<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 13, 1998
STORMEDIA INCORPORATED
(Exact name of registrant as specified in Charter)
<TABLE>
<CAPTION>
DELAWARE 0-25796 77-0373062
-------- ------- ----------
<S> <C> <C>
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) Number)
</TABLE>
385 REED STREET
SANTA CLARA, CA 95050-3118
(Address of Principal Executive Offices)
(408) 327-8400
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Form 8-K dated January 13, 1998 as
set forth in the pages attached hereto.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and exhibits are filed as part of
this Report, where indicated.
(a) Financial statements of business acquired prepared pursuant to
Rule 3-05 of Regulation S-X:
Audited Consolidated Financial Statements of Akashic Memories
Corporation and Subsidiaries as of and for the year ended
December 28, 1997.
Audited Consolidated Financial Statements of Akashic Memories
Corporation and Subsidiaries as of December 31, 1996 and for the
period from September 30, 1996 (inception) to December 31, 1996.
Audited Consolidated Financial Statements of Akashic
International, Inc. and Subsidiaries (Formerly Akashic Memories
Corporation) as of and for the years ended December 31, 1996 and
1995.
(b) Pro Forma financial information required pursuant to Article 11
of Regulation S-X.
Registrant acquired Akashic Memories Corporation ("Akashic") on
December 31, 1997. Akashic was created on September 30, 1996 when
certain assets and liabilities of Akashic International, Inc. ("AII")
(the parent of Akashic) were transferred to Akashic for convertible
debentures and convertible preferred stock. The assets and liabilities
transferred comprise essentially of all the operating assets and
liabilities of AII and were recorded at AII's historical cost. 100% of
Akashic preferred stock is owned by AII.
The consolidated financial statements of AII are considered the
predecessor to Akashic and are presented herein pursuant to Rule 3-05
of Regulation S-X.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of December 15,
1997, among the Registrant, AII, Akashic, and StorMedia
Acquisition Corporation. (Incorporated by reference to
Registrant's current report on Form 8-K filed on January 13,
1998, File No. 0-25796.)
2.2 Form of Agreement of Merger between Akashic and StorMedia
Acquisition Corporation. (Incorporated by reference to
Registrant's current report on Form 8-K filed on January 13,
1998, File No. 0-25796.)
24.1 Consent of Deloitte & Touche LLP
24.2 Consent of KPMG Peat Marwick LLP
</TABLE>
2
<PAGE> 3
Independent Auditors' Report
The Board of Directors
Akashic Memories Corporation:
We have audited the accompanying balance sheet of Akashic Memories Corporation
as of December 28, 1997, and the related statement of operations, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presently fairly, in
all material respects, the financial position of Akashic Memories Corporation as
of December 28, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses from
operations in 1997, has a net capital deficiency, and was sold to a new parent
on December 31, 1997, all of which raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
------------------------------
Mountain View, California
February 23, 1998
3
<PAGE> 4
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Net sales........................................................ $213,881
Cost of sales.................................................... 251,646
--------
Gross deficiency............................................ (37,765)
--------
Operating expenses:
Research and development......................................... 13,674
Selling, general, and administrative............................. 10,475
Nonrecurring charges............................................. 148,402
--------
Total operating expenses.................................... 172,551
Operating loss.............................................. (210,316)
Interest income.................................................. 1,689
Interest expense................................................. (12,194)
Other expense.................................................... (401)
--------
Loss before income tax expense................................... (221,222)
Income tax expense............................................... 124
--------
Net loss......................................................... $(221,346)
=========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents........................... .................. $ 11,046
Accounts receivable, less allowances of $12,896 at December 28, 1997 .. 15,424
Inventories ........................................................... 20,018
Other current assets .................................................. 895
---------
Total current assets ............................................... 47,383
Plant and equipment, net ................................................. 3,236
---------
$ 50,619
=========
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable ................................................ $ 14,842
Accrued liabilities ................................................... 12,921
Accrued cancellation charges .......................................... 3,500
Short-term debt to a customer ......................................... 4,960
Short-term debt to AII................................................. 126,000
---------
Total current liabilities .......................................... 162,223
Long-term debt ........................................................ 100,000
Commitments and contingencies
Stockholder's equity:
Convertible preferred stock - 31,756,583 authorized:
Series A, $.79828 par value; 19,200,000 designated, issued
and outstanding................................................... 15,327
Series B, $.001 par value; 12,556,583 designated, none
issued and outstanding............................................ --
Common stock, $.001 par value; 36,556,583 authorized,
23,335 issued and outstanding..................................... 21
Accumulated deficit ................................................... (226,952)
---------
Total stockholder's equity ......................................... (211,604)
---------
$ 50,619
=========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss .................................................................. $(221,346)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 35,790
Writedown of property & equipment.......................................... 146,702
Changes in operating assets and liabilities:
Accounts receivable .................................................... 8,395
Inventories ............................................................ (982)
Other assets ........................................................... 222
Trade accounts payable ................................................. (6,553)
Accrued liabilities .................................................... 2,184
Net payable to affiliate................................................ 2,042
--------
Net cash used in operating activities ............................... (33,546)
--------
INVESTING ACTIVITIES - Acquisition of plant and equipment, net ................. (37,318)
--------
FINANCING ACTIVITIES
Payment of bank overdraft ................................................. (4,342)
Issuance of notes payable from Kubota Finance, Inc......................... 25,000
Payment of notes payable to Kubota Finance, Inc. .......................... (67,000)
Issuance of debt to AII.................................................... 126,000
Payment of notes payable to bank .......................................... (17,000)
Issuance of notes payable to customer ..................................... 4,695
Proceeds from issuance of Common Stock .................................... 21
Dividend to Kubota USA .................................................... (2,161)
--------
Net cash provided by financing activities ........................... 65,213
--------
Decrease in cash and cash equivalents ..................................... (5,651)
Cash and cash equivalents at beginning of year ............................ 16,697
--------
Cash and cash equivalents at end of year .................................. $ 11,046
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .................................................... $ 10,106
========
Cash paid for income taxes ................................................ $ --
========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Product credits off-set against the related notes payable ................. $ 2,183
========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
AKASHIC MEMORIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Akashic Memories Corporation (the "Company" or Akashic) was incorporated in
California on September 30, 1996 as part of a corporate reorganization in which
the former Akashic Memories Corporation changed its name to Akashic
International, Inc. (AII). Subsequent to this name change, certain operating
assets and liabilities of AII were transferred to the Company in exchange for a
$100,000,000 convertible subordinated debenture and 19,200,000 shares of Series
A convertible preferred stock. Assets and liabilities transferred were recorded
at AII's historical cost as the transaction was considered to be a transfer
between entities under common control. The Company is wholly-owned by AII which
is a wholly-owned subsidiary of Kubota U.S.A., Inc. (Kubota USA). Kubota USA is
a subsidiary of Kubota Corporation (the Parent) of Japan. AII funded the Company
with an additional $126,000,000 during fiscal 1997. (Notes 5 and 3) During 1997,
the Company was dependent on its Parent for financial support. The Company is
primarily engaged in the research, development, production and marketing of
magnetic rigid disk media and disk substrates. The Company sells its product
primarily in the United States and Southeast Asia to manufacturers of disk
drives for use in the personal computer and workstation industries.
Kubota Finance, a wholly-owned subsidiary of the Parent had loans outstanding to
the Company and its subsidiaries totaling $67,000,000 in 1997 which has been
fully repaid during 1997. In addition, the Parent had guaranteed the Company's
notes payable to banks totaling $17,000,000 at December 31, 1996 which have been
fully repaid during 1997. The accompanying consolidated financial statements may
not be indicative of the financial condition and results of operations if the
Company had operated without such affiliations.
