846 1,065
-------- ------- --------
$ 46,767 $181,597 $198,679
======== ======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK, PUT OPTIONS AND EQUITY
Current liabilities:
Trade accounts payable........................................... $ 10,584 $ 18,997 $ 32,402
Short-term borrowings............................................ 7,283 -- --
Current portion of long-term debt................................ 2,944 47 20
Accrued salaries and benefits.................................... 2,010 4,607 4,139
Income taxes payable............................................. 2,069 3,407 4,845
Other accrued expenses........................................... 722 1,209 1,100
-------- ------- --------
Total current liabilities................................ 25,612 28,267 42,506
Long-term debt, less current portion............................... 12,806 111 32
Redeemable Preferred Stock, par value $.01 per share 6,300 Series A
shares authorized, 1,890 shares issued and outstanding at
December 31, 1994, and no shares issued and outstanding at
December 31, 1995 and March 29, 1996; and 5,040 Series B shares
authorized, no shares issued and outstanding at December 31,
1994, 1995 and March 29, 1996; aggregate liquidation preference
$4,793 at December 31, 1994 and $0 at December 31, 1995 and March
29, 1996......................................................... 4,750 -- --
Put options........................................................ -- 20,605 12,363
Commitments and contingencies
Equity:
Preferred Stock, $.01 par value; 1,000 shares authorized; none
issued or outstanding......................................... -- -- --
Class A Common Stock, $.013 par value; 50,000 shares authorized;
618, 11,482, and 12,761 shares issued and outstanding at
December 31, 1994 and 1995, and March 29, 1996,
respectively.................................................. 8 153 170
Convertible Class B Common Stock; $.013 par value; 5,000 shares
authorized; 1,520, 5,738, and 4,362 shares issued and
outstanding at December 31, 1994 and 1995 and March 29, 1996,
respectively.................................................. 20 77 58
Additional paid-in capital....................................... 368 108,116 109,907
Deferred compensation............................................ -- (10) (9)
Net unrealized gain.............................................. -- 95 --
Retained earnings................................................ 3,203 24,183 33,652
-------- ------- --------
Total equity............................................. 3,599 132,614 143,778
-------- ------- --------
$ 46,767 $181,597 $198,679
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND
MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR COMPANY PREDECESSOR/ COMPANY
---------------------------- ------------ COMPANY ------------------------------------
PERIOD FROM PERIOD FROM COMBINED THREE MONTHS ENDED
YEAR ENDED JANUARY 1 TO MAY 20 TO YEAR ENDED YEAR ENDED ---------------------
DECEMBER 31, MAY 19, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1994 1994 1995 1995 1996
------------ ------------- ------------ ------------ ------------ --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 77,145 $26,168 $ 55,598 $ 81,766 $161,455 $27,880 $61,156
Cost of sales................. 64,352 22,077 43,795 65,509 117,827 21,818 44,047
-------- ------- ------- ------- --------
Gross profit................ 12,793 4,091 11,803 16,257 43,628 6,062 17,109
Operating expenses:
Research and development.... 5,417 2,124 3,116 5,010 9,269 1,692 3,708
Selling, general and
administrative............ 7,117 1,583 2,552 3,883 5,435 1,008 2,050
Restructuring charge........ 24,916 -- -- -- --
-------- ------- ------- ------- --------
Total operating
expenses............ 37,450 3,707 5,668 8,893 14,704 2,700 5,758
-------- ------- ------- ------- --------
Operating earnings
(loss).............. (24,657) 384 6,135 7,364 28,924 3,362 11,351
Interest income (expense)
net....................... -- -- (663) (1,083) 76 (567) 485
-------- ------- ------- ------- --------
Earnings (loss) before
income tax expense........ (24,657) 384 5,472 6,281 29,000 2,795 11,836
Income tax expense............ -- -- 2,079 2,386 7,842 759 2,367
-------- ------- ------- ------- --------
Net earnings (loss)......... $(24,657) $ 384 $ 3,393 $ 3,895 $ 21,158 $ 2,036 $ 9,469
======== ======= ======= ======= ========
Earnings per share:
Primary..................... $ 0.30 $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======= ========
Fully diluted............... $ 0.30 $ 0.35 $ 1.38 $ 0.18 $ 0.52
======= ======= ========
Number of shares used in per
share computation:
Primary..................... 11,175 11,175 15,314 11,175 18,305
======= ======= ========
Fully diluted............... 11,175 11,175 15,338 11,175 18,309
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(INFORMATION FOR MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NET
--------------- PAID-IN DEFERRED DIVISIONAL UNREALIZED RETAINED TOTAL
SHARES AMOUNT CAPITAL COMPENSATION EQUITY GAIN EARNINGS EQUITY
------ ------ ---------- ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR PERIOD
Balances at December 31, 1992..... -- $ -- $ -- $ -- $ 36,011 $ -- $ -- $ 36,011
Net advances from Nashua.......... -- -- -- -- 7,051 -- -- 7,051
Net loss.......................... -- -- -- -- (24,657) -- -- (24,657)
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1993..... -- -- -- -- 18,405 -- -- 18,405
Net advances from Nashua.......... -- -- -- -- 3,280 -- -- 3,280
Net earnings...................... -- -- -- -- 384 -- -- 384
------ ---- -------- ---- -------- --- ------- --------
Balances at May 19, 1994.......... -- $ -- $ -- $ -- $ 22,069 $ -- $ -- $ 22,069
====== ==== ======== ==== ======== === ======= ========
SUCCESSOR PERIOD
Net proceeds from sale of Class A
Common Stock for $115 and $281,
respectively.................... 2,138 $ 28 $ 368 $ -- $ -- $ -- $ -- $ 396
Preferred Stock dividends
(.03 per share)................. -- -- -- -- -- -- (190 ) (190)
Net earnings...................... -- -- -- -- -- -- 3,393 3,393
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1994..... 2,138 28 368 -- -- -- 3,203 3,599
Proceeds from exercise of
common stock options............ 908 12 275 -- -- -- -- 287
Proceeds from sale of Common
Stock........................... 7,087 95 118,051 -- -- -- -- 118,146
Conversion of Redeemable Preferred
Stock to Common Stock........... 7,087 95 4,655 -- -- -- -- 4,750
Proceeds from sale of put
options......................... -- -- 1,918 -- -- -- -- 1,918
Reclassification of put option
obligation...................... -- -- (20,605) -- -- -- -- (20,605)
Deferred compensation............. -- -- 86 (10) -- -- -- 76
Tax benefit arising from early
dispositions of stock issued
upon exercise of stock
options......................... -- -- 3,368 -- -- -- -- 3,368
Preferred Stock dividends
(.01 per share)................. -- -- -- -- -- -- (178 ) (178)
Net unrealized gain............... -- -- -- -- -- 95 -- 95
Net earnings...................... -- -- -- -- -- -- 21,158 21,158
------ ---- -------- ---- -------- --- ------- --------
Balances at December 31, 1995..... 17,220 $230 $108,116 $(10) $ -- $ 95 $24,183 $132,614
Proceeds from exercise of common
stock options (unaudited)....... 166 2 167 -- -- -- -- 169
Settlement of put options
(unaudited)..................... -- -- (311) -- -- -- -- (311)
Reclassification of put option
obligation (unaudited).......... -- -- 8,242 -- -- -- -- 8,242
Repurchase of Class A Common stock
(unaudited)..................... (263 ) (4) (7,208) -- -- -- -- (7,212)
Deferred compensation
(unaudited)..................... -- -- -- 1 -- -- -- 1
Net unrealized gain (loss)
(unaudited)..................... -- -- -- -- -- (95) -- (95)
Tax benefit arising from early
dispositions of stock issued
upon exercise of stock options
(unaudited)..................... -- -- 901 -- -- -- -- 901
Net earnings (unaudited).......... -- -- -- -- -- -- 9,469 9,469
------ ---- -------- ---- -------- --- ------- --------
Balances at March 29, 1996
(unaudited)..................... 17,123 $228 $109,907 $ (9) $ -- $ -- $33,652 $143,778
====== ==== ======== ==== ======== === ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INFORMATION FOR MARCH 31, 1995 AND MARCH 29, 1996 IS UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------- -------------------------------------------------------
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
YEAR ENDED JANUARY 1 MAY 20 TO YEAR ENDED -------------------------
DECEMBER 31, TO MAY 19, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 29,
1993 1994 1994 1995 1995 1996
------------ ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss)........................ $(24,657) $ 384 $ 3,393 $ 21,158 $ 2,036 $ 9,469
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.............. 7,973 467 357 4,355 584 3,029
Restructuring charge....................... 24,916 -- -- -- -- --
Deferred income taxes...................... -- -- (1,979) (612) -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (2,202) (3,650) (10,352) (14,405) (3,385) (9,251)
Inventories.............................. (446) (766) (979) (4,195) (2,016) (546)
Prepaid expenses......................... 315 481 (1,387) (1,690) (402) (689)
Other assets............................. (16) (9) (213) (575) (78) (219)
Trade accounts payable................... (2,517) 575 7,053 8,413 1,926 13,405
Accrued liabilities...................... (197) 1,210 1,224 3,084 (240) (577)
Income taxes payable..................... -- -- 2,069 4,706 (1,010) 2,339
-------- -------- ------- -------- ------- -------
Net cash provided by (used in)
operating activities................ 3,169 (1,308) (814) 20,239 (2,585) 16,960
-------- -------- ------- -------- ------- -------
INVESTING ACTIVITIES
Acquisition of plant and equipment......... (10,563) (1,972) (14,113) (60,321) (3,510) (27,909)
Interest capitalized on plant and
equipment................................ -- -- (364) (197) (197) --
Sale of short-term investments............. -- -- -- -- -- 12,626
Purchase of short-term investments......... -- -- -- (18,326) -- --
Other...................................... -- -- (447) -- -- --
-------- -------- ------- -------- ------- -------
Net cash used in investing
activities.......................... (10,563) (1,972) (14,924) (78,844) (3,707) (15,283)
-------- -------- ------- -------- ------- -------
FINANCING ACTIVITIES
Short-term borrowings (repayments)......... -- -- 7,283 (8,783) 6,654 --
Issuance of long-term obligations.......... -- -- 11,708 79 -- --
Payment of debt obligations................ -- -- (5,854) (17,812) (100) (106)
Proceeds from sale of Common Stock, net of
issuance costs........................... -- -- 396 118,433 85 169
Proceeds from sale of Preferred Stock, net
of issuance costs........................ -- -- 4,750 -- -- --
Proceeds from sale of put options.......... -- -- -- 1,918 -- (311)
Repurchase of Class A Common Stock......... -- -- -- -- -- (7,212)
Preferred Stock dividends paid............. -- -- (190) (178) (76) --
Net advances from Nashua................... 7,051 3,280 -- -- -- --
-------- -------- ------- -------- ------- -------
Net cash provided by financing
activities.......................... 7,051 3,280 18,093 93,657 6,563 (7,460)
-------- -------- ------- -------- ------- -------
Increase (decrease) in cash and cash
equivalents.............................. (343) -- 2,355 35,052 271 (5,783)
Cash and cash equivalents at beginning of
period................................... 343 -- -- 2,355 2,355 37,407
-------- -------- ------- -------- ------- -------
Cash and cash equivalents at end of
period................................... $ -- $ -- $ 2,355 $ 37,407 $ 2,626 $ 31,624
======== ======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest..................... -- -- $ 727 $ 1,827 $ 734 --
======= ======== =======
Cash paid for income taxes................. -- -- $ 1,988 $ 3,748 $ 1,770 $ --
======= ======== =======
Non-cash financing and investing
activities:
Obligations to Nashua incurred for purchase
of thin film
division................................. -- -- $ 6,950 -- -- --
=======
Equipment acquired under capital lease
obligations.............................. -- -- $ 2,946 $ 2,141 $ 1,592 --
======= ======== =======
Equipment acquired under short-term
borrowings............................... -- -- -- $ 1,500 $ 1,500 --
======== =======
Conversion of Preferred Stock to Common
Stock.................................... -- -- -- $ 4,750 -- --
========
Tax benefit arising from early dispositions
of stock issued upon exercise of stock
options.................................. -- -- -- $ 3,368 -- $ 901
======== =======
Net unrealized gain on investments......... -- -- -- $ 95 -- --
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- BASIS OF PRESENTATION
On May 4, 1994, StorMedia Incorporated (the "Company") was incorporated to
acquire the thin film division (the "Predecessor") of Nashua Corporation
("Nashua"). The Company develops, manufactures and sells sputtered thin film
disks to independent hard disk drive manufacturers. On May 20, 1994, the Company
purchased substantially all of the assets (excluding certain accounts
receivable) and assumed certain liabilities (the "Acquisition") of the
Predecessor. The Company's operations prior to May 20, 1994 were immaterial.
At the time of the Acquisition, the Company delivered Subordinated
Promissory Notes for $4,950 (See Note 6) to Nashua, assumed $5,486 of current
liabilities, and agreed to pay Nashua a contingent amount ("Earn Out Payment")
based upon the 1994 combined operating profits of the Predecessor and Company.
In addition, Nashua retained $10,000 of selected accounts receivable which were
guaranteed by the Company and which receivables have since been fully paid by
the obligors. The Earn Out Payment of $2,000 plus accrued interest was paid to
Nashua in 1995.
The Acquisition was accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon fair values of assets acquired and
liabilities assumed as of May 20, 1994. The replacement cost of the acquired
plant and equipment was reduced by the excess of the fair value of the net
assets acquired over the purchase price.
A summary of the assets acquired and liabilities incurred by the Company is
as follows:
<TABLE>
<S> <C>
Assets acquired:
Accounts receivable...................................................... $15,357
Inventories.............................................................. 4,637
Prepaid expenses and other current assets................................ 1,532
Plant and equipment...................................................... 910
-------
22,436
Less receivables retained by Nashua...................................... 10,000
-------
$12,436
=======
Liabilities incurred:
Notes payable to Nashua at acquisition................................... $ 4,950
Earn out payment......................................................... 2,000
-------
6,950
Accounts payable......................................................... 3,531
Accrued liabilities...................................................... 1,955
-------
$12,436
=======
</TABLE>
The accompanying financial statements include the accounts of the
Predecessor for the period from January 1, 1994 through May 19, 1994 and for the
year ended December 31, 1993. The accompanying consolidated financial statements
for the year ended December 31, 1995 and for the period from May 20, 1994
through December 31, 1994 include the accounts of the Company and its wholly
owned subsidiaries, StorMedia International Ltd. and StorMedia Foreign Sales
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.
The 1994 pro forma combined results of operations include the operations of
the Predecessor from the beginning of the period through May 19, 1994 and the
results of the Company for the remainder of the period,
F-7
<PAGE> 57
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
adjusted on a pro forma basis for changes in interest expense, depreciation and
corporate charges. See Note 12.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with maturities of less than three months at date of purchase to be
cash equivalents for purposes of the statements of cash flows. Cash equivalents
are stated at cost which approximates market.
Short-term investments: As of January 1, 1995, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date. At
March 29, 1996, all short-term investments are designated as
"available-for-sale." Interest on the investments are included in interest
income. The adoption of SFAS No. 115 did not have a material impact on the
Company's consolidated financial statements.
Concentration of credit risk: A majority of the Company's trade receivables
are derived principally from export sales to the Far East operations of large
U.S. companies within the disk drive industry. The Company performs ongoing
credit evaluations of its customers' financial condition. See Note 11.
Inventories: Inventories are stated at the lower of cost or market (net
realizable value). Cost is determined using the first-in, first-out method.
Provisions to reduce the cost of obsolete, slow moving and non-usable inventory
to net realizable value are charged to operations.
Prepaid expenses: The Company includes in prepaid expenses the cost of
consumable spare parts and the recoverable amount of sputtering materials which
are used in production. Spare parts and sputtering materials are charged to
manufacturing costs when used over the Company's normal operating cycle, which
is less than twelve months.
Plant and equipment: Plant and equipment is carried at cost of acquisition
which includes capitalized interest on construction in progress. Depreciation is
computed on a straight-line basis generally over five years, representing the
shorter of the estimated useful lives of the equipment or the lease term in the
case of assets under capital leases. Leasehold improvements are depreciated over
the shorter of the estimated useful lives of the assets, or the term of the
leased property, computed on a straight-line basis.
Revenue recognition: The Company records sales when shipped and provides an
allowance for estimated costs associated with returns of nonconforming product.
Foreign currency accounting: The functional currency of the Singapore
branch of StorMedia International Ltd. is the U.S. dollar. Exchange gains and
losses which result from the remeasurement of foreign currency financial
statements into U.S. dollars are included in results of operations. Net
translation gains/losses were immaterial through March 29, 1996.
Foreign exchange gains and losses: The Company enters into foreign forward
exchange contracts for firm commitments on equipment and
construction-in-progress to hedge foreign exchange risk. Any gains or losses on
these instruments are recognized in accordance with SFAS No. 52, "Foreign
Currency Translations" and SFAS No. 80, "Accounting for Futures Contracts." The
Company does not enter into derivative financial
F-8
<PAGE> 58
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
instruments for trading purposes. As of March 29, 1996, there were no foreign
forward exchange contracts outstanding.
Income taxes: Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax basis and the
financial reporting basis of assets and liabilities.
The Predecessor was a division of Nashua, and its taxable income or loss
was included in the tax return of Nashua. SFAS No. 109 was applied to determine
the income tax expense or benefit to be recorded in the accompanying financial
statements by the Predecessor as though it were a separate taxpayer.
Earnings per share: Earnings per share is calculated by dividing net
earnings by the weighted average number of shares of Common Stock and Common
Stock Equivalents outstanding including, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, dilutive common equivalent shares
from stock options granted at an exercise price less than the IPO price (using
the treasury stock method) and common shares from the conversion of the Series A
Preferred Stock and Series B Preferred Stock as if they were outstanding
throughout the periods presented prior to the IPO (using the if-converted
method).
Use of estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
NOTE 3 -- BALANCE SHEET COMPONENTS
Short-term investments: The amortized cost and amortized fair value of
securities available-for-sale as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds.......................... $ 5,113 $ -- $ 17 $ 5,096
U.S. government obligations.............. 4,964 -- -- 4,964
Commercial paper......................... 21,643 96 -- 21,739
Money market instruments................. 341 -- -- 341
Municipal bonds.......................... 7,232 -- -- 7,232
Auction rate preferred................... 16,440 16 -- 16,456
--------- ---------- --- ---------
Total.......................... $55,733 $112 $ 17 $55,828
======= ======== ======== =======
Included in cash and cash equivalents.... $37,407
Included in short-term investments....... 18,421
---------
Total.................................... $55,828
=======
</TABLE>
F-9
<PAGE> 59
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The amortized cost and amortized fair value of securities
available-for-sale as of March 29, 1996, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds.......................... $ 6,091 $ -- $ -- $ 6,091
U.S. government obligations.............. 4,968 -- -- 4,968
Commercial paper......................... 1,385 -- 95 1,290
Money market instruments................. 13,170 -- -- 13,170
Municipal bonds.......................... 6,105 -- -- 6,105
Auction rate preferred................... 5,700 -- -- 5,700
--------- ---------- ---------- ---------
Total.......................... $37,419 $ -- $ 95 $37,324
======= ======== ======== =======
Included in cash and cash equivalents.... $31,624
Included in short-term investments....... 5,700
---------
Total.................................... $37,324
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 29,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Inventories:
Raw materials................................. $ 2,741 $ 4,167 $ 5,155
Work-in-process............................... 1,808 4,368 4,869
Finished goods................................ 1,067 1,276 333
------- ------- --------
Total inventories..................... $ 5,616 $ 9,811 $ 10,357
======= ======= ========
Plant and equipment:
Leasehold improvements........................ $ 2,282 $ 8,379 $ 12,050
Machinery and equipment....................... 7,202 37,381 61,229
Construction-in-progress...................... 8,849 36,695 37,020
------- ------- --------
$ 18,333 $ 82,455 $ 110,299
Less allowance for depreciation and
amortization............................... (357) (4,599) (7,562)
------- ------- --------
Plant and equipment, net................... $ 17,976 $ 77,856 $ 102,737
======= ======= ========
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
Nashua provided certain services to the Predecessor up through May 19,
1994, including executive management, treasury, tax, financial audit, insurance
administration, legal, 401(k) plan administration and general research services.
Nashua generally charged the Predecessor for these services based upon the
relationship of its sales to total Nashua sales. There were also direct charges
for specific expenses paid by Nashua for the Predecessor including insurance
coverage and specific research and engineering projects. Management believes the
allocation method of the service charges to be reasonable. Management believes
the charges incurred for selling, general and administrative expenses and
research and development expenses would not have been incurred by the Company on
a stand-alone basis, and would have decreased the net loss of the Predecessor by
$482 and $894 for the period from January 1 to May 19, 1994, and for the year
ended December 31, 1993, respectively.
The Predecessor's financial statements also included amortization of
goodwill relating to the acquisition of Lin Data Corporation in May 1987 which
became Nashua's thin film disk division. In the fourth quarter of
F-10
<PAGE> 60
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1993, Nashua decided to sell its thin film disk division and recorded a
restructuring charge of $24,916. The charge reflected Nashua's estimated net
realizable value of the business and comprised write-downs of plant and
equipment (approximately $18,700) and goodwill (approximately $6,216).
The following charges by Nashua were included in the accompanying
statements of operations of the Predecessor:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1, 1994
TO DECEMBER 31,
MAY 19, 1994 1993
--------------------------- ------------
<S> <C> <C>
Selling, general and administrative.............. $ 252 $ 685
Research and development......................... 230 209
Restructuring charge............................. -- 24,916
</TABLE>
The Predecessor purchased substantially all of its substrate requirements
from Nashua Precision Technologies (NPT), a division of Nashua. In addition, in
connection with the acquisition, the Company entered into a supply agreement
with Nashua for the purchase of 75% of the Company's substrate requirements for
a period of two years beginning May 20, 1994. The supply agreement is
conditioned upon Nashua meeting competitive quality and price criteria.
Purchases from NPT were:
<TABLE>
<S> <C>
Year ended December 31, 1995............................................... $12,634
Period from May 20 to December 31, 1994.................................... 6,089
Period from January 1 to May 19, 1994...................................... 4,769
Year ended December 31, 1993............................................... 12,447
</TABLE>
The Company purchased equipment from a company controlled by the
brother-in-law of the President and Chief Operating Officer. Such purchases
amounted to approximately $1.8 million and approximately $0.1 million during
1995 and 1994, respectively. All transactions were conducted on an arms-length
basis.
NOTE 5 -- SHORT-TERM BORROWINGS
Line of Credit
On December 1, 1995, the Company entered into an unsecured revolving credit
facility agreement (the "Agreement") with Bank of America National Trust and
Savings Association ("Bank of America"). Under the Agreement, the Company may
borrow up to $20,000 (the "Credit Facility") on a revolving basis through
October 31, 1997. Borrowings under the Agreement carry interest at LIBOR plus
.75% or, at the option of the Company, at a reference rate (as defined in the
Agreement) if 50% or less of the Credit Facility is utilized; or at LIBOR plus
1.25% or, at the option of the Company, at a reference rate (as defined in the
Agreement) if more than 50% of the Credit Facility is utilized. The Credit
Facility provides for a commitment fee of $50 per annum. As of December 31,
1995, the Company had no borrowings under the Credit Facility.
The Agreement prohibits the payment of cash dividends and requires the
continued compliance with various financial covenants. At December 31, 1995, the
Company was in full compliance with all covenants and conditions.
Under the Company's Loan and Security Agreement dated May 20, 1994, as
amended (the "Senior Loan Agreement") with Coastfed Business Credit Corporation
("Coast"), which the Company terminated and repaid in August 1995, the Company
was permitted to borrow up to $15,000 on a revolving basis secured by
substantially all of the assets of StorMedia Incorporated. The Senior Loan
Agreement provided the Company with a trade receivables credit line pursuant to
which the Company could borrow funds equal to 80% of the eligible trade
receivables of the U.S. operation at an interest rate equal to the bank's prime
rate plus 2%.
F-11
<PAGE> 61
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest charges were computed on the effect of cash in-transit and clearing
periods specified in the Senior Loan Agreement as well as outstanding balances.