As a result of a significant downturn in the thin film media industry and the
loss of certain customers the Company incurred a loss of approximately $221M
million during 1997. As a result of these and other factors, the Company, which
had historically relied on its Parent for financial support, was sold to
another company in the thin film media industry on December 31, 1997. (See Note
13). It is uncertain as to whether the new parent will provide sufficient
financial support to allow the Company to continue operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: In accordance with generally accepted accounting principles,
the Company's management utilizes estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Concentration of Credit Risk: Financial instruments potentially exposing the
Company to concentration of credit risk consist primarily of trade receivables.
A majority of the Company's trade receivables are derived from sales to a few
hard disk drive manufacturers. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit extended when considered necessary, but generally requires no
collateral. The Company maintains reserves for potential credit losses. The
Company's policy is to invest cash and cash equivalents in a number of high
credit quality institutions and to limit the amount placed with any financial
institution.
Basis of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances, transactions and intercompany profits are
eliminated in consolidation.
Fiscal Year: Akashic operates and reports on a 52- or 53- week fiscal year
ending on the Sunday nearest December 31 of each year. Fiscal 1997 ended on
December 28, 1997 and consisted of 52 weeks.
Foreign Currency Translation: The Company's subsidiary in Malaysia uses the
U.S. Dollar as the functional currency. Accordingly, monetary assets and
liabilities are remeasured using period-end exchange rates, and nonmonetary
assets and liabilities are translated using historical rates. Revenues and
costs are translated using average exchange rates for the period, except for
costs related to those balance sheet items that are translated using historical
rates. Remeasurement and transaction gains and losses during the year ended
December 28, 1997 were not significant.
7
<PAGE> 8
Cash equivalents: Cash equivalents are investments debt securities purchased
with a remaining maturity of three months or less when acquired. The carrying
amount reported in the financial statements for cash equivalents as of December
28, 1997 approximates fair value because of the short maturity of the
outstanding balances.
Inventories: Inventories are stated at lower of (first-in, first-out) cost or
market.
Equipment and Leasehold Improvements: Equipment and leasehold improvements are
stated at cost. Depreciation is computed using the straight-line method over
estimated useful lives of two to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or lease terms of
three to ten years.
Long-lived assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company deems an asset to be impaired if a forecast of
undiscounted future operating cash flows directly related to the asset,
including disposal value if any, is less than the carrying amount. If an asset
is determined to be impaired, the loss is measured as the amount by which the
carrying amount of its assets exceeds its fair value. (Note 3)
Revenue Recognition: The Company recognizes sales and records estimated product
return reserves upon shipment.
Income Taxes: The Company files its income tax returns as a member of a
consolidated group. In accordance with the tax-sharing agreement with Kubota
USA, a group member with taxable income obtains an income tax charge from Kubota
USA as if the group member filed on a separate return basis. A group member with
taxable losses obtains an income tax credit based on its proportionate
contribution to reducing taxes payable by other members in consolidation.
Additionally, the tax-sharing agreement addresses the utilization of net
operating loss carryforwards and tax credits. On December 31, 1997 due to the
purchase of the Company (See Note 13), the tax sharing agreement between the
Company, AII, and Kubota USA, was revised to exclude the Company from receiving
or incurring tax related benefits or liabilities as calculated under the
agreement.
The Company accounts for income taxes using an asset and liability approach to
financial accounting and reporting for income taxes. Under this method deferred
tax assets and liabilities at the end of each period are determined based on
future tax consequences attributable to the difference between the financial
statement carrying amounts of existing assets and liabilities and the respective
tax basis using the tax rate expected to be in effect when taxes are actually
paid or recorded. Valuation allowances are provided when necessary to reduce
deferred tax assets to the amount expected to be realized.
Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method.
8
<PAGE> 9
NOTE 3 - BALANCE SHEET INFORMATION
INVENTORIES - (NET)
<TABLE>
<CAPTION>
December 28,
1997
(in thousands)
--------------
<S> <C>
Finished goods $10,165
Work-in-process 763
Raw materials 9,090
-------
Total $20,018
=======
</TABLE>
<TABLE>
<CAPTION>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
December 28,
1997
(in thousands)
--------------
<S> <C>
Machinery and equipment $ 209,501
Leasehold improvements 62,332
Construction-in-progress 10,282
---------
282,115
Less:
Accumulated depreciation and amortization (132,177)
Writedown of property and equipment $(146,702)
---------
Total $ 3,236
=========
</TABLE>
NOTE 4 - NONRECURRING CHARGES
During 1997, the Company experienced difficult conditions in the thin film media
industry and lost certain customers. As a result, the Company's fixed assets
were determined to be impaired and the Company took a noncash pretax charge of
$146.7 million to reflect this impairment. In 1997 the Company reduced its
work force by approximately 100 administrative and management personnel, and
incurred a severance charge of $1.7 million.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company had an outstanding balance on the unsecured
notes payable of $42 million plus accrued interest to Kubota Finance, Inc.
During 1997, Kubota Finance, Inc. issued additional notes payable totaling $25
million. The notes, bearing interest at rates ranging from 5.92% to 6.45%, were
due in varying amounts on March 31, 1998. In December 1997, the Company fully
repaid its outstanding balance on the unsecured notes payable plus accrued
interest to Kubota Finance, Inc.
On September 30, 1996, the Company issued a convertible subordinated debenture
of $100 million to AII. The principal and any unpaid interest are due on
September 30, 1999. Interest is payable semiannually at 6.5% per annum. The
debenture is convertible at the option of the holder at any time prior to the
maturity date into the Company's Series B preferred stock at an initial
conversion price of $7.96396 per share, subject to adjustment.
In December 1997, the Company issued various non-interest bearing notes payable
of $126 million to AII. The principal is due on March 31, 1998.
On December 31, 1997 prior to the sale of the Company to StorMedia (See Note
13) AII forgave all remaining outstanding debt totaling $226 million and
interest of $1.6 million due from the Company.
Interest expense on all related party loans totaled $9.7 million for
fiscal 1997.
The Company had purchases from affiliates of approximately $3.1 million during
fiscal 1997.
NOTE 6 - SHORT-TERM DEBT
Notes payable of $17 million to Banks were repaid in full in June 1997. The
notes accrued interest at rates ranging from approximately 5.625% to 6.35%
through June 1997.
Short-term debt of $4.6 million consists of a loan from a customer of the
Company. The loan calls for maximum borrowings of $7,500,000 which must be drawn
in $500,000 increments, based on certain milestone achievements. The loan bears
interest at 6.0% per year. The outstanding balance of the loan is reduced on a
quarterly basis by an
9
<PAGE> 10
amount equal to $0.15 per product unit sold to the customer ("Product Credits").
Akashic may increase this offset amount from time to time to reduce the
outstanding balance of the loan. Beginning April 30, 1997, Akashic is required
to make quarterly payments of $528,000, less the amount of any Product Credit
for the prior quarter. The customer has certain rights of offset against
outstanding product receivables. All unpaid interest and principal balance is
due in full on March 31, 2000. At December 28, 1997, the Company was in default
of this agreement and no further borrowings were available.
NOTE 7 - INCOME TAXES
The Company is included in the federal consolidated group of Kubota USA for
federal income tax purposes.
Income tax expense for the year ended December 28, 1997 consisted of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Federal $ -- -- --
State 124 -- 124
Foreign -- -- --
--- --- ---
$124 -- 124
=== === ===
</TABLE>
The 1997 income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to pretax income as a result of the
following:
<TABLE>
<S> <C>
Computed at statutory rate $(77,422)
State taxes, net of federal income tax expense 124
Foreign subsidiary loss, no benefit realized 18,451
Current year domestic loss, no benefit realized 58,977
-------
Total $ 124
=======
</TABLE>
The type of temporary differences that give rise to significant portions of the
Company's deferred tax assets and liabilities are set out below.