The weighted average effective interest rate for the year ended December 31,
1995 and for the period from May 20, 1994 to December 31, 1994 was 14.7% and
13.7%, respectively. Notwithstanding the amount outstanding under the Senior
Loan Agreement, the Company was obligated to make monthly minimum interest
payments of $13 to Coast. At December 31, 1994 the aggregate amount of the
Company's indebtedness to Coast under the trade receivables credit line was
$4,300 and there was $4,678 available for future borrowings. Under the terms of
the trade receivables credit line, all collections of trade receivables were
remitted to Coast, with loan availability adjusted accordingly. The Senior Loan
Agreement contained certain requirements including restrictions on payment of
any common stock dividends, approval of asset sales, mergers and additional
borrowings, and maintenance of a minimum level of tangible net worth.
On January 27, 1995, the Company amended its Senior Loan Agreement with
Coast extending the expiration date to August 31, 1995 and entered into a $4,000
term loan agreement within the total $15,000 commitment. The term loan accrued
interest at a rate of prime plus 2% and was payable monthly in arrears.
Singapore Financing Agreement
On November 4, 1994, StorMedia International Ltd. ("Subsidiary"), one of
the Company's wholly owned subsidiaries, entered into three financing agreements
with Sembawang Leasing Pte Ltd. ("Sembawang"): an accounts receivable factoring
agreement, a short term loan and a capital lease (See Note 6). In August 1995,
the Subsidiary repaid Sembawang the entire principal amounts owing under the
three financing agreements, plus accrued interest.
The accounts receivable factoring agreement permitted the Subsidiary to
borrow funds in U.S. dollars on a full recourse basis equal to 90% of the
Subsidiary's eligible trade receivables, at a discount rate equal to a United
States bank's prime rate plus 1.75% and less a service charge of .125% of each
amount factored. During the initial year of the agreement Sembawang retained an
additional 5% of the amount factored as a security deposit applied to all three
financing agreements up to a maximum of $150 for any one month and $2,000 for
the year. At December 31, 1994, the aggregate amount of the Subsidiary's
indebtedness to Sembawang under the accounts receivable financing factoring
agreement was $2,983. The weighted average interest rate during the period from
November 4, 1994 to December 31, 1994 was 10.25%.
The short term loan facility permitted borrowings of up to $1,500 in U.S.
dollars at an interest rate of SIBOR plus 2.625%. The borrowings were repayable
in quarterly installments over the year following the date of the initial
borrowing.
In connection with the borrowing agreements between Sembawang and the
Subsidiary, the Company, the Company's subordinated debt holders and the
Company's Chairman entered into agreements with Sembawang. The Company and its
Chairman entered into guarantee agreements with Sembawang under which each would
guarantee payment of borrowings under the capital lease line and the facility
agreement. The Company's Chairman received a $50 fee in consideration of his
guarantee. In addition, Sembawang had a security interest in all of the assets
of the Subsidiary, and the capital lease line and the facility agreement
contained various covenants, including maintenance of minimum levels of tangible
net worth and ratios of debt to equity.
F-12
<PAGE> 62
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- LONG-TERM DEBT
Long-term debt at December 31, 1995 and December 31, 1994 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 29,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
12 3/8% Subordinated note due May 20, 1999..... $ 5,854 $ -- $--
Subordinated promissory notes due May 20,
1997......................................... 4,950 -- --
Capital lease obligations...................... 2,946 158 52
Earn out payment............................... 2,000 -- --
------------ ------ ---
Total long-term borrowings................... 15,750 158 52
Less current portion......................... 2,944 47 20
------------ ------ ---
Total long-term portion.............. $ 12,806 $111 $32
========== ========== =========
</TABLE>
In July 1994 the Company sold a $5,854, 12 3/8% Subordinated Note to its
majority stockholder. This note accrued interest at 12 3/8% per annum, payable
quarterly, with the principal payable in two equal installments on May 20, 1998
and 1999. Payment of principal and accrued interest on this note accelerated and
became payable upon the occurrence of the IPO. This 12 3/8% Subordinated Note,
plus accrued interest, was repaid in full on the closing of the Company's IPO.
On May 20, 1994, in connection with the acquisition of the Predecessor, the
Company delivered two Subordinated Promissory Notes totaling $4,950 to Nashua.
The notes accrue interest at an annual rate of prime plus 2% which was payable
quarterly. Principal was payable quarterly on the occurrence of certain events.
These Subordinated Promissory Notes, plus accrued interest, were repaid in full
on the closing of the Company's IPO.
On November 4, 1994, the Subsidiary entered into three financing agreements
with Sembawang, all of which were fully repaid in 1995. Under the capital lease
the Company had available up to $5,000 in financing representing 67% of the cost
of the equipment being leased. Fixed lease payments were to be made quarterly
over a five year period beginning at the end of the calendar quarter following
equipment installation and acceptance by the Company. In addition, variable
interest payments were to be made quarterly over the same five year period
computed at the rate of SIBOR plus 2.625% based on the amount outstanding.
As part of the purchase of the Predecessor, the Company agreed to pay an
Earn Out Payment (See Note 1), to Nashua which had been determined to be $2,000.
The Earn Out Payment accrued interest annually beginning on March 15, 1995 at a
rate of prime plus 2%. Principal payments were scheduled to be made in two equal
installments on June 30, 1995 and 1996 plus accrued interest. The Earn Out
Payment was paid in two installments of principal plus accrued interest on June
30, 1995 and August 1, 1995.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
1996.................................................................... $ 47
1997.................................................................... 45
1998.................................................................... 47
1999.................................................................... 18
2000.................................................................... 1
thereafter.............................................................. --
</TABLE>
F-13
<PAGE> 63
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- COMMITMENTS
Operating Leases
The Company leases all its facilities under noncancelable operating leases
which expire at various dates during the next six years. Rental expense for the
year ended December 31, 1995, the period from May 20, 1994 through December 31,
1994, the period from January 1, 1994 through May 19, 1994 and the year ended
December 31, 1993 were $1,286, $544, $227 and $588, respectively. Future minimum
payments under noncancelable operating leases as of December 31, 1995 are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C> <C>
1996......................................................................... $1,312
1997......................................................................... 960
1998......................................................................... 664
1999......................................................................... 636
2000......................................................................... 514
thereafter................................................................... --
</TABLE>
Capital Expenditures
At December 31, 1995, the Company had noncancelable purchase commitments
for manufacturing equipment totaling $32,224.
NOTE 8 -- 401(K) PLAN
During 1994, the Company established a 401(k) employee salary deferral plan
(the "Plan") that allows voluntary contributions by all full-time U.S. employees
upon employment. Under the Plan, eligible employees may contribute from 1% to
15% of their pretax earnings, up to the Internal Revenue Service's annual
contribution limit. The Company matches employee contributions at 50% of the
first 6% contributed with an annual maximum employer match of $2,500. The
Company's contributions to the Plan for the year ended December 31, 1995 and for
the period from May 20 to December 31, 1994 were $442 and $199, respectively.
NOTE 9 -- EQUITY
Common Stock
The Class B Common Stock is convertible into shares of Class A Common Stock
on a one for one basis at the discretion of the holder based upon the occurrence
of certain conversion events.
On May 4, 1995, the Company sold 4,313 shares of its Class A Common Stock
in connection with its IPO. The net proceeds of this offering were $41.9 million
after deducting underwriting discounts and commissions and expenses of the
offering.
On July 26, 1995, the Company sold 2,775 shares of its Class A Common Stock
in connection with its secondary offering. The net proceeds of this offering
were $76.2 million after deducting underwriting discounts and commissions and
expenses of the offering.
As part of the initial funding of the Company in May 1994, the Company sold
1,890 shares of Series A Preferred Stock and 7,560 shares of Series B Preferred
Stock concurrent with the sale of 618 shares of Class A Common Stock and 1,520
shares of Class B Common Stock in addition to $5,854 of subordinated debt. Upon
the closing of the Company's IPO, the Company's Series A and Series B Preferred
Stock was converted into shares of Class A and Class B Common Stock.
F-14
<PAGE> 64
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Redeemable Preferred Stock
Both Series A Preferred Stock and Series B Preferred Stock had a
liquidation preference of approximately $.75 per share plus accumulated and
unpaid dividends and redeemable at the option of the holders at the liquidation
preference amount upon a change in ownership or upon an affirmative vote of the
preferred stockholders after May 20, 1999. Both Series A Preferred Stock and
Series B Preferred Stock accumulated dividends daily at an annual rate of 8% of
the liquidation preference amount payable quarterly in August, November,
February and May.
The Series A Preferred Stock was convertible into shares of Class A Common
Stock at the discretion of the holder any time after the date of issuance at a
conversion ratio of 1.0 to 0.75, subject to adjustments for certain dilutive
transactions. The Series B Preferred Stock was convertible into shares of Class
B Common Stock at the discretion of the holder any time after the date of
issuance at a conversion ratio of 1.0 to 0.75, subject to adjustments for
certain dilutive transactions. Series B Preferred Stock was also convertible
into Series A Preferred Stock at the option of the holder in the event of the
acquisition of the Company by another entity, the sale of all or substantially
all of the Company's assets or by the written consent or agreement of the
holders of two-thirds of the then outstanding shares of Series B Preferred
Stock. Shares of Series A Preferred Stock and Series B Preferred Stock
automatically converted into shares of Class A Common Stock and Class B Common
Stock, respectively, at the then effective conversion ratios upon the closing of
the IPO.
1994 Stock Option Plans
The Company has adopted two stock option plans: the 1994 Incentive Stock
Option Plan ("ISO Plan") and the 1994 Non-Qualified Stock Option Plan ("NSO
Plan"). A total of 3,150 shares of Class A Common Stock have been reserved for
issuance under the Plans as of December 31, 1995. Eligible individuals under the
Plans may be granted options to purchase the Company's Class A Common Stock at
an exercise price per share of at least 100% of fair market value at date of
grant for an incentive stock option and at least 85% of fair market value for a
non-qualified stock option. Options under the ISO Plan may be granted to
employees and consultants of the Company and generally vest monthly over a four
year period from the date of grant. Options under the NSO Plan may be granted to
employees, directors, contractors or other individuals affiliated with the
Company and generally vest seven years from the date of grant with vesting
accelerated upon the achievement of certain financial objectives. Options under
both plans have a maximum term of ten years.
1995 Director Option Plan
The Company's 1995 Director Option Plan (the "Director Plan") was adopted
by the Company's Board of Directors in February 1995 and was approved by the
stockholders in March 1995. The Director Plan provides for the granting of
nonqualified stock options to nonemployee directors of the Company who are not
employed directly or indirectly by the Company or by a stockholder of the
Company ("Outside Director"). A total of 75 shares of Class A Common Stock has
been reserved for issuance under the Director Plan. Under the Director Plan,
each Outside Director is automatically granted a non-qualified option to
purchase 12 shares of Class A Common Stock on the last to occur of the date of
adoption of the plan or the date upon which such person first becomes a director
("Initial Option") with an exercise price equal to the fair market value of the
Company's Class A Common Stock as of the date of grant. Thereafter, each Outside
Director is automatically granted an option to purchase 3 shares of Class A
Common Stock on April 1 of each year, except in the year the Director Plan was
adopted ("Subsequent Option"), provided he or she has served as a director for
at least six months as of such date.
Options granted under the Director Plan generally have a term of ten years
and are evidenced by an option agreement between the Company and the director to
whom the option is granted. The exercise price of
F-15
<PAGE> 65
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
each option granted under the Director Plan is equal to the fair market value of
the Class A Common Stock on the date of grant. Initial Options granted under the
Director Plan generally vest cumulatively as to 12/48ths of the shares on the
first anniversary date of the date of grant and as to 1/48th of the shares
subject to the option each month thereafter. Subsequent Options generally vest
entirely on the fourth anniversary of the date of grant. In the event of a
merger of the Company with or into another corporation or an acquisition of
assets involving the Company, or a change of control, each option shall become
fully vested and exercisable, including shares which would not otherwise be
exercisable, immediately prior to the closing. Unless terminated sooner, the
Director Plan will terminate in 2005. The Board has certain authority to amend
or terminate the Director Plan.