<TABLE>
<S> <C>
Deferred tax assets
Accruals and reserves $10,758
State income taxes 43
Net operating loss carryforward --
Property and equipment 48,414
-------
TOTAL GROSS DEFERRED TAX ASSETS 59,215
Valuation allowance (59,215)
-------
TOTAL DEFERRED TAX ASSETS (LIABILITIES) $ --
=======
</TABLE>
The Company's deferred income tax assets and liabilities represent the net tax
effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred income tax
assets include allowance for bad debt, inventory reserve, plant and equipment
write-downs and various other accruals and reserves not currently deductible
and tax depreciation in excess of book depreciation. The Company provided a
full valuation allowance against the deferred tax assets at December 28, 1997.
10
<PAGE> 11
NOTE 8 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company rents office and manufacturing facilities under operating leases
which expire through 2000. Rent expense was $2,662,000 for fiscal 1997.
The future minimum lease payments are as follows:
<TABLE>
<CAPTION>
TOTAL
<S> <C>
Year ending December 31:
1998 $2,564,000
1999 2,160,000
2000 279,000
</TABLE>
CAPITAL EXPENDITURES
At December 28, 1997, the Company had noncancelable purchase commitments
totaling $20.5 million.
CLAIM AND LEGAL PROCEEDINGS
In the normal course of business the Company from time to time has been named
as a defendant in certain civil and regulatory, legal proceedings. The Company
believes it has adequate accruals for these matters and that the ultimate
resolution of these matters will not result in a material adverse impact on the
Company's consolidated financial position or results of operations.
NOTE 9 - STOCKHOLDER'S EQUITY
During 1997, the Company declared a dividend to the Kubota USA of $2,161,000 for
outstanding receivables.
Convertible Preferred Stock
During September 1996, the Company issued 19,200,000 shares of Series A
preferred stock and debenture bonds (See Note 1 and Note 4) in exchange for
certain assets and liabilities of AII.
Significant terms of the Company's Series A and Series B preferred stock are as
follows:
o Each share of preferred stock is convertible into shares of common stock
computed by dividing the conversion price in effect at the time of the
conversion by the conversion value per share of the preferred. The
initial conversion price and conversion value are as follows (subject to
certain antidilution adjustments) at the election of the holder:
o Series A preferred $7.23996
o Series B preferred $7.96396
Such conversion shall be automatic in the event of an initial public
offering of stock meeting certain criteria or, the written consent of
not less than two-thirds (2/3) of the then-outstanding shares of Series
A and Series B preferred, voting together as a single class.
o Each share has voting rights equivalent to the number of shares of
common stock into which it is convertible.
o Preferred stock shareholders are entitled to noncumulative dividends
prior and in preference to any declaration or payment of any dividend on
common stock of the Company at a rate of $0.57920 and $0.63712 per share
per annum, on each outstanding share of Series A and Series B preferred
stock, respectively.
o In the event of liquidation, dissolution or winding up of the Company,
preferred shareholders shall be entitled to be paid first and out of the
assets of the Company available to holders of its capital stock in an
amount equal to $7.23996 per share of Series A preferred, and $7.96396
per share of Series B preferred. Both amounts are subject to
anti-dilutive provisions. If the assets and funds to be distributed are
insufficient to permit full payment, then the funds shall be distributed
on a pro rata basis. Upon completion of the distribution, the holders of
the common stock will receive a pro rata distribution of any remaining
assets of the Company.
11
<PAGE> 12
Stock Option Plan
In October 1996, the Board of Directors of Akashic approved the 1996 Stock
Option Plan (the "Plan"). Under the Plan, incentive and nonqualified stock
options to purchase up 4,800,000 shares of Akashic's common stock may be granted
to employees, directors and consultants. Incentive stock options must be granted
at a price not less than 100% of fair market value at the date of grant as
determined by Akashic's Board of Directors. Nonqualified options must be granted
at not less than 85% of the fair market. The exercise price for both incentive
and nonqualified stock options must not be less than 110% of the fair market
value for employees with more than 10% voting power of all classes of stock of
the Company at the date of grant. Options generally vest over four years and
expire at the earlier of ten years from the date of grant or upon termination of
employment.
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- -----
<S> <C> <C>
Options at beginning of year 3,484,400 $ 0.90
Options granted 1,145,800 0.90
Options terminated (4,606,865) 0.90
Options exercised (23,335) 0.90
---------
Options at end of year 0
=========
</TABLE>
As of December 28, 1997, the Plan was terminated.
Additional Stock Plan Information
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) requires the disclosure of pro forma net loss and loss
per share had the Company adopted the fair value method. Under SFAS 123, the
fair value of stock-based awards by private companies to employees is calculated
using the minimum value method. This method requires subjective assumptions,
including expected time to exercise, which greatly affect the calculated values.
The Company's calculations were made using the following weighted average
assumptions: expected life, one year following vesting; risk free interest rate
of 6.27% in 1997; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1997 awards had
been amortized to expense over the vesting period of the awards, pro forma net
loss would not have been materially impacted for the year ended December 28,
1997.
12
<PAGE> 13
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which covers substantially all full time
employees. Eligible employees are permitted to make deferred contributions of up
to 15% of their annual gross compensation, subject to certain Internal Revenue
Service limitations. The Company may contribute $0.20 for each $1.00 a
participant contributes up to the first 5% of employee earnings with a maximum
of 1% of the employee's gross wages. The Company made contributions to the plan
of $399,000 during 1997. Employee contributions and earnings thereon vest
immediately. Company contributions and earnings thereon vest over three years of
service.
NOTE 11 - MAJOR CUSTOMERS
In fiscal 1997, three major customers represented 56%, 16% and 13% of the
Company's net sales, and 66%, 18% and 0% of the Company's net accounts
receivable, respectively.
NOTE 12 - SEGMENT INFORMATION
A. Geographic Information of the Company's operations:
<TABLE>
<CAPTION>
U.S. Malaysia Elimination Consolidated
---- -------- ----------- ------------
<S> <C> <C> <C> <C>
Total net sales $213,904 $ 34,908 $(34,931) $ 213,881
======== ======== ========= =========
Operating loss $168,628 $(52,718) $ -- $(221,346)
======== ======== ========= =========
Identifiable assets $ 46,026 $ 4,593 $ -- $ 50,619
======== ======== ========= =========
</TABLE>
B. Sales from domestic to unaffiliated customers in the U.S. and other
geographic regions were as follows:
<TABLE>
<CAPTION>
Year Ended
December 28, 1997
-----------------
<S> <C>
Far East $161,703
United States 52,201
--------
Total $213,904
========
</TABLE>
NOTE 13 - SUBSEQUENT EVENTS
Effective December 31, 1997, StorMedia Incorporated paid $10 million cash and
issued 2,000,000 shares of its Class A Common Stock in exchange for the
preferred stock of Akashic and certain patents and applications pending of
Kubota Corporation. In connection with the transaction, StorMedia did not assume
any of the Company's bank or related party borrowings.
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Akashic Memories Corporation:
We have audited the accompanying consolidated balance sheet of Akashic Memories
Corporation (Company) (a wholly-owned subsidiary of Akashic International, Inc.)
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations and accumulated deficit and of cash flows for the
period from September 30, 1996 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Akashic Memories Corporation and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the period from September 30, 1996 (inception) to December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, effective
December 31, 1997 the Company's operations were sold to StorMedia Incorporated.
As discussed in Notes 1, 3, 4, 5 and 7, the Company, prior to such sale, had
been dependent on Kubota Corporation and affiliates for financial support and
had significant transactions with such affiliates. Accordingly, the accompanying
financial statements may not be indicative of the financial condition or results
of operations had the Company operated without such affiliations.