The following summarizes the transactions under the 1994 and 1995 Plans:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------------------
AVAILABLE NUMBER OF AGGREGATE
FOR GRANT SHARES PRICE PER SHARE PRICE
--------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balances December 31, 1994............ 60 1,965 $ 0.19 $ 367
Options authorized.................. 1,200 -- -- --
Options granted..................... (1,169) 1,169 $ 0.89-$31.83 $11,086
Options terminated.................. 59 (59) $ 0.19-$18.00 $ (197)
Options exercised................... -- (908) $ 0.19-$ 8.00 $ (287)
------ ----- ------------- -------
Balances December 31, 1995............ 150 2,167 $ 0.19-$31.83 $10,969
Options granted (unaudited)......... (215) 215 $ 16.67-$19.00 $ 3,645
Options terminated (unaudited)...... 37 (37) $ 0.19-$31.83 (382)
Options exercised (unaudited)....... -- (166) $ 0.19-$18.00 (171)
------ ----- ------------- -------
Balances March 29, 1996 (unaudited)... (28) 2,179 $ 0.19-$31.83 $14,061
====== ===== ============= =======
</TABLE>
At December 31, 1995 and March 29, 1996, 653 and 607 options were
exercisable at a weighted average exercise price of $0.91 and $1.96,
respectively.
During the first quarter of 1996 the Company granted options subject to
stockholder approval. On April 29, 1996, the stockholders of the Company
approved the additional options grant.
Put Options
The Company sold 750 put options in private placements during the fourth
quarter of 1995. Each option obligates the Company to purchase one share of
Common Stock at $27.47 per share if the purchaser exercises the option. The
warrants expire in April 1996. The proceeds of the put option offerings of $1.9
million have been recorded in additional paid-in-capital. The amount related to
the Company's potential $20.6 million obligation to buyback 750 shares of Common
Stock has been removed from Stockholders' Equity and recorded as Put options.
(See Note 14)
F-16
<PAGE> 66
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 1995 includes
the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal.................................................. $ 3,077 $ (475) $2,602
State.................................................... 1,773 (137) 1,636
Foreign.................................................. 236 -- 236
Charge in lieu of taxes early dispositions of stock
issued upon exercise of stock options.................. 3,368 -- 3,368
------ ----- ------
Total.......................................... $ 8,454 $ (612) $7,842
====== ===== ======
</TABLE>
Income taxes reconcile to the amount computed by applying the federal
statutory rate to income before income taxes as follows:
<TABLE>
<CAPTION>
PERIOD FROM MAY 20,
1994 THROUGH
1995 DECEMBER 31, 1994
---- -------------------
<S> <C> <C>
Tax computed at federal statutory rate...................... 35 % 34%
State income taxes (net of federal benefit)................. 4 6
Foreign sales corporation................................... (2 ) (7)
Foreign subsidiary income................................... (10 ) 6
Other, net.................................................. -- (1)
--
---
Income tax provision........................................ 27 % 38%
=== ==
</TABLE>
Significant components of deferred tax assets and liabilities as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax asset:
Property and equipment basis differences................. $ 551 $1,009
Accrual and reserve accounts............................. 1,689 612
State taxes.............................................. 321 229
Inventory costs.......................................... 5 129
Other.................................................... 25 --
------ ------
Total gross deferred tax assets............................ 2,591 1,979
Less valuation allowance................................... -- --
------ ------
Net tax assets and liabilities............................. $2,591 $1,979
====== ======
</TABLE>
Management believes it is more likely than not that a full benefit will be
obtained for the deferred tax assets.
The Company has been granted a seven year tax holiday in Singapore with the
possibility of a three year extension. Consolidated earnings before income taxes
includes $20,927 of income from foreign operations for the year ended December
31, 1995. These earnings are considered to be permanently invested in non-U.S.
operations. Additional taxes of approximately $8,580 would have to be provided
if these earnings were repatriated to the U.S.
F-17
<PAGE> 67
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Tax Benefit
The Company recognized an income tax benefit from the exercise or early
disposition of certain stock options. This benefit resulted in a decrease in
current income taxes payable and an increase in additional paid-in capital.
Income tax expense (benefit) for all Predecessor periods has been computed
as if the Predecessor was a separate taxpayer. Because the Predecessor generated
significant operating losses in 1992 and 1993 which were not realizable on a
stand alone basis under SFAS No. 109, no income tax benefit was provided in the
Predecessor's financial statements for these years. No income tax expense was
provided in the financial statements of the Predecessor for the period from
January 1, 1994 through May 19, 1994 because deferred tax assets relating to net
operating loss carryovers and other tax benefits which had previously been
reserved by valuation allowances were available to offset any otherwise payable
current income taxes or deferred income tax liabilities.
NOTE 11 -- SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION
The Company operates in one industry segment and is engaged in the
development, manufacture and sale of thin film disks to the disk drive industry.
The Company began manufacturing and selling product from its initial
manufacturing site in Singapore in the fourth quarter of 1994. The following
table summarizes geographic information on the Company's operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 U.S. ASIA ELIMINATIONS CONSOLIDATED
----------------------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Total net sales.......................... $121,384 $76,024 $(35,953) $161,455
======== ======= ======== ========
Operating earnings....................... $ 7,048 $21,876 $ -- $ 28,924
======== ======= ======== ========
Identifiable assets...................... $119,680 $66,417 $ (4,500) $181,597
======== ======= ======== ========
<CAPTION>
PERIOD FROM MAY 20, 1994
THROUGH DECEMBER 31, 1994 U.S. ASIA ELIMINATIONS CONSOLIDATED
----------------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Total net sales.......................... $ 55,141 $ 4,267 $ (3,810) $ 55,598
======== ======= ======== ========
Operating earnings (loss)................ $ 6,836 $ (701) $ -- $ 6,135
======== ======= ======== ========
Identifiable assets...................... $ 31,715 $18,862 $ (3,810) $ 46,767
======== ======= ======== ========
</TABLE>
Sales from domestic operations were as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------ ----------------------------------------------------------------
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, JANUARY 1, 1994 MAY 20, 1994 TO DECEMBER 31, MARCH 31, MARCH 29,
1993 TO MAY 19, 1994 DECEMBER 31, 1994 1995 1995 1996
------------ --------------- ----------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Far East........ $ 68,402 $24,680 $49,420 $ 82,879 $13,973 $22,712
United States... 4,979 1,488 1,911 5,122 1,322 1,884
Europe.......... 3,764 -- -- -- -- --
------- ------- ------- -------
Total... $ 77,145 $26,168 $51,331 $ 88,001 $15,295 $24,596
======= ======= ======= =======
</TABLE>
F-18
<PAGE> 68
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------- -------------------------------------------------------------------
PERIOD FROM PERIOD FROM QUARTER QUARTER
FISCAL YEAR JANUARY 1, 1994 MAY 20, 1994 TO FISCAL YEAR ENDED ENDED
1993 TO MAY 19, 1994 DECEMBER 31, 1994 1995 MARCH 31, 1995 MARCH 29, 1996
----------- --------------- ----------------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Customer A... 36% 65% 66% 54% 41% 60%
Customer B... 16 20 27 45 55 39
Customer C... 44 -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------- -----------------------------
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, AS OF
1993 1994 1995 MARCH 29, 1996
------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Accounts receivable balances:
Customer A........................... 35% 42% 45% 54%
Customer B........................... 23 55 50 37%
Customer C........................... 42 -- -- --
</TABLE>
NOTE 12 -- PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
Pro forma combined operating results assume that the Predecessor had been
acquired and the Company's initial capitalization had occurred on January 1,
1994, and reflect for the periods prior to May 20, 1994 an increase in interest
expense on debt issued in conjunction with the acquisition and upon the initial
capitalization of the Company, a decrease in depreciation and charges to the
Predecessor by Nashua and related pro forma income tax effects as shown in the
following table.
F-19
<PAGE> 69
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The objective of this pro forma statement of operations information is to
show the significant effects on historical financial information as if the
transactions described in Note 1 had occurred at January 1, 1994. However, the
Pro Forma Combined Statement of Operations is not necessarily indicative of the
results of operations that would have been attained had the transactions
mentioned above actually occurred on January 1, 1994 and may not be indicative
of future operating results.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ----------------- PRO FORMA
PERIOD FROM PERIOD FROM PREDECESSOR/COMPANY
JANUARY 1 TO MAY 20 TO PRO FORMA COMBINED
MAY 19, 1994 DECEMBER 31, 1994 ADJUSTMENTS YEAR ENDED
------------ ----------------- -------------- DECEMBER 31, 1994
(IN THOUSANDS) --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................... $ 26,168 $55,598 $ -- $ 81,766
Cost of sales................. 22,077 43,795 (363)(1) 65,509
------- ------- ----- -------
Gross profit........ 4,091 11,803 363 16,257
Operating expenses:
Research and development.... 2,124 3,116 (230)(2) 5,010
Selling, general and
administrative........... 1,583 2,552 (252)(2) 3,883
------- ------- ----- -------
3,707 5,668 (482) 8,893
------- ------- ----- -------
Operating
earnings.......... 384 6,135 845 7,364
Interest, net................. -- (663) (420)(3) (1,083)
------- ------- ----- -------
Earnings before
income taxes...... 384 5,472 425 6,281
Income tax expense............ -- 2,079 307(4) 2,386
------- ------- ----- -------
Net earnings................ $ 384 $ 3,393 $ 118 $ 3,895
======= ======= ===== =======
</TABLE>
- ---------------
Pro forma adjustments:
(1) Decrease in depreciation
(2) Decrease in charges by Nashua
(3) Additional interest expense
(4) Increase in income tax expense
F-20
<PAGE> 70
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 29, 1996 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- QUARTERLY SUMMARIES (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Quarterly Financial Data:
1995
Net sales....................................... $27,880 $34,679 $45,954 $52,942
Gross profit.................................... 6,062 8,790 13,375 15,401
Net earnings.................................... 2,036 3,588 7,137 8,397
Earnings per share.............................. $ 0.18 $ 0.26 $ 0.40 $ 0.45
1994(1)
Net sales....................................... $16,523 $19,600 $21,620 $24,023
Gross profit.................................... 2,707 3,958 4,539 5,053
Net earnings.................................... 242 831 1,298 1,524
Earnings per share.............................. $ 0.02 $ 0.07 $ 0.11 $ 0.13
</TABLE>
- ---------------
(1) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the
period May 20, 1994 through December 31, 1994, as if the Acquisition had
been consummated on January 1, 1994 and reflects for the period from January
1, 1994 through May 19, 1994 an increase in interest expense for debt issued
in connection with the Acquisition and upon the initial capitalization of
the Company, a decrease in depreciation and charges by Nashua, and related
pro forma income tax effect. See Note 12 of Notes to Consolidated Financial
Statements. The pro forma statement of operations may not be indicative of
future operating results.
NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 1996, pursuant to the terms of the put option,
the Company repurchased and retired 263 shares of Class A Common Stock at an
aggregate cost of $7.2 million and closed 38 put options by cash settlement at
an aggregate cost of $0.3 million. In April, the Company closed 450 put options
by cash settlement of $1.7 million. As of April 29, 1996, the Company had no put
options outstanding.
In February 1996, Prudential Equity Investors III, L.P. converted 1,376
shares of Class B Common Stock to Class A Common Stock.
In February 1996, the Company entered into an agreement to sell certain
equipment to Surface Technology Incorporated ("STI"), and to purchase certain
quantities of plated and polished substrates from STI. The Company has an option
to acquire STI. As of December 31, 1995, the Company had accounts receivable
from STI of approximately $1.0 million.
In April 1996, the Board of Directors approved a three-for-two split of its
Class A and Class B Common Stock. The stock split was effected as a stock
dividend. This effect has been shown retroactively throughout the Company's
financial statements.
On April 29, 1996, the Board of Directors approved a proposed filing of a
registration statement with the Securities and Exchange Commission to sell 3,000
shares of the Company's Class A Common Stock to the public.
F-21
<PAGE> 71
LOGO
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various costs and expenses payable by
the Company, other than underwriting discounts and commissions, of the sale and
distribution of the securities being registered. All of the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
Nasdaq National Market listing fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 50,555
NASD Filing Fee........................................................... 14,661
Nasdaq National Market.................................................... 17,500
Blue Sky Fees and Expenses................................................ 10,000
Legal Fees and Expenses................................................... 75,000
Accounting Fees and Expenses.............................................. 75,000
Printing.................................................................. 50,000
Transfer Agent and Registrar Fees......................................... 5,000
Miscellaneous............................................................. 2,284
--------
Total........................................................... $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DCL"), the Company's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
directors' duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the DCL; or (iv) for any
transaction from which the director derived any personal benefit. This provision
does not affect the availability of equitable remedies such as injunctive relief
or rescission. Further, the provision does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its stockholders. However, the
inclusion of this provision together with a provision which requires the Company
to indemnify its officers and directors against certain liabilities, is intended
to enable the Company to attract qualified persons to serve as directors who
might otherwise be reluctant to do so.