/s/ Deloitte and Touche LLP
-------------------------------
San Jose, California
February 7, 1997
(December 31, 1997 as to Note 11)
14
<PAGE> 15
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Akashic International, Inc.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and equivalents $ 16,697
Accounts receivable - net 26,002
Inventories 19,036
Other current assets 768
Due from affiliates 3,392
-------
Total current assets 65,895
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net 148,410
DEPOSITS 349
-------
TOTAL ASSETS $214,654
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable to affiliate $ 42,000
Notes payable - banks 17,000
Cash overdraft 4,342
Accounts payable 21,395
Accrued expenses 14,237
Due to affiliates 1,350
-------
Total current liabilities 100,324
-------
CONVERTIBLE DEBENTURE DUE TO AKASHIC INTERNATIONAL, INC. 100,000
-------
NOTES PAYABLE - OTHER 2,448
-------
STOCKHOLDER'S EQUITY:
Convertible preferred stock - 31,756,583 authorized:
Series A, $.79828 par value; 19,200,000 designated, 15,327
issued and outstanding
Series B, $.001 par value; 12,556,583 designated, none --
issued and outstanding
Common stock, $.001 par value; 36,556,583 authorized, --
none issued and outstanding
Accumulated deficit (3,445)
-------
Total stockholder's equity 11,882
-------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $214,654
=======
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 16
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Akashic International, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
PERIOD FROM SEPTEMBER 30, 1996 (INCEPTION) TO DECEMBER 31, 1996
(in thousands)
<TABLE>
<S> <C>
NET SALES $ 46,578
-------
COSTS AND EXPENSES:
Cost of sales 49,391
Research and development 2,231
Marketing, general and administrative 1,501
Reversal of allowance for doubtful account receivable (1,490)
-------
Total costs and expenses 51,633
-------
LOSS FROM OPERATIONS (5,055)
INTEREST EXPENSE (1,728)
-------
LOSS BEFORE INCOME TAX BENEFIT (6,783)
INCOME TAX BENEFIT 3,338
-------
NET LOSS/ACCUMULATED DEFICIT $ (3,445)
=======
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 17
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Akashic International, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM SEPTEMBER 30, 1996 (INCEPTION) TO DECEMBER 31, 1996
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (3,445)
Adjustments to reconcile net loss to net cash in operating activities:
Depreciation and amortization 2,374
Gain on reversal of allowance for doubtful accounts receivable 1,490
Changes in operating assets and liabilities, net of
balances transferred in (Note 1):
Accounts receivable (2,306)
Inventories (2,857)
Other current assets 334
Due from affiliates (3,392)
Accounts payable 1,375
Accrued expenses 694
Due to affiliates 1,189
-------
Net cash used in operating activities (4,544)
-------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (35,703)
Deposits (22)
-------
Net cash used in investing activities (35,725)
-------
FINANCING ACTIVITIES:
Cash transferred in from AII (Note 1) 6,723
Borrowings under short-term debt 49,000
Principal payments on long-term debt (552)
Cash overdraft 1,795
-------
Net cash provided by financing activities 56,966
-------
NET INCREASE IN CASH AND EQUIVALENTS 16,697
CASH AND EQUIVALENTS, Beginning of period --
-------
CASH AND EQUIVALENTS, End of period $ 16,697
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Assets acquired $ 161,890
=======
Convertible debenture issued to Akashic International, Inc. (100,000)
=======
Preferred stock issued to Akashic International, Inc. (15,327)
=======
Liabilities assumed $ 46,563
=======
Cash paid for interest $ 621
=======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE> 18
AKASHIC MEMORIES CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Akashic International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 30, 1996 (INCEPTION) TO DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company - Akashic Memories Corporation (the "Company") was incorporated
in California on September 30, 1996 as part of a corporate reorganization in
which the former Akashic Memories Corporation changed its name to Akashic
International, Inc. (AII). Subsequent to this name change, certain operating
assets and liabilities of AII were transferred to Akashic Memories
Corporation in exchange for a $100,000,000 convertible subordinated
debenture and 19,200,000 shares of Series A convertible preferred stock.
Assets and liabilities transferred were recorded at AII's historical cost.
The Company was, as of December 31, 1996, wholly-owned by AII which is a
wholly-owned subsidiary of Kubota U.S.A., Inc. (Kubota USA). Kubota USA is a
wholly-owned subsidiary of Kubota Corporation (the Parent) of Japan. See
Note 11 concerning the subsequent sale of the Company's operations to
StorMedia Incorporated. The Company is primarily engaged in the research,
development, production and marketing of magnetic rigid disk media and disk
substrates. The Company sells its products primarily in the United States
and Southeast Asia to manufacturers of disk drives for use in the personal
computer and workstation industries.
Kubota Finance, a wholly-owned subsidiary of Kubota Corporation, has loans
outstanding to the Company totaling $42,000,000 at December 31, 1996 (Note
3). In addition, Kubota Corporation has guaranteed the Company's notes
payable to banks totaling $17,000,000 at December 31, 1996 (Note 4). The
accompanying consolidated financial statements may not be indicative of the
financial condition and results of operations if the Company had operated
without such affiliations. The Company has been dependent on its Parent for
financial support and has obtained a commitment from the Parent to support
the Company as necessary through December 31, 1997. See Note 10 concerning
the subsequent sale of the Company's operations to StorMedia Incorporated.
Basis of Consolidation - The consolidated financial statements include the
accounts of Akashic Memories Corporation (Akashic), its wholly-owned United
States subsidiary, AMC Substrates, Inc. (AMC), and its wholly-owned
Malaysian subsidiary, Akashic Kubota Technologies Sdn. Bhd. (AKT). All
significant intercompany balances, transactions and intercompany profits are
eliminated in consolidation.
Fiscal Year - The Company operates and reports on a 52- or 53-week fiscal
year ending on the Sunday nearest December 31 of each year. Fiscal 1996
ended on December 29, 1996. For convenience of presentation, the year end is
indicated as of December 31 in these financial statements.
Use of Estimates - In accordance with generally accepted accounting
principles, the Company's management utilizes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
18
<PAGE> 19
Concentration of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
trade accounts receivable. A majority of the Company's trade receivables are
derived from sales to hard disk drive manufacturers. At December 31, 1996,
approximately 99% of trade receivables were with three customers. To reduce
credit risk, the Company performs ongoing credit evaluations of its
customers' financial condition and limits the amount of credit extended when
considered necessary, but generally requires no collateral. The Company
maintains reserves for estimated potential credit losses.
Foreign Currency Translation - The Company's subsidiary in Malaysia uses the
U.S. dollar as the functional currency. Accordingly, assets and liabilities
are translated using period-end exchange rates, except non-monetary assets,
which are translated using historical rates. Revenues and costs are
translated using average exchange rates for the period, except for costs
related to those balance sheet items that are translated using historical
rates. Transaction gains and losses during the period from September 30,
1996 (inception) to December 31, 1996 were not significant.
Cash Equivalents - Cash equivalents are highly liquid debt investments
purchased with a maturity of three months or less.
Inventories - Inventories are stated at lower of standard cost, which
approximates actual cost (first-in, first-out basis) or market.
Equipment and Leasehold Improvements - Equipment and leasehold improvements
are stated at cost. Depreciation is computed using the straight-line method
over estimated useful lives of two to seven years. Leasehold improvements
are amortized over the shorter of their estimated useful lives or lease
terms of three to ten years.
Revenue Recognition - The Company recognizes sales at the time of product
shipment. Allowances for sales returns are provided at the time of sale.
Fair Values of Financial Instruments - The Company believes that the
carrying amount reported in the financial statements for cash equivalents as
of December 31, 1996 approximates fair value because of the short maturity
of the outstanding balance. The fair value of notes payable - banks and
notes payable - others approximates the carrying amount based on the current
rate offered to the Company for debt of the same remaining maturities.
Determination of the fair value of the convertible subordinated debenture is
not practicable given the lack of comparable instruments of this type.
Income Taxes - The Company files its tax returns as a member of a
consolidated group. In accordance with AII's tax-sharing agreement with
Kubota USA, a group member with taxable income obtains an income tax charge
from Kubota USA as if the group member filed on a separate return basis. A
group member with taxable losses obtains an income tax credit based on its
proportionate contribution to reducing taxes payable by other members in
consolidation. Additionally, the tax-sharing agreement addresses the
utilization of net operating loss carryforwards and tax credits. As a
wholly-owned subsidiary of AII, the Company participates in the consolidated
group's tax arrangements. (See Note 11 concerning subsequent event.)