In addition, the Company's Amended and Restated Certificate of
Incorporation and Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by the DCL. The Company believes that indemnification under its
Bylaws and Amended and Restated Certificate of Incorporation covers at least
negligence and gross negligence by indemnified parties and permits the Company
to advance litigation expenses in the case of stockholder derivative actions or
other actions against an undertaking by the indemnified party to repay such
advances even if it is ultimately determined that the indemnified party is not
entitled to indemnification.
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements will require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers to the fullest extent
permitted by law (other than liabilities arising from actions not taken in good
faith or in a manner the indemnitee believed to be opposed to the best interests
of the Company) and to advance their expenses, including attorneys fees,
incurred as a result of any proceeding against them as to which they could be
indemnified. Insofar as
II-1
<PAGE> 73
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefor unenforceable. The
Company believes that the provisions in its Amended and Restated Certificate of
Incorporation Bylaws and indemnification agreements are necessary to attract and
retain qualified persons as directors and executive officers.
The Company has obtained an insurance policy providing directors' and
officers' liability coverage. At present there is no pending litigation or
proceeding involving a director, officer or employee of the Company where
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Reference is also made to Article IX of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-2
<PAGE> 74
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 -- Form of Underwriting Agreement between Registrant and the
Underwriters.
5.1 -- Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, regarding legality of securities being registered.
11.1 -- Statement of Computation of Earnings Per Share.
23.1 -- Consent of KPMG Peat Marwick LLP (see page II-5).
23.2 -- Consent of Counsel (included in Exhibit 5.1).
23.3 -- Consent of Lahive & Cockfield.
24.1 -- Power of Attorney (see page II-4).
27.1 -- Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules.
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions of the Company's Amended and Restated
Certificate of Incorporation and Bylaws, Delaware Corporation Law, the
Underwriting Agreement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will unless in the opinion of its counsel
the question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, StorMedia Incorporated, a corporation organized and existing under
the law of the State of Delaware, certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 21st day of May, 1996.
StorMedia Incorporated
By: /s/ WILLIAM J.
ALMON
William J. Almon,
Chairman of the Board and Chief
Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint William J. Almon and Stephen M. Abely, or any of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf to sign, execute and file this Registration Statement and any or all
amendments (including, without limitation, post-effective amendments and any
amendments or abbreviated registration statements pursuant to Rule 462(b)
increasing the amount of securities for which registration is being sought) to
this Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto, with the Securities and Exchange
Commission or any regulatory authority, granting unto such attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as he might
or could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully
do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ WILLIAM J. ALMON Chairman of the Board and May 21, 1996
(William J. Almon) Chief Executive Officer
(Principal Executive
Officer)
/s/ STEPHEN M. ABELY Chief Financial Officer, Vice May 21, 1996
(Stephen M. Abely) President, Finance and
Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ JOHN A. DOWNER Director May 21, 1996
(John A. Downer)
/s/ FRANCIS J. LUNGER Director May 21, 1996
(Francis J. Lunger)
/s/ MARK S. ROSSI Director May 21, 1996
(Mark S. Rossi)
</TABLE>
II-4
<PAGE> 76
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report included herein and to the
incorporation by reference in the Prospectuses on Form S-3 of our report dated
January 17, 1996 appearing on page 42 of the StorMedia Incorporated Annual
Report on Form 10-K for the year ended December 31, 1995. We also consent to the
references to our firm under the heading "Experts" in the Prospectuses.
KPMG Peat Marwick LLP
Palo Alto, California
May 21, 1996
II-5
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ---------- ------------------------------------------------------------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement between Registrant and the
Underwriters.
5.1 -- Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, regarding legality of securities being registered.
23.1 -- Consent of KPMG Peat Marwick LLP (see page II-5).
23.2 -- Consent of Counsel (included in Exhibit 5.1).
23.3 -- Consent of Lahive & Cockfield.
24.1 -- Power of Attorney (see page II-4).
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 78
[Appendix -- Graphic Image Page 25]
BUSINESS SECTION
THIN FILM DISK TECHNOLOGY
This is a graphical illustration of a hard disk drive of which the Company's
thin film disk products are a component. The illustration displays the major
components including the Disk, Recording Head, Spindle Actuator and the
Electronics assembled into a hard disk drive. It is a computer generated
sketch rather than a realistic picture and has all the major components
labeled.
<PAGE> 1
EXHIBIT 1.1
4,500,000 Shares
STORMEDIA INCORPORATED
CLASS A COMMON STOCK ($0.013 PER SHARE PAR VALUE)
UNDERWRITING AGREEMENT
<PAGE> 2
June __, 1996
Morgan Stanley & Co. Incorporated
Montgomery Securities
Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Morgan Stanley & Co. International Limited
Montgomery Securities
Smith Barney Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England, UK
Ladies and Gentlemen:
StorMedia Incorporated, a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") and certain stockholders of the Company
(the "Selling Stockholders") named in Schedule I hereto severally propose to
sell to the Underwriters an aggregate of 4,500,000 shares of the Company's Class
A Common Stock ($0.013 per share par value) (the "Firm Shares"), of which
3,000,000 shares are to be issued and sold by the Company and 1,500,000 shares
are to be sold by the Selling Stockholders, each Selling Stockholder selling the
amount set forth opposite such Selling Stockholder's name in Part A of Schedule
I hereto.
The Selling Stockholders also propose to sell to the U.S.
Underwriters named in Schedule II not more than an additional 675,000 shares of
Class A Common Stock of the Company (the "Additional Shares"), if and to the
extent that the U.S. Underwriters' shall have determined to exercise, on behalf
of the Underwriters, the right to purchase such shares of Class A Common Stock
granted to the Underwriters in Article II hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares". The
shares of Class A Common Stock ($0.013 per share par value) of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the Class A Common Stock. The Company and the Selling
Stockholders are hereinafter sometimes collectively referred to as the
"Sellers".
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a prospectus,
relating to the Shares. The registration statement contains two prospectuses to
be used in connection with the offer and sale of the Shares: the U.S.
prospectus, to be used in connection with the offer and sale of Shares in the
United States and Canada to United States and Canadian Persons, and the
international prospectus, to be used in connection with the offering and sale of
Shares outside the United States and Canada to persons other than United States
and Canadian Persons. The international prospectus is identical to the U.S.
prospectus except for the outside front cover page. The registration statement
as amended at the time it becomes effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"Securities Act"), is hereinafter referred to as the "Registration Statement,"
the U.S. prospectus and the international prospectus in the respective forms
first used to confirm sales of Shares are hereinafter collectively referred to
as the
1.
<PAGE> 3
"Prospectus." The term "preliminary prospectus" means any preliminary form of
the Prospectus. As used herein, the terms "Registration Statement," "Prospectus"
and "preliminary prospectus" shall include in each case the documents, if any,
incorporated by reference (the "Incorporated Documents") that the Company has
filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), therein. The terms "supplement," "amendment" and "amend" as used herein
shall include all documents deemed to be incorporated by reference in the
Prospectus that are filed subsequent to the date of the Prospectus by the
Company with the Commission pursuant to the Exchange Act. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) under the Securities Act for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to refer to both the registration statement referred to above (Commission File
No. 333-_____) and the Rule 462 Registration Statement, in each case as amended
from time to time.
It is understood that, subject to the conditions hereinafter
stated, 3,600,000 Firm Shares (the "U.S. Firm Shares") will be sold to the
several U.S. Underwriters named in Schedule II hereto (the "U.S. Underwriters")
by the Company and the Selling Stockholders in connection with the offering and
sale of such U.S. Firm Shares in the United States and Canada to United States
and Canadian Persons (as such terms are defined in the Agreement Between U.S.
and International Underwriters of even date herewith), and 900,000 Firm Shares
(the "International Shares") will be sold to the several International
Underwriters named in Schedule II hereto (the "International Underwriters") by
the Company and the Selling Stockholders in connection with the offering and
sale of such International Shares outside the United States and Canada to
persons other than United States and Canadian Persons. Of the U.S. Firm Shares,
2,400,000 are to be issued and sold by the Company (the "U.S. Company Shares")
and 1,200,000 are to be sold by the Selling Stockholders (the "U.S. Selling
Stockholder Shares"). Morgan Stanley & Co. Incorporated, Montgomery Securities
and Smith Barney Inc. shall act as representatives (the "U.S. Representatives")
of the several U.S. Underwriters, and Morgan Stanley & Co. International
Limited, Montgomery Securities and Smith Barney Inc., shall act as
representatives (the "International Representatives") of the several
International Underwriters. The U.S. Representatives and the International
Representatives are collectively referred to as the "Representatives."
The U.S. Underwriters and the International Underwriters are hereinafter
collectively referred to as the "Underwriters."
I.
The Company represents and warrants to each of the
Underwriters that:
(a) The Company meets the requirements for using a
Registration Statement on Form S-3 and such Registration Statement has
become effective; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purpose are pending before or threatened by the Commission.
(b) (1) Each part of the Registration Statement did not
contain and each such part, as amended or supplemented, if applicable,
will not contain, any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (2) the Registration
Statement and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Securities
Act and the applicable rules and regulations of the Commission
thereunder, (3) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and
warranties set forth in this paragraph (b) do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
2.
<PAGE> 4
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Other than StorMedia International Ltd., a Cayman Islands
corporation and StorMedia Foreign Sales Corporation, a U.S. Virgin
Islands Corporation, the Company has no subsidiaries. Each subsidiary
of the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(e) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(f) The shares of Class A Common Stock (including the Shares
to be sold by the Selling Stockholders) outstanding prior to the
issuance of the Shares have been duly authorized and validly issued,
fully paid and non-assessable.
(g) The shares of Class A Common Stock to be sold by the
Company have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid, legal and binding
obligation of the Company in accordance with its terms.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the Amended and
Restated Certificate of Incorporation or By-laws of the Company or the
certificate of incorporation or by-laws or other charter documents of
any subsidiary, or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no consent, approval or authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under
this Agreement, except such as have been obtained and such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not been any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (1) the
Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock, nor declared, paid
or otherwise made any dividend or distribution of any kind of its
capital stock other than the three-for-two stock dividend to be paid on
May 28, 1996 to stockholders of record as of May 13, 1996 and other
than ordinary customary
3.
<PAGE> 5
dividends except certain net purchases of options issued and shares
issued on exercise of options under the Company's stock option plans
upon termination of employment of the optionee in accordance with the
terms of such stock option plans; and (3) there has not been any
material change in the capital stock, short-term debt or long-term debt
of the Company and its consolidated subsidiaries, except in each case
as described in or contemplated by the Prospectus.
(l) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the
business of the Company and its subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
(m) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied
for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
(n) There are no legal, regulatory or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of
its subsidiaries are subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that are not described or filed as required.
(o) Each of the Company and its subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits
of and from, and has made all declarations and filings with, all
foreign, federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to
own, lease, license and use its properties and assets and to conduct
its business in the manner described in the Prospectus, except to the
extent that the failure to obtain or file would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(p) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or Rule 462 under the Securities
Act, complied when so filed in all material respects with the
Securities Act, the Exchange Act, and the rules and regulations of the
Commission thereunder. The Incorporated Documents heretofore filed,
when they were filed (or, if any amendment with respect to any such
document was filed, when such amendment was filed), conformed in all
material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder; any further
Incorporated Documents so filed will, when they are filed, conform in
all material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
4.
<PAGE> 6
(q) Except as described in the Prospectus, each of the Company
and its subsidiaries owns or possesses or can acquire on reasonable
terms all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, and trade names currently
employed by them in connection with the business now operated by them,
neither the Company nor any of its subsidiaries has received any notice
of infringement or conflict with asserted rights of others with respect
to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
any material adverse change in the condition, financial or otherwise,
or in the earning, business or operations of the Company and its
subsidiaries, taken as a whole.
(r) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
(s) Except as described in the Prospectus, each of the Company
and its subsidiaries is (1) in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (2) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its
business and (3) is in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(t) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such review,
the Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(u) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only
in accordance with management's general or specific authorization; and
(4) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(v) If at any time during the twenty-five (25) day period
after the Registration Statement becomes effective any rumor,
publication or event relating to or affecting the Company shall occur
as a result of which in your opinion the market price for the Class A
Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of,
and disseminate
5.
<PAGE> 7
a press release or other public statement, reasonably satisfactory to
you, responding to or commenting on such rumor, publication or event.
(w) There is no owner of any securities of the Company that
has any rights, not effectively satisfied or waived, to require
registration of any shares of capital stock of the Company in
connection with the filing of the Registration Statement.
(x) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
II.
Each of the Selling Stockholders represents and warrants to
each of the Underwriters that:
(a) This Agreement has been duly authorized executed and
delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Stockholder and First Interstate Bank of California, as Custodian,
relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "Custody Agreement") and the Power of Attorney
appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the
"Power of Attorney") will not contravene any provision of applicable
law, or the certificate of incorporation or by-laws of such Selling
Stockholder (if such Selling Stockholder is a corporation), or any
agreement or other instrument binding upon such Selling Stockholder or
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over such Selling Stockholder, and no consent,
approval, authorization or order of or qualification with any
governmental body or agency is required for the performance by such
Selling Stockholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Stockholder,
except such as may be required by the securities or Blue Sky laws of
the various states or other jurisdictions in connection with the
offer and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will
have, valid marketable title to the Shares to be sold by such Selling
Stockholder and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement and the Power of Attorney and to sell, transfer and deliver
the Shares to be sold by such Selling Stockholder.
(d) The Shares to be sold by such Selling Stockholder pursuant
to this Agreement have been duly authorized and are validly issued,
fully paid and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by each Selling Stockholder and
are valid and binding agreements of such Selling Stockholder.
(f) Delivery of the Shares to be sold by such Selling
Stockholder pursuant to this Agreement will pass marketable title to
such Shares free and clear of any security interest, claims, liens,
equity and other incumbency.
(g) All written information furnished by or on behalf of such
Selling Stockholder expressly for use in the Registration Statement and
Prospectus is, and on the Closing Date will be, true, correct, and
6.
<PAGE> 8
complete, and does not, and on the Closing Date will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading.
III.
On the basis of the representations and warranties contained
in this Agreement, but subject to its terms and conditions, the Company hereby
agrees to issue and sell the U.S. Company Shares to the several U.S.
Underwriters and the Selling Stockholders hereby agree to sell the U.S. Selling
Stockholder Shares to the several U.S. Underwriters, in the same proportion as
the number of Stockholder Shares set forth opposite such Selling Stockholder's
name in Part A of Schedule I hereto bears to the total number of U.S. Selling
Stockholder Shares, and each U.S. Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company and the Selling Stockholders at $________ per share (the "Purchase
Price") the respective number of U.S. Company Shares and U.S. Selling
Stockholders Shares (subject to such adjustments to eliminate fractional shares
as the U.S. Representatives may determine) that bear the same proportion to the
number of U.S. Company Shares and U.S. Selling Stockholders Shares to be sold by
the Company or the Selling Stockholders, as the case may be, as the number of
U.S. Firm Shares set forth in Schedule II hereto opposite the name of such U.S.
Underwriter bears to the total number of U.S. Firm Shares.
On the basis of the representations and warranties contained
in this Agreement, but subject to its terms and conditions, the Company hereby
agrees to issue and sell the International Company Shares to the several
International Underwriters and the Selling Stockholders hereby agree to sell the
International Selling Stockholder Shares to the several International
Underwriters, in the same proportion as the number of Stockholder Shares are set
forth opposite such Selling Stockholder's name in Part A of Schedule I hereto
bears to the total number of International Selling Stockholder Shares, and each
of the International Underwriters, upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees, severally and not jointly, to purchase from the Company and the Selling
Stockholders at the Purchase Price the respective number of International Shares
(subject to such adjustments to eliminate fractional shares as the International
Representatives may determine) that bear the same proportion to the number of
International Company Shares and International Selling Stockholders Shares to be
sold by the Company or the Selling Stockholders, as the case may be, as the
number of International Shares set forth in Schedule II hereto opposite the name
of such International Underwriters bears to the total number of International
Shares.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Selling
Stockholders hereby agree to sell to the U.S. Underwriters up to 675,000
Additional Shares, and the U.S. Underwriters shall have a one-time right to
purchase, severally and not jointly, up to 675,000 Additional Shares at the
Purchase Price. Additional Shares may be purchased as provided in Article V
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the U.S. Representatives may determine) that bears the same
proportion to the total number of Additional Shares to be purchased as the
number of U.S. Firm Shares set forth in Schedule II hereto opposite the name of
such U.S. Underwriter bears to the total number of U.S. Firm Shares. The
Additional Shares to be purchased by the U.S. Underwriters hereunder and the
U.S. Firm Shares are hereinafter collectively referred to as the U.S. Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated, it will not for a period of ninety
(90) days after the date of the public offering of the Shares, (1) offer,
pledge, sell, contract to sell, grant any option, right or warrant to purchase,
or otherwise transfer or dispose of, directly or indirectly, any shares of Class
A Common Stock of the Company or any securities convertible into or exercisable
or exchangeable for such Class A Common Stock, or (2) enter into any swap or
similar agreement that
7.
<PAGE> 9
transfers, in whole or in part, the economic risk of ownership of the Class A
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities in cash or
otherwise, other than (a) the Shares to be sold hereunder, (b) any shares of
such Class A Common Stock sold or issued upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof described
in the Prospectus or of which the Underwriters have been advised in writing, (c)
shares of Class A Common Stock registered pursuant to a Registration Statement
on Form S-8 (which Form S-8 shall not be filed with and declared effective by
the Commission until ___________, 1996), or, (d) the grant of options pursuant
to the Company's 1994 Incentive Stock Option Plan, 1994 Non-Qualified Stock
Option Plan, 1995 Director Option Plan and the 1995 Employee Stock Purchase
Plan as to shares reserved for issuance under such plans as of the Closing,
including any shares currently subject to outstanding options which become
available for future grant under such plans upon termination of such
previously issued options.
The Selling Stockholders, each severally, and not jointly,
hereby agree that, without the prior written consent of Morgan Stanley & Co.
Incorporated, they will not, for a period of ninety (90) days after the date of
the public offering of the Shares, (1) offer, pledge, sell, contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Class A Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for such Class A
Common Stock, or (2) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Class A Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities in cash or
otherwise, other than the Shares to be sold hereunder.
IV.
The Sellers are advised by you that the Underwriters propose
to make a public offering of their respective portions of the Shares as soon as
in your judgment is advisable after the Registration Statement and this
Agreement have become effective. The Sellers are further advised by you that the
Shares are to be offered to the public at $________ a share (the public offering
price) and to certain dealers selected by you at a price that represents a
concession not in excess of $________ a share under the public offering price,
and that any Underwriter may allow, and such dealers may reallow, a concession,
not in excess of $________ a share, to any Underwriter or to certain other
dealers.
V.
Payment for the Firm Shares to be sold by each Seller shall be
made to such Seller in federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 A.M., New York City time, on ______________, 1996,
or at such time or on the same or such other date, not later than ____________,
199___ as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made in federal or
other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the Several Underwriters at
10:00 A.M., New York City time, on such date (which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor later
than ten business days after the date specified in the notice to be provided by
the Representatives of the U.S. Underwriters to the Selling Stockholders
notifying the Selling Stockholders of their intent to exercise the option to
purchase the Additional Shares. The time and date of such payment are
hereinafter referred to as the Option Closing Date. The notice of the
determination to exercise the option to purchase Additional Shares and of the
Option Closing Date may be given at any time within thirty (30) days after the
date of this Agreement.
8.
<PAGE> 10
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than two (2) full business days prior to
the Closing Date or the Option Closing Date, as the case may be. The
certificates evidencing the Firm Shares and Additional Shares shall be delivered
to you on the Closing Date or the Option Closing Date, as the case may be, for
the respective accounts of the several Underwriters, with any transfer taxes
payable in connection with the transfer of the Shares to the Underwriters duly
paid, against payment of the purchase price therefor.
VI.
The obligations of the Sellers and the several obligations of
the Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act, and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations, of the Company and its subsidiaries, taken as a
whole, from that set forth in the Registration Statement,
that, in your judgment, is material and adverse and that makes
it, in your judgment, impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer of the Company, to the effect set forth in clause (a) above and
to the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has performed all of the agreements and satisfied
all of the conditions on its part to be performed or satisfied
hereunder on or prior to the Closing Date.
(c) You shall have received on the Closing Date an opinion of
Wilson, Sonsini, Goodrich & Rosati, counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the State of Delaware, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and
its subsidiaries taken as a whole;
9.
<PAGE> 11
(ii) other than StorMedia International Ltd., a
Cayman Islands corporation and StorMedia Foreign Sales
Corporation, a U.S. Virgin Islands Corporation, the Company
has no subsidiaries;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained under "Capitalization" and "Description of Capital
Stock" in the Prospectus;
(iv) the shares of Class A Common Stock (including
the Firm Shares to be sold by the Selling Stockholders)
outstanding prior to the issuance of the Firm Shares have been
duly authorized and are validly issued, fully paid and
nonassessable;
(v) the Firm Shares to be sold by the Company have
been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar
rights;
(vi) the Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder. This Agreement has been duly authorized,
executed and delivered by the Company;
(vii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or bylaws of the
Company or, to such counsel's knowledge, any agreement or
other instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to such counsel's
knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval or authorization or
order of, or qualification with any governmental body or
agency is required for the performance by the Company of its
obligations under this Agreement, except such as have been
obtained or such as are required by the securities or blue sky
laws of the various states or other jurisdictions in
connection with the offer and sale of the Shares by the
Underwriters;
(viii) the statements (1) in the Prospectus under
"Management," "Description of Capital Stock," and "Shares
Eligible for Future Sale" and in the Registration Statement in
Items 14 and 15 and (2) in the Company's Registration
Statement on Form 8-A filed under the Exchange Act concerning
the description of the Company's Capital Stock incorporated by
reference in the Prospectus in each case insofar as such
statements constitute a summary of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(ix) such counsel does not know of any legal,
regulatory or governmental proceeding pending or threatened in
writing to which the Company or any of its subsidiaries is a
party or to which any of the properties of the Company or any
of its subsidiaries is subject that is required to be
described in the Registration Statement or the Prospectus and
is not so described or of any statutes, regulations, contracts
or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
or filed as required;
10.
<PAGE> 12
(x) the Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;
(xi) to such counsel's knowledge, except as disclosed
or specifically contemplated by the Prospectus, there is no
owner of any securities of the Company that has any rights,
not effectively satisfied or waived, to require registration
of any shares of capital stock of the Company in connection
with the filing of the Registration Statement;
(xii) to such counsel's knowledge: (1) the
Registration Statement has become effective under the
Securities Act, no stop order proceedings with respect thereto
have been instituted or are pending or threatened under the
Securities Act and nothing has come to such counsel's
attention to lead it to believe that such proceedings are
contemplated; and (2) any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) or Rule 462
of the rules and regulations has been made in the manner and
within the time period required by such Rule 424(b) or Rule
462; and
(xiii) the Shares to be sold under this Agreement to
the Underwriters are duly authorized for quotation on the
Nasdaq National Market.
In addition, such counsel shall state that (1) although they
have participated in the preparation of the Registration Statement and the
Prospectus, involving, among other things, review and discussion of the contents
thereof, discussion and inquiries concerning various legal matters and the
review of certain records, documents and proceedings, and participation in
conferences with certain officers and other representatives of the Company,
including its independent accountants, and with you and your counsel at which
the contents of the Registration Statement and the Prospectus were discussed,
they have not independently verified the accuracy or completeness of the
statements contained in the Registration Statement or Prospectus, (2) the
Registration Statement and the Prospectus and any supplements or amendments
thereto (except for financial statements and schedules and financial and
statistical data therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities Act and the rules
and regulations of the Commission thereunder or (3) that nothing has come to the
attention of such counsel which caused them to believe that (except for
financial statements and schedules and financial and statistical data therein as
to which such counsel need not express any belief) the Registration Statement
and the Prospectus included therein at the time the Registration Statement
became effective or at the applicable Closing Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
With respect to subparagraph (iii), (viii) (ix), (xi) and
(xii) of paragraph (c) above, Wilson, Sonsini, Goodrich & Rosati may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified. With respect to
subparagraphs (ii) and (vii) and (ix) of (c) above, Wilson, Sonsini, Goodrich &
Rosati may rely as to matters involving the application of laws of any
jurisdiction other than the State of California, the General Corporation Law of
the State of Delaware and the federal laws of the United States upon an opinion
or opinions of counsel for the Company, provided that such counsel is
satisfactory to your counsel, a copy of each opinion so relied upon is delivered
to you and is in form and substance satisfactory to your counsel, and Wilson,
Sonsini, Goodrich & Rosati shall state in their opinion that they believe they
are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Kirkland & Ellis, counsel for the Selling Stockholders, dated the
Closing Date, to the effect that
11.