The Company accounts for income taxes under an asset and liability approach.
Valuation allowances are provided when necessary to reduce deferred tax
assets to the amount expected to be realized.
19
<PAGE> 20
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
2. BALANCE SHEET INFORMATION
Accounts Receivable-Net -- Accounts receivable as of December 31, 1996 are
net of allowances for sales returns of $426,000. During 1996, the Company
reversed $1,490,000 allowance for doubtful account for an accounts
receivable which was fully reserved by AII and transferred to the Company at
nominal book value at inception. The resulting gain has been shown as a
separate line in the statement of operations and accumulated deficit.
Inventories
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Finished goods ...................................... $ 9,745
Work-in-process ..................................... 2,910
Raw materials ....................................... 6,381
--------
Total ....................................... $ 19,036
========
</TABLE>
Equipment and Leasehold Improvements-Net
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Machinery and equipment ............................. $146,412
Leasehold improvements .............................. 30,722
Furniture and fixtures .............................. 57
Construction-in-progress ............................ 67,607
--------
244,798
Accumulated depreciation and amortization ........... (96,388)
--------
Total ....................................... $148,410
========
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
At December 31, 1996, the Company has unsecured notes payable to Kubota
Finance, Inc. (KFI) of $42,000,000, bearing interest at rates ranging from
5.92% to 6.4%, due in varying amounts through March 31, 1997. The due dates
on such notes were subsequently extended to March 31, 1998. Interest expense
on these loans was $435,000 for the period from September 30, 1996
(inception) to December 31, 1996.
On September 30, 1996, the Company issued a $100,000,000 convertible
debenture (see Note 5) and 19,200,000 shares of Series A preferred stock to
AII in exchange for certain assets and liabilities of AII.
During the period from September 30, 1996 (inception) to December 31, 1996,
the Company had purchases from affiliates of $711,000.
Under a management service agreement with an affiliate, the Company paid
annual service fees of $70,000 to the affiliate during the period from
September 30, 1996 (inception) to December 31, 1996.
20
<PAGE> 21
4. NOTES PAYABLE
Notes payable to banks are unsecured loans guaranteed by Kubota Corporation.
At December 31, 1996, the notes bear interest at rates ranging from 5.99% to
6.03% and were due in March 1997. The due dates on such notes were
subsequently extended to March 1998.
Other notes payable consists of a loan from a customer of the Company. The
loan calls for maximum borrowings of $7,500,000 which must be drawn down in
$500,000 increments, based on certain milestone achievements. The line bears
interest at 6.0% per annum. The outstanding balance of the loan is reduced
by an amount equal to $0.15 per product unit sold to the customer ("Product
Credits"). Akashic may increase this offset amount from time to time, as
defined in the loan agreement, to reduce the outstanding balance of the
loan. In addition, Akashic is required to make quarterly payments of
$528,000, less the amount of any Product Credit for the prior quarter,
beginning April 30, 1997. All unpaid interest and principal balance is due
in full on March 31, 2000. At December 31, 1996, approximately $4,500,000 of
the credit facility was available under this loan agreement.
5. CONVERTIBLE SUBORDINATED DEBENTURE
On September 30, 1996, the Company issued a convertible subordinated
debenture of $100 million to AII. The principal and any unpaid interest are
due on September 30, 1999. Interest is payable semiannually at 6.5% per
annum. The debenture is convertible at the option of the holder at any time
prior to the maturity date into the Company's Series B preferred stock at an
initial conversion price of $7.96396 per share, subject to adjustment.
6. INCOME TAXES
In accordance with the principles of the tax-sharing agreement with Kubota
USA, the Company recognized a tax benefit of approximately $3,338,000 for
the period from September 30, 1996 (inception) to December 31, 1996.
At December 31, 1996, the Company had net deferred income tax assets of
approximately $11 million. Deferred income taxes arise from temporary
differences in accumulated depreciation and amortization totaling $6.8
million, inventory reserves totaling $1.4 million and other accrued
expenses of $2.8 million. The Company provided a full amount of valuation
allowance against the net deferred income tax assets at December 31, 1996.
At December 31, 1996, the Company has income tax credit carryforwards of
approximately $1 million.
7. OPERATING LEASES
The Company rents office and manufacturing facilities under operating leases
which expire through 1999. Certain leases are guaranteed by Kubota
Corporation. Rent expense was $628,000 for the period from September 30,
1996 (inception) to December 31, 1996.
21
<PAGE> 22
The future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
GUARANTEED
BY KUBOTA
CORPORATION OTHER TOTAL
<S> <C> <C> <C>
Year ending December 31:
1997 .............................. $1,465 $ 796 $2,261
1998 .............................. 1,528 267 1,795
1999 .............................. 1,154 134 1,288
2000 .............................. 101 -- 101
------ ------ ------
$4,248 $1,197 $5,445
====== ====== ======
</TABLE>
8. STOCKHOLDER'S EQUITY
Convertible Preferred Stock:
During September 1996, the Company issued 19,200,000 shares of Series A
preferred stock and debenture bonds in exchange for certain assets and
liabilities of AII.
Significant terms of the Company's Series A and Series B preferred stock are
as follows:
o Each share of preferred stock is convertible into shares of common stock
computed by dividing the conversion price in effect at the time of the
conversion by the conversion value per share of the preferred. The
initial conversion price and conversion value are as follows (subject to
certain antidilution adjustments) at the election of the holder:
o Series A preferred $7.23996
o Series B preferred $7.96396
Such conversion shall be automatic in the event of an initial public
offering of stock meeting certain criteria or, the written consent of
not less than two-thirds (2/3) of the then-outstanding shares of Series
A and Series B preferred, voting together as a single class.
o Each share has voting rights equivalent to the number of shares of
common stock into which it is convertible.
o Preferred stock shareholders are entitled to noncumulative dividends
prior and in preference to any declaration or payment of any dividend on
common stock of the Company at a rate of $0.57920 and $0.63712 per share
per annum, on each outstanding share of Series A and Series B preferred
stock, respectively.
o In the event of liquidation, dissolution or winding up of the Company,
preferred shareholders shall be entitled to be paid first and out of the
assets of the Company available to holders of its capital stock in an
amount equal to $7.23996 per share of Series A preferred, and $7.96396
per share of Series B preferred. Both amounts are subject to
anti-dilutive provisions. If the assets and funds to be distributed are
insufficient to permit full payment, then the funds shall be distributed
on a pro rata basis. Upon completion of the distribution, the holders of
the common stock will receive a pro rata distribution of any remaining
assets of the Company.
22
<PAGE> 23
Common Stock
At December 31, 1996, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock ............... 19,200,000
Conversion of Series B preferred stock ............... 12,556,583
Stock option plan .................................... 4,800,000
----------
36,556,583
==========
</TABLE>
Stock Option Plan
In October 1996, the Board of Directors of Akashic Memories Corporation
approved the 1996 Stock Option Plan (the "Plan"). Under the Plan, incentive
and nonqualified stock options to purchase up to 4,800,000 shares of common
stock may be granted to employees, directors and consultants. Incentive
stock options must be granted at a price not less than 100% of fair market
value at the date of grant as determined by the Board of Directors.
Nonqualified options must be granted at not less than 85% of the fair market
value. The exercise price for both incentive and nonqualified stock options
must not be less than 110% of the fair market value for employees with more
than 10% voting power of all classes of stock of the Company at the date of
grant. Options generally vest over four years and expire at the earlier of
ten years from date of grant or upon termination of employment.
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
<S> <C> <C>
Granted (weighted average fair value of $0.22 per share) ........... 3,516,400 $0.90
Canceled ........................................................... (31,600) 0.90
---------
Outstanding, December 31, 1996 (none vested) at a weighted
average price of $0.90 per share ................................ 3,484,800
=========
</TABLE>
At December 31, 1996, 1,315,200 shares were available for future grants
under the Plan.