<PAGE> 13
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling
Stockholders;
(ii) the execution and delivery by each Selling
Stockholder of, and the performance by such Selling
Stockholder of its obligations under, this Agreement and the
Custody Agreement and Powers of Attorney of such Selling
Stockholder will not contravene any provision of applicable
law, or the certificates of incorporation or by-laws of such
Selling Stockholder (if such Selling Stockholder is a
corporation), or, to such counsel's knowledge, any agreement
or other instrument binding upon such Selling Stockholder or,
to such counsel's knowledge, any judgment, order or decree of
any governmental body, agency or court having jurisdiction
over such Selling Stockholder, and no consent, approval,
authorization or order of or qualification with any
governmental body or agency is required for the performance by
such Selling Stockholder of its obligations under this
Agreement or the Custody Agreement or Power of Attorney of
such Selling Stockholder, except such as may be required by
the securities or Blue Sky laws of the various states or
other jurisdictions in connection with offer and sale of the
Shares;
(iii) each of William J. Almon and Prudential Private
Equity Investors III, L.P. and, to our knowledge the other
Selling Stockholders has valid marketable title to the Shares
to be sold by such Selling Stockholder and has the legal right
and power, and all authorization and approval required by law,
to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Selling Stockholder and to sell,
transfer and deliver the Shares to be sold by such Selling
Stockholder;
(iv) the Custody Agreement of each Selling
Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder; and
(v) assuming that the Underwriters are "bona fide
purchasers" (as defined in the Uniform Commercial Code as in
effect in the State of New York (the "UCC")) of the Shares to
be sold by each Selling Stockholder, the Underwriters will
acquire an interest in such Shares free of any "adverse claim"
(as defined in the UCC) upon delivery of the Shares to be sold
by each Selling Stockholder pursuant to the Underwriting
Agreement.
With respect to the matters set forth in this section,
Kirkland & Ellis may rely upon an opinion or opinions of counsel for any Selling
Stockholders and, to the extent such counsel deems appropriate, upon the
representations of each Selling Stockholder contained herein and in the Custody
Agreement and Power of Attorney of such Selling Stockholder and in other
documents and instruments; provided that (A) each such counsel for the Selling
Stockholders is satisfactory to your counsel, (B) a copy of each opinion so
relied upon is delivered to you and is in form and substance satisfactory to
your counsel, (C) copies of such Custody Agreements and Powers of Attorney and
of any such other documents and instruments shall be delivered to you and shall
be in form and substance satisfactory to your counsel and (D) Kirkland & Ellis
shall state in their opinion that they are justified in relying on each such
other opinion.
(e) You shall have received on the Closing Date an opinion of
Lahive & Cockfield, special patent counsel to the Company, dated the
Closing Date, to the effect that:
(i) The Company, under its present name or former
name, is listed in the records of the United States Patent and
Trademark Office ("PTO") as the holder of record of the patent
applications listed in Exhibit A to such opinion (the "Patent
Applications"). [Four] of such Patent Applications, listed on
Exhibit B to such opinion, have been allowed or indicated as
containing allowable subject matter. To such counsel's
knowledge, written assignments to the Company of
12.
<PAGE> 14
all ownership interests in the Patent Applications have been
duly authorized, executed and delivered by all of the
inventors in accordance with their terms. To such counsel's
knowledge, there is no claim of any party other than the
Company to any ownership interest or lien with respect to any
of the Patent Applications.
(ii) The statements in the Prospectus under the
captions "Risk Factors --Intellectual Property and Proprietary
Rights" and "Business -- Intellectual Property and Proprietary
Rights" (the "Intellectual Property Portions"), to our
knowledge, insofar as such statements relate to the Patent
applications or any legal matters, documents and proceedings
relating thereto fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein.
(iii) To such counsel's knowledge, other than in
connection with assertions or inquiries made by patent office
examiners in the ordinary course of the prosecution of the
Company's Patent Applications, there is not pending or
threatened in writing any action, suit, proceeding or claim by
others (A) challenging the validity or scope of the Patent
Applications or any other material patent or patent
applications held by or licensed to the Company, or (B) other
than as disclosed to the Underwriters, asserting that any
patent is infringed by the activities of the Company described
in the Prospectus or by the manufacture, use or sale of any of
the Company's products or other items made and used according
to the Patent Applications held by or licensed to the Company.
(iv) To such counsel's knowledge, there is not
pending or threatened in writing any action, suit, proceeding
or claim by the Company asserting infringement on the part of
any third party of the Patent Applications or any other
patents or patent applications held by or licensed to the
Company, except as set forth in such counsel's opinion letter
dated [March 3, 1995], addressed to the Company, attached to
such opinion.
(v) Such counsel does not know of any contracts or
other documents relating to patents or proprietary information
of a character required to be filed as exhibits to the
Registration Statement or required to be described in the
Registration Statement or the Prospectus that are not filed or
described as required.
Such counsel has participated in conferences with
employees of the Company at which the Patent Applications of
the Company as disclosed in the Intellectual Property Portions
of the Registration Statement were discussed, and although
such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement (except
to the extent stated in paragraph (e)(ii) above), on the basis
of such conferences and such representation of the Company,
nothing has come to such counsel's attention which leads them
to believe that the Intellectual Property Portions of the
Registration Statement and the Prospectus included therein at
the time the Registration Statement became effective contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading and such counsel
believes that (except for financial statements and schedules
as to which such counsel need not express any belief) the
Intellectual Property Portions of the Prospectus, as amended
or supplemented, if applicable, does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(f) You shall have received on the Closing Date (i) an opinion
of Maples & Calder, special Cayman Islands counsel to the Company,
dated the Closing Date to the effect that StorMedia International
13.
<PAGE> 15
Ltd. has been duly incorporated, is validly existing as a corporation
in good standing under the laws of the Cayman Islands and has the
corporate power and authority to own its property and to conduct its
business as described in the Director's Certificate attached thereto as
Exhibit 1, and (ii) an opinion of Abraham, Low & Partners, special
Singapore counsel to the Company, dated the Closing Date to the effect
that StorMedia International Ltd. is duly registered as a foreign
company, is validly existing in Singapore, under the Singapore
Companies Act Cap. 50, and that such counsel does not know of any
legal, regulatory or governmental proceeding pending or threatened in
writing to which StorMedia International Ltd. is a party or to which
any of its properties are subject that is required to be described in
the Registration Statement or the Prospectus and is not so described or
of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(g) The opinions of Wilson, Sonsini, Goodrich & Rosati, Lahive
& Cockfield, Maples & Calder and Abraham, Low & Partners, described in
paragraph (c), (e) and (f) above (and any opinions of counsel for any
Selling Stockholder described in paragraph (d) above) shall be rendered
to you at the request of the Company or one or more of the Selling
Stockholders, as the case may be, and shall so state therein.
(h) You shall have received on the Closing Date an opinion of
Brobeck, Phleger & Harrison, LLP, special counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in
subparagraphs (v), (vi), (viii) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters"),
(x) and the penultimate subparagraph of paragraph (c) above.
(i) You shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to you, from
KPMG Peat Marwick, L.L.P., independent public accountants, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(j) The "lock-up" agreements between you and certain officers,
directors and stockholders of the Company relating to sales of shares
of Class A Common Stock of the Company or any securities convertible
into or exercisable or exchangeable for such Class A Common Stock,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
(k) The Company shall have complied with the provisions of
Section VII(a) hereof with respect to the furnishing of Prospectuses
on the business day next succeeding the date of this Agreement, in
such quantities as you reasonably request.
All of the agreements, opinions, certificates and letters
mentioned above or elsewhere in this Agreement shall be deemed in compliance
with the provisions hereof only if Brobeck, Phleger & Harrison, LLP, counsel for
the Underwriters, shall be satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the Representatives
on the Option Closing Date of such documents as they may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Additional Shares, other matters related to the issuance of the
Additional Shares and an opinion or opinions of counsel in form and substance
satisfactory to counsel for the Underwriters.
14.
<PAGE> 16
VII.
In further consideration of the agreements of the Underwriters
herein contained, the Company covenants as follows:
(a) To furnish you, without charge, three (3) signed copies of
the Registration Statement including exhibits and to each other
Underwriter a conformed copy of the Registration Statement without
exhibits and, during the period mentioned in paragraph (c) below, as
many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
In the case of the Prospectus, to furnish copies of the Prospectus in
New York City, prior to 5:00 p.m., on the business day next succeeding
the date of this Agreement, in such quantities as you reasonably
request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish you a copy of each such
proposed amendment or supplement, and to file no such proposed
amendment or supplement to which you reasonably object.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of your counsel the Prospectus
is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of your counsel, it is necessary to
amend or supplement the Prospectus to comply with law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to
the Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request and to pay all expenses (including fees and
disbursements of counsel) in connection therewith, and in connection
with any review of the offering of the shares by the National
Association of Securities Dealers, Inc.
(e) To make generally available to the Company's
securityholders and to you as soon as practicable an earnings statement
covering the twelve-month period ending [__________, 1997 -- one year
after the effective date of the Registration Statement] that satisfies
the provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) To pay all expenses incident to the performance of its
obligations under this Agreement, including (i) the preparation and
filing of the Registration Statement and the Prospectus and all
amendments and supplements thereto, (ii) the preparation, issuance and
delivery of the Shares, including any transfer taxes payable in
connection with the transfer of the Shares to the Underwriters, (iii)
the fees and disbursements of the Company's counsel and accountants,
(iv) the qualification of the Shares under state securities or Blue Sky
laws in accordance with the provisions of Article VII(d), including
filing fees and the fees and disbursements of counsel for the
Underwriters in connection therewith and in connection with the
preparation of any Blue Sky or Legal Investment Memoranda, (v) the
printing and delivery to the Underwriters, in quantities as hereinabove
stated, copies of the Registration Statement and all amendments thereto
and of each preliminary prospectus and the Prospectus and any
amendments or supplements thereto, (vi) the printing and delivery to
the Underwriters of copies of any Blue Sky or Legal Investment
Memoranda, (vii) the filing fees and expenses if any, incurred with
respect to any filing with the National
15.
<PAGE> 17
Association of Securities Dealers, Inc., made in connection with the
offering of the Shares, including any counsel fees incurred on behalf
of or disbursements by Morgan Stanley in its capacity as "qualified
independent underwriter," (viii) any expenses incurred by the Company
in connection with a "road show" presentation to potential investors
and (ix) the listing of the Shares on the Nasdaq National Market.
(g) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to you copies of
(i) all reports to its stockholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to obtain and
maintain in effect the quotation of the Shares on the Nasdaq National
Market and will take all necessary steps to cause the Shares to be
included on the Nasdaq National Market as promptly as practicable and
to maintain such inclusion for a period of three years after the date
hereof or until such earlier date as the Shares shall be listed for
regular trading privileges on the Nasdaq National Market or another
national securities exchange approved by you.
(j) The Company will comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which may from time to time be applicable
to the Company.
(k) The Company will comply with all provisions of all
undertakings contained in the Registration Statement.
(l) Prior to the Closing Date or any Additional Closing Date,
as the case may be, the Company will not issue any press release or
other communication directly or indirectly and will not hold any press
conference with respect to the Company, or its financial condition,
results of operations, business, properties or assets, or this
offering, without your prior written consent.
(m) The Company will not, without the prior written consent of
the Representatives, consent to any holder of the Company's capital
stock who is subject to a Lock-Up Agreement selling, transferring,
assigning or making any other disposition of any shares of capital
stock of the Company during the period that such shares are subject to
a Lock-Up Agreement.
VIII.
Unless otherwise agreed to by the Company, each Selling
Stockholder, severally and not jointly, agrees to pay or cause to be paid (i)
all taxes, if any, on the transfer and sale of the Shares being sold by such
Selling Stockholder and (ii) such Selling Stockholder's pro rata share
(determined by dividing the number of Shares sold by such Selling Stockholder by
the total number of Shares sold by all Sellers) of all costs and expenses
incident to the performance of the obligations of the Selling Stockholders and
the Company under this Agreement, including, but not limited to, all expenses
incident to the delivery of the Shares, the fees and expenses of counsel and
accountants for the Selling Stockholders and the Company, the costs and expenses
incident to the preparation, printing and filing of the Registration Statement
(including all exhibits thereto) and the Prospectus and any amendments or
supplements thereto, the expenses of qualifying the Shares under the securities
or Blue Sky laws of various jurisdictions, all fees payable in connection with
any review of the offering of the Shares by the National Association of
Securities Dealers, Inc., and the cost of furnishing to the Underwriters the
required copies of the Registration Statement and Prospectus and any amendments
or supplements thereto.
16.
<PAGE> 18
IX.
The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
by any Underwriter or any such controlling person in connection with defending
or investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to the
Underwriters furnished to the Company in writing by such Underwriter through you
expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter, or any person controlling such Underwriter, from
whom that person asserting any such losses, claims, damages or liabilities
purchased Shares, if a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability.
Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any who
controls any Underwriter within the meaning of either Section 15 of the Security
Act or Section 20 of the Exchange Act, or is under common control with, or is
controlled by, any Underwriter, and the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, up to the net amount received by such Selling
Stockholder from the sale of Shares pursuant hereto, from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to information
relating to such Selling Stockholder furnished in writing by or on behalf of
such Selling Stockholder expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto;
provided, however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter, or any
person controlling such Underwriter, from whom that person asserting any such
losses, claims, damages or liabilities purchased Shares, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage or liability.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of the directors of the Company,
the Selling Stockholders, each officer or director of any Selling Stockholder,
each of the officers who sign the Registration Statement and each person, if
any, who controls or is under common control with the Company or any Selling
Stockholder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including,
17.
<PAGE> 19
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to any of the three preceding paragraphs, such
person (hereinafter called the indemnified party) shall promptly notify the
person against whom such indemnity may be sought (hereinafter called the
indemnifying party) in writing, and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party, unless (1) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (2) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties, and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to the third preceding paragraph, by the Company,
in the case of parties indemnified pursuant to the first preceding paragraph,
and by the Selling Stockholders in the case of parties indemnified pursuant to
the second preceding paragraph. The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this paragraph,
the indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (1) such settlement is
entered into more than thirty (30) days after receipt by such indemnifying party
of the aforesaid request and (2) such indemnifying party shall not have
reimbursed the indemnified party for such fees and expenses in accordance with
such request prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
If the indemnification provided for in the first, second or
third paragraphs of this Article IX is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (1) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (2) if the allocation provided by clause (1) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (1) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the
18.
<PAGE> 20
other hand in connection with the statements or omissions, if any, that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand in connection with the offering
of the Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Shares (before deducting expenses)
received by the Sellers and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate public offering price of the
Shares. The relative fault of the Sellers on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact, if any, relates to
information supplied by the Sellers or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and with respect to the Selling
Stockholders, but only with reference to information relating to such Selling
Stockholder furnished in writing by or on behalf of such Selling Stockholder
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto. The Underwriters'
respective obligations to contribute pursuant to this Article IX are several in
proportion to the respective number of Shares they have purchased hereunder, and
not joint.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Article IX were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article IX, (x) no Underwriter shall be
required to contribute any amount in excess of the total price at which the
Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission, and (y) no Selling Stockholder shall be required
to contribute amounts in excess of the net amount received by such Selling
Stockholder from the sale of Shares pursuant hereto. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Article IX are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this
Article IX and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (1) any termination of this Agreement, (2) any
investigation made by or on behalf of any Underwriter, or by or on behalf of any
Selling Stockholder or the Company, its officers or directors or any other
person controlling the Company and (3) acceptance of and payment for any of the
Shares.
X.
This Agreement shall be subject to termination, by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (1) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (2) trading of any securities
of the Company shall have been suspended on any exchange or in any
over-the-counter market, (3) a general moratorium on commercial banking
activities in New York shall have been declared by either federal or New York
State authorities or (4) there shall have occurred any outbreak or escalation of
hostilities or any change in financial markets or any calamity or crisis that,
in your judgment, is material and adverse and (b) in the case of any of the
19.
<PAGE> 21
events specified in clauses (a) (1) through (4), such event singly or together
with any other such event makes it, in your judgment, impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus.
XI.
This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement by the
Commission.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
nondefaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to Article
III be increased pursuant to this Article XI by an amount in excess of one-ninth
of such number of Shares without the written consent of such Underwriter. If, on
the Closing Date or the Option Closing Date, as the case may be, any Underwriter
or Underwriters shall fail or refuse to purchase Shares and the aggregate number
of Shares with respect to which such default occurs is more than one-tenth of
the aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to you, the Company and the Selling Stockholders for the purchase
of such Shares are not made within 36 hours after such default, this Agreement
shall terminate without liability on the part of any nondefaulting Underwriter,
the Company and the Selling Stockholders. In any such case you, the Company or
the Selling Stockholder shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, but in no event for longer than seven
(7) days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of any Seller to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason any Seller shall be unable to perform its obligations under
this Agreement, the Sellers will reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.
This Agreement may be signed in two or more counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
20.
<PAGE> 22
XII.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
Very truly yours,
STORMEDIA INCORPORATED
By: /s/ Stephen M. Abely
-------------------------------------------
Stephen M. Abely
Title: Vice President and Chief Financial Officer
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE
I HERETO, ACTING SEVERALLY
By: /s/ Stephen M. Abely
-------------------------------------------
Attorney-in-Fact
Accepted, ____________, 1996
MORGAN STANLEY & CO. INCORPORATED
MONTGOMERY SECURITIES
SMITH BARNEY INC.
Acting severally on behalf of themselves and the several U.S.
Underwriters named in Schedule II hereto.
By Morgan Stanley & Co. Incorporated
By: /s/ William R. Salisbury
----------------------------------------
Morgan Stanley & Co. International Limited
Montgomery Securities
Smith Barney Inc.
Acting severally on behalf of themselves and the
several International Underwriters named in
Schedule II hereto.
By Morgan Stanley & Co. International Limited
By
------------------------------------------------
21.
<PAGE> 23
Schedule I
Selling Stockholders
<TABLE>
<CAPTION>
Number of
U.S. Firm Shares
Stockholder To Be Sold
----------- ----------
<S> <C>
Prudential Private Equity Investments III, L.P.................................
William J. Almon............................................................... ---------
Total U.S. Firm Shares.................................................... 1,200,000
</TABLE>
<TABLE>
<CAPTION>
Number of International
Firm Shares
Stockholder To Be Sold
----------- ----------
<S> <C>
Prudential Private Equity Investments III, L.P.................................
William J. Almon............................................................... -------
Total International Firm Shares................................................ 300,000
=======
</TABLE>
1.
<PAGE> 24
Schedule II
U.S. Underwriters
<TABLE>
<CAPTION>
Number of
U.S. Firm Shares To Be
U.S. Underwriter Purchased
---------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..............................................
Montgomery Securities..........................................................
Smith Barney Inc............................................................... ---------
Total U.S. Firm Shares......................................................... 2,400,000
=========
</TABLE>
International Underwriters
<TABLE>
<CAPTION>
Number of International
Firm Shares
International Underwriters To Be Purchased
-------------------------- ---------------
<S> <C>
Morgan Stanley & Co. International.............................................
Montgomery Securities..........................................................
Smith Barney Inc............................................................... ---------
Total International Firm Shares................................................ 1,200,000
=========
</TABLE>
2.
<PAGE> 1
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
(415) 493-9300
May 21, 1996
StorMedia Incorporated
390 Reed Street
Santa Clara, CA 95050
RE: Registration Statement on Form S-3
CIK No. 0000942787; File No. 0-25796
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 filed by you
with the Securities and Exchange Commission (the "Commission") on May 21, 1996
(as such may be further amended or supplemented, the "Registration Statement"),
in connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of up to 5,175,000 shares of your Class A Common Stock (the
"Shares"). The Shares, which include up to 675,000 shares of Class A Common
Stock issuable pursuant to an over-allotment option granted to the underwriters
(the "Underwriters"), are to be sold to the Underwriters as described in such
Registration Statement for sale to the public. Of the shares being sold,
3,000,000 are being sold by the Company and 1,500,000 are being sold by certain
holders of the Company (including the 675,000 Share of Class A Common Stock in
the over-allotment option). As your counsel in connection with this transaction,
we have examined the proceedings proposed to be taken by you in connection with
the issuance and sale of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the
<PAGE> 2
prospectus constituting a part thereof, which has been approved by us, as such
may be further amended or supplemented, or incorporated by reference in any
registration statement relating to the prospectus filed pursuant to Rule 462(b)
of the Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 11.1
STORMEDIA INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 29, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Primary:
Statement of operations data:
Net earnings $ 9,469 $ 2,036
======= =======
Weighted average number of common and dilutive
equivalent shares used in computations:
Common Stock 17,043 2,138
Stock options and other common stock equivalents 1,262 1,530
------- -------
Subtotal 18,305 3,668
------- -------
Pursuant to Staff Accounting Bulletin No. 83:
Preferred Stock converted on an as-if basis according at
exercise prices less than the anticipated initial public
offering price using the treasury stock method -- 7,087
Stock options -- 420
------- -------
Shares used in computing net earnings per share 18,305 11,175
======= =======
Net earnings per share $0.52 $0.18
======= =======
Fully Diluted:
Statement of operations data:
Net earnings $ 9,469 $ 2,036
======= =======
Weighted average number of common and dilutive
equivalent shares used in computations:
Common Stock 17,043 2,138
Stock options and other common stock equivalents 1,266 1,530
------- -------
Subtotal 18,309 3,668
------- -------
Pursuant to Staff Accounting Bulletin No. 83:
Preferred Stock converted to an as-if basis according at
exercise prices less than the anticipated initial public
offering price using the treasury stock method -- 7,087
Stock options -- 420
------- -------
Shares used in computing net earnings per share 18,309 11,175
======= =======
Net earnings per share $0.52 $0.18
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.3
(LAHIVE & COCKFIELD LETTERHEAD)
May 21, 1996
Board of Directors
StorMedia, Inc.
390 reed Street
Santa Clara, CA 95050
Re: Registration Statement on Form S-3 StorMedia Incorporated
Dear Ladies and Gentlemen:
We consent to the use of our name wherever appearing in the
Registration Statement on Form S-3 (the "Registration Statement") to be filed
by you with the Securities and Exchange Commission, on May 22, 1996 in
connection with the registration under the Securities Act of 1933, as amended,
of shares of your Class A Common Stock, including the Prospectus constituting a
part thereof, which has been approved by us, as such may be further amended or
supplemented, or incorporated by reference in any registration statement
relating to the Prospectus filed pursuant to Rule 462(b) under the Securities
Act of 1933.
Very truly yours,
JAMES E. COCKFIELD for
LAHIVE & COCKFIELD
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000942787
<NAME> STORMEDIA INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-29-1996
<EXCHANGE-RATE> 1
<CASH> 31,624
<SECURITIES> 5,700
<RECEIVABLES> 40,449
<ALLOWANCES> 1,084
<INVENTORY> 10,357
<CURRENT-ASSETS> 94,301
<PP&E> 110,299
<DEPRECIATION> 7,562
<TOTAL-ASSETS> 198,679
<CURRENT-LIABILITIES> 42,506
<BONDS> 0
0
0
<COMMON> 228
<OTHER-SE> 143,778
<TOTAL-LIABILITY-AND-EQUITY> 198,679
<SALES> 61,156
<TOTAL-REVENUES> 61,156
<CGS> 44,047
<TOTAL-COSTS> 5,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,836
<INCOME-TAX> 2,367
<INCOME-CONTINUING> 9,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,469
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<FN>
<F1>PER SHARE COMPUTATION REFLECTS THREE-FOR-TWO STOCK SPLIT.
</FN>
</TABLE>