Additional Stock Plan Information
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma
net loss and loss per share had the Company adopted the fair value method.
Under SFAS 123, the fair value of stock-based awards by private companies to
employees is calculated using the minimum value method. This method requires
subjective assumptions, including expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
following weighted average assumptions: expected life, one year following
vesting; risk free interest rate of 6.27% in 1996; and no dividends during
the expected term (since the Company is not public, stock volatility was
assumed nil for calculation purposes). The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net
loss would not have been materially impacted for the period from September
30, 1996 (inception) to December 31, 1996.
23
<PAGE> 24
9. MAJOR CUSTOMERS
For the period from September 30, 1996 (inception) to December 31, 1996,
three major customers represented 64%, 18% and 12% of the Company's net
sales.
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which covers substantially all full
time employees. Eligible employees are permitted to make deferred
contributions of up to 15% of their annual gross compensation, subject to
certain Internal Revenue Service limitations. The Company may contribute
$0.20 for each $1.00 a participant contributes up to the first 5% of
employee earnings with a maximum of 1% of the employee's gross wages. The
Company made contributions to the plan of $100,000 during the period from
September 30, 1996 (inception) to December 31, 1996. The employee
contributions and earnings thereon are vested immediately. Company
contributions and earnings thereon are vested over three years of service.
11. SUBSEQUENT EVENT
Effective December 31, 1997, the Company's operations were sold to StorMedia
Incorporated for $10 million cash. In connection with the transaction,
StorMedia Incorporated did not assume any of the Company's bank or
intercompany borrowings. In addition, on December 31, 1997 in anticipation
of the sales transaction, the tax sharing agreement ("Agreement") between
the Company, Akashic International, Inc., and Kubota USA, was revised to
exclude the Company from receiving or incurring any tax related benefits or
liabilities as calculated under the Agreement since the inception of the
Company.
The accompanying financial statements are reported on a historical cost
basis and do not purport to reflect the fair values of assets and
liabilities in consideration of the sale transaction.
* * * * *
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Akashic International, Inc.:
We have audited the accompanying consolidated balance sheets of Akashic
International, Inc. (formerly Akashic Memories Corporation) (a wholly-owned
subsidiary of Kubota U.S.A., Inc.) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income and accumulated deficit,
and of cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on 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
misstatements. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Akashic International, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, effective
December 31, 1997 the Company's operations were sold to StorMedia Incorporated.
As discussed in Notes 1, 3, 4, 5 and 6, the Company, prior to such sale, had
been dependent on Kubota Corporation and affiliates for financial support and
had significant transactions with such affiliates. Accordingly, the accompanying
financial statements may not be indicative of the financial condition or results
of operations had the Company operated without such affiliations.
/s/ Deloitte & Touche LLP
- ------------------------------
San Jose, California
February 7, 1997
(December 31, 1997 as to Note 10)
25
<PAGE> 26
AKASHIC INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY AKASHIC MEMORIES CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, except share amounts)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ......................................... $ 16,721 $ 1,324
Accounts receivable - net .................................... 27,646 36,849
Due from Kubota U.S.A. and affiliated companies .............. 54 3,965
Inventories .................................................. 19,036 9,689
Other current assets ......................................... 768 1,105
--------- ---------
Total current assets ...................................... 64,225 52,932
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net ...................... 148,410 66,732
DEPOSITS ........................................................ 349 113
--------- ---------
TOTAL ASSETS .................................................... $ 212,984 $ 119,777
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Notes payable - banks ........................................ $ 95,000 $ 78,000
Notes payable to Kubota Finance and Kubota Corporation ....... 94,300 27,000
Cash overdraft ............................................... 4,342 1,301
Accounts payable ............................................. 21,395 21,414
Accrued expenses ............................................. 16,535 13,121
Due to Kubota U.S.A. and affiliated companies ................ 173 261
--------- ---------
Total current liabilities ................................. 231,745 141,097
--------- ---------
NOTES PAYABLE TO KUBOTA CORPORATION ............................. 55,000 55,000
--------- ---------
NOTES PAYABLE - OTHER ........................................... 2,448 --
--------- ---------
STOCKHOLDER'S DEFICIENCY:
Common stock, no par value; 1,000,000 shares authorized; 2,340
shares issued and outstanding ............................. 34,010 34,010
Accumulated deficit .......................................... (110,219) (110,330)
--------- ---------
Total stockholder's deficiency ............................ (76,209) (76,320)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY .................. $ 212,984 $ 119,777
========= =========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
AKASHIC INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY AKASHIC MEMORIES CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
NET SALES .............................. $ 223,243 $ 183,247
--------- ---------
COSTS AND EXPENSES:
Cost of sales ....................... $ 196,315 $ 170,387
Research and development ............ 8,133 6,113
Marketing, general and administrative 8,910 5,490
--------- ---------
Total costs and expenses ......... 213,358 181,990
--------- ---------
INCOME FROM OPERATIONS ................. 9,885 1,257
OTHER INCOME (EXPENSE):
Interest income ..................... 1,036 148
Interest expense .................... (11,002) (9,682)
Other, net .......................... 140 52
--------- ---------
Total other expense, net ......... (9,826) (9,482)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ...... 59 (8,225)
INCOME TAX BENEFIT (Note 5) ............ 52 12,210
--------- ---------
NET INCOME ............................. 111 3,985
ACCUMULATED DEFICIT:
Beginning of year ................... (110,330) (114,315)
--------- ---------
End of year ......................... $(110,219) $(110,330)
========= =========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
AKASHIC INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY AKASHIC MEMORIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ............................................. $ 111 $ 3,985
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................... 21,246 16,771
Provision for doubtful accounts and returns ......... 355 (343)
Changes in operating assets and liabilities:
Accounts receivable ............................... 8,848 (14,992)
Due from Kubota U.S.A. and affiliated companies ... 3,911 (134)
Inventories ....................................... (9,347) (1,842)
Other current assets .............................. 337 (570)
Accounts payable .................................. (19) 8,271
Accrued expenses .................................. 3,414 4,211
Due to Kubota U.S.A. affiliated companies ......... (88) (82)
--------- ---------
Net cash provided by operating activities ...... 28,768 15,275
--------- ---------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ...... (102,924) (42,153)
Deposits ............................................... (236) (6)
--------- ---------
Net cash used in investing activities .......... (103,160) (42,159)
--------- ---------
FINANCING ACTIVITIES:
Borrowings under short-term debt ....................... 84,300 286,000
Borrowings under long-term debt ........................ 3,000 55,000
Principal payments on long-term debt ................... (552) (315,000)
Cash overdraft ......................................... 3,041 1,301
--------- ---------
Net cash provided by financing activities ...... 89,789 27,301
--------- ---------
NET INCREASE IN CASH AND EQUIVALENTS ...................... 15,397 417
CASH AND EQUIVALENTS, Beginning of year ................... 1,324 907
--------- ---------
CASH AND EQUIVALENTS, End of year ......................... $ 16,721 $ 1,324
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year for interest ...... $ 10,747 $ 9,454
========= =========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
AKASHIC INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY AKASHIC MEMORIES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - Akashic International, Inc. (formerly Akashic Memories
Corporation) (the "Company") is wholly-owned by Kubota U.S.A., Inc. (Kubota
USA) which is a wholly-owned subsidiary of Kubota Corporation (the Parent) of
Japan. The Company is primarily engaged in the research, development,
production and marketing of magnetic rigid disk media and disk substrates.
The Company sells its product primarily in the United States and Southeast
Asia to manufacturers of disk drives for use in the personal computer and
workstation industries. See Note 10 concerning the subsequent sale of the
Company's operations to StorMedia Incorporated.
During September 1996, as part of a corporate reorganization, the Company
changed its name from Akashic Memories Corporation to Akashic International,
Inc. (AII). The consolidated financial statements include the accounts of AII
and its wholly-owned United States subsidiaries, Akashic Memories Corporation
(Akashic), AMC Substrates, Inc. (AMC), and its wholly-owned Malaysian
subsidiary, Akashic Kubota Technologies Sdn. Bhd. (AKT).
Kubota Finance, a wholly-owned subsidiary of Kubota Corporation, and Kubota
Corporation have loans outstanding to the Company and its subsidiaries
totaling $64,300,000 and $85,000,000, respectively, at December 31, 1996
(Note 3). In addition, Kubota Corporation has also guaranteed the Company's
notes payable to banks totaling $95,000,000 (Note 4) and certain operating
leases (Note 6). The accompanying consolidated financial statements may not
be indicative of the financial condition and results of operations if the
Company had operated without such affiliations. The Company has been
dependent on its Parent for financial support and has obtained a commitment
from it to support the Company as necessary through December 31, 1997. See
Note 10 concerning the subsequent sale of the Company's operations to
StorMedia Incorporated.
USE OF ESTIMATES - In accordance with generally accepted accounting
principles, the Company's management utilizes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Significant estimates in the 1996 and 1995 consolidated financial statements
include the allowance for doubtful accounts, inventory reserves, sales return
reserves, and the valuation allowance for deferred tax assets.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially expose
the Company to concentrations of credit risk consist primarily of trade
accounts receivable. A majority of the Company's trade receivables are
derived from sales to hard disk drive manufacturers. At December 31, 1996,
approximately 99% of trade receivables were with three customers. At
29
<PAGE> 30
December 31, 1995, approximately 90% of trade receivables were with four
customers. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit extended when considered necessary, but generally requires no
collateral. The Company maintains reserves for potential credit losses, and
all such losses to date have been within management's expectations.
BASIS OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances, transactions and intercompany profits are
eliminated in consolidation.
FISCAL YEAR - Akashic operates and reports on a 52- or 53-week fiscal year
ending on the Sunday nearest December 31 of each year. Fiscal 1996 ended on
December 29, 1996 and consisted of 52 weeks and fiscal 1995 ended on January
1, 1996 and consisted of 52 weeks. For convenience of presentation, the year
end is indicated as December 31 in these financial statements.
FOREIGN CURRENCY TRANSLATION - The Company's subsidiary in Malaysia uses the
U.S. dollar as the functional currency. Accordingly, assets and liabilities
are translated using period-end exchange rates, except non-monetary assets,
which are translated using historical rates. Revenue and costs are translated
using average exchange rates for the period, except for costs related to
those balance sheet items that are translated using historical rates.
Transaction gains and losses during the years ended December 31, 1996 and
1995 were not significant.
CASH EQUIVALENTS - Cash equivalents are highly liquid debt investments
purchased with a maturity of three months or less.
INVENTORIES - Inventories are stated at lower of standard cost, which
approximates actual cost (first-in, first-out basis) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold improvements
are stated at cost. Depreciation is computed using the straight-line method
over estimated useful lives of two to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or lease terms of
three to ten years.
REVENUE RECOGNITION - The Company recognizes sales and records estimated
product return reserves at the time of product shipment.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The Company believes that the carrying
amount reported in the financial statements for cash equivalents as of
December 31, 1996 approximates fair value because of the short maturity of
the outstanding balance. The fair value of notes payable - banks and notes
payable - others approximate the carrying amount based on the current rate
offered to the Company for debt of the same remaining maturities.
INCOME TAXES - The Company files its tax returns as a member of a
consolidated group. In accordance with the tax-sharing agreement with Kubota
USA, a group member with taxable income obtains an income tax charge from
Kubota USA as if the group member filed on a separate return basis. A group
member with taxable losses obtains an income tax credit based on its
proportionate contribution to reducing taxes payable by other members in
consolidation. Additionally, the tax-sharing agreement addresses the
utilization of net operating loss carryforwards and tax credits.
30
<PAGE> 31
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Valuation allowances are provided when necessary
to reduce deferred tax assets to the amount expected to be realized.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
31
<PAGE> 32
2. BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE - Accounts receivable as of December 31, 1996 and 1995
are net of allowances for doubtful accounts of $20,000 for both years and
sales returns of $655,000 and $300,000, respectively.
<TABLE>
<CAPTION>
INVENTORIES
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 9,744 $ 2,916
Work-in-process 2,911 3,335
Raw materials 6,381 3,438
--------- ---------
Total $ 19,036 $ 9,689
========= =========
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
1996 1995
--------- ---------
(IN THOUSANDS)
Machinery and equipment $ 146,412 $ 101,660
Leasehold improvements 30,722 26,508
Furniture and fixtures 57 57
Construction-in-progress 67,607 17,402
--------- ---------
244,798 145,627
Accumulated depreciation and amortization (96,388) (78,895)
--------- ---------
Total $ 148,410 $ 66,732
========= =========
</TABLE>
The significant increase in machinery and equipment and
construction-in-progress during 1996 was primarily attributable to purchases
of equipment for expansion of the Company's substrate plant in Malaysia.
3. TRANSACTIONS WITH AFFILIATES
At December 31, 1996, the Company has unsecured notes payable to Kubota
Finance, Inc. (KFI) of $64,300,000 bearing interest at rates ranging from
5.92% to 6.4%, due in varying amounts through March 31, 1997. At December 31,
1996, the Company also has unsecured loans payable to Kubota Corporation of
$85,000,000 bearing interest at 5%, due in varying amounts through September
2000. The principal amount on the long-term note payable to Kubota
Corporation is payable as follows, $18,300,000 in 1998, $18,300,000 in 1999
and $18,400,000 in 2000. Interest expense on these loans was $5,982,000 and
$4,394,000 for fiscal 1996 and 1995, respectively.
During fiscal 1996 and 1995, the Company has sales to an affiliate of $43,000
and $34,000, respectively. The Company had purchases from affiliates of
$2,114,000 and $756,000 during fiscal 1996 and 1995, respectively.
32
<PAGE> 33
Under a management service agreement, the Company paid annual service fees of
$70,000 and $64,000 to Kubota USA during fiscal 1996 and 1995, respectively.
4. NOTES PAYABLE
Notes payable to banks are unsecured loans guaranteed by Kubota Corporation.
At December 31, 1996, the notes bear interest at rates ranging from
approximately 5.625% to 6.35% and are due in varying amounts through June
1997.
Other notes payable consists of a loan from a customer of the Company. The
loan calls for maximum borrowings of $7,500,000 which must be drawn down in
$500,000 increments, based on certain milestone achievements. The line bears
interest at 6.0% per year. The outstanding balance of the loan is reduced by
an amount equal to $0.15 per product unit sold to the customer ("Product
Credits"). Akashic may increase this offset amount from time to time to
reduce the outstanding balance of the loan. In addition, Akashic is required
to make quarterly payments of $528,000, less the amount of any Product Credit
for the prior quarter, upon the earlier of the final loan disbursement or
April 30, 1997. All unpaid interest and principal balance is due in full on
March 31, 2000. At December 31, 1996, approximately $4,500,000 of the credit
facility was available under this loan agreement.
5. INCOME TAXES
In accordance with the tax-sharing agreement with Kubota USA, the Company
recognized a tax benefit of approximately $52,000 and $12,210,000 in 1996 and
1995, respectively. Approximately $8,100,000 of the 1995 income tax benefit
relates to a change in the 1994 consolidated income tax return subsequent to
finalizing the 1994 financial statements. The group elected to exclude
certain tax loss carryforwards of one of the group entities under an
alternative filing position for its 1994 income tax return. This entity's
loss carryforwards had been included in calculating the 1994 financial
statement income tax provision, which was an acceptable alternative method of
filing. This change in filing position resulted in an increased allocation of
benefit to the Company. The Company has accounted for the additional prior
year benefit as a change in accounting estimate and, accordingly, recorded
such benefit in fiscal 1995.
At December 31, 1996, the Company had net deferred income tax assets of
approximately $30 million. Deferred income taxes arise primarily from net
operating loss carryforwards and temporary differences in accumulated
depreciation and amortization, capitalization of certain inventory costs,
allowances for doubtful accounts, inventory and warranty reserves, state
taxes and certain accrued expenses.
The Company provided a full amount of valuation allowance against the net
deferred income tax assets at December 31, 1996.
33
<PAGE> 34
At December 31, 1996, the Company had unconsolidated net operating loss
carryforwards related to preacquisition operations of approximately $14
million available to offset future federal taxable income, expiring in 1997
through 2003.
At December 31, 1996, the Company has approximately no stand-alone and $30
million of allocated net operating loss (NOL) carryforwards for federal
consolidated tax-sharing purposes and consolidated tax return purposes,
respectively, which expire in years through 2009. Additionally, the Company
has income tax credit carryforwards of approximately $1 million.
The Company also has approximately no stand-alone and $24 million of
allocated NOL carryforwards for state combined tax-sharing and combined tax
return purposes, respectively, which expire in various years through 1999.
The allocated NOL carryforwards for tax return purposes are part of the
consolidated NOL carryforwards of Kubota USA and subsidiaries, and will be
utilized when the consolidated group has taxable income.
6. OPERATING LEASES
The Company rents office and manufacturing facilities under operating leases
which expire through 1999. Certain leases are guaranteed by Kubota
Corporation. Rent expense was $2,486,964 and $2,243,000 for fiscal 1996 and
1995, respectively.
The future minimum lease payments are as follows:
<TABLE>
<CAPTION>
GUARANTEED BY
KUBOTA
CORPORATION OTHER TOTAL
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending December 31:
1997 $1,465 $ 796 $2,261
1998 1,528 267 1,795
1999 1,154 134 1,288
2000 101 -- 101
------ ------ ------
$4,248 $1,197 $5,445
====== ====== ======
</TABLE>
7. AKASHIC MEMORIES CORPORATION
In October 1996, the Board of Directors of Akashic (a newly formed
subsidiary) approved the 1996 Stock Option Plan (the "Plan"). Under the Plan,
incentive and nonqualified stock options to purchase up to 4,800,000 shares
of Akashic's common stock may be granted to employees, directors and
consultants. Incentive stock options must be granted at a price not less than
100% of fair market value at the date of grant as determined by Akashic's
Board of Directors. Nonqualified options must be granted at not less than 85%
of the fair market value. The exercise price for both incentive and
nonqualified stock options must not be less than 110% of the fair market
value for employees with more than 10% voting power of all classes of stock
of the Company at the date of grant. Options generally vest over four years
and expire at the earlier of ten years from date of grant or upon termination
of employment.
34
<PAGE> 35
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding, January 1, 1996 -- $ --
Granted (weighted average fair value of $0.22 per share) 3,516,400 0.90
Canceled (31,600) 0.90
---------
Outstanding, December 31, 1996 (none vested) at a weighted 3,484,800
average price of $0.90 per share =========
</TABLE>
At December 31, 1996, 1,415,200 shares were available for future grants under
the Plan.
ADDITIONAL STOCK PLAN INFORMATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value
method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of
stock-based awards by private companies to employees is calculated using the
minimum value method. This method requires subjective assumptions, including
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the following weighted average
assumptions: expected life, one year following vesting; risk free interest
rate of 6.27% in 1996; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1996 awards had been amortized to expense over the vesting period of the
awards, pro forma net income would not have been materially impacted in 1996.
8. MAJOR CUSTOMERS
In fiscal 1996, four major customers represented 53%, 13%, 11% and 11% of the
Company's net sales, respectively. In fiscal 1995, four major customers
represented 38%, 20%, 20% and 10% of the Company's net sales, respectively.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which covers substantially all full
time employees. Eligible employees are permitted to make deferred
contributions of up to 15% of their annual gross compensation subject to
certain Internal Revenue Service limitations. The Company may contribute
$0.20 for each $1.00 a participant contributes up to the first 5% of employee
earnings with a maximum of 1% of the employee's gross wages. The Company made
contributions to the plan of $325,000 during 1996 and $125,000 during 1995.
Employee contributions and earnings
35
<PAGE> 36
thereon vest immediately. Company contributions and earnings thereon vest
over three years of service.
10. SUBSEQUENT EVENT
Effective December 31, 1997, the Company's operations were sold to StorMedia
Incorporated for $10 million cash. In connection with the transaction,
StorMedia Incorporated did not assume any of the Company's bank or
intercompany borrowings.
The accompany financial statements are reported on a historical cost basis
and do not purport to reflect their fair value of assets and liabilities in
consideration of the sale transaction.
* * * *
36
<PAGE> 37
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma statements of operations including the notes
thereto, give effect to the acquisition of Akashic Memories Corporation in
exchange for $10.0 million in cash and 2,000,000 shares of StorMedia common
stock.
The unaudited pro forma combined condensed balance sheet combines StorMedia's
balance sheet as of September 30, 1997 with the balance sheet of Akashic
Memories Corporation as of December 28, 1997. The unaudited pro forma combined
condensed statements of operations combine StorMedia's results of operations
for the year ended December 31, 1996 and the nine months ended September 30,
1997 with Akashic International Inc's (predecessor to Akashic Memories
Corporation) results of operations for the year ended December 27, 1996 and
Akashic Memories Corporation's results of operations for the nine months ended
September 26, 1997, respectively, giving effect to the business combination as
if it had occurred as of January 1, 1996.
In addition, the supplemental unaudited pro forma combined condensed statement
of operations combines StorMedia's result of operations for the year ended
December 31, 1997 with Akashic Memories Corporation's results of operations for
the year ended December 28, 1997.
The following unaudited pro forma combined condensed financial statements are
not necessarily indicative of the future results of operations of the Company or
the results of operations which would have occurred had the Company and Akashic
been combined during the periods presented. In addition, the pro forma results
are not intended to be a projection of future results.
37
<PAGE> 38
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OF STORMEDIA INCORPORATED AND AKASHIC MEMORIES CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AKASHIC
MEMORIES STORMEDIA
CORPORATION INCORPORATED PRO FORMA
AS OF AS OF ADJUSTMENTS
ASSETS DECEMBER 28, 1997 SEPTEMBER 27, 1997 DR/(CR) COMBINED
----------------- ------------------ ------------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents and short-term
investments ...................................... $ 11,046 $ 16,250 $ (10,000) (7) $ 17,296
Accounts receivable ................................ 15,424 9,333 24,757
Inventories ........................................ 20,018 24,330 44,348
Assets held for sale ............................... -- -- 16,914 (1) 16,914
Prepaid expenses and other current assets .......... 895 8,660 2,466 (4) 12,021
--------- --------- --------- ---------
Total current assets ............................. 47,383 58,573 9,380 115,336
Plant and equipment, net ............................... 3,236 136,452 (3,236)(2) 136,452
Deposits and other assets .............................. -- 1,095 -- 1,095
--------- --------- --------- ---------
$ 50,619 $ 196,120 $ 6,144 $ 252,883
========= ========= ========= =========
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable ............................. $ 14,842 $ 21,990 $ $ 36,832
Short-term debt to a customer....................... 4,960 48,334 53,294
Accrued liabilities ................................ 16,421 9,860 (3,347)(3)(5)(6)(8) 29,628
Short-term debt to AII ............................. 126,000 -- 126,000 (6) --
--------- --------- --------- ---------
Total current liabilities ......................... 162,223 80,184 122,653 119,754
Negative goodwill -- -- (12,818)(4) 12,818
Long-term debt, less current portion ................... 100,000 132 100,000 (6) 132
Stockholder's equity:
Preferred stock..................................... 15,327 -- 15,327 (7) --
Common stock ....................................... 21 237 (6)(7)(8) 264
Additional paid-in capital ......................... -- 126,450 (4,348)(7) 130,798
Accumulated deficit .............................. (226,952) (10,883) (16,914)(1)
3,236 (2)
2,464 (3)
14,375 (7)
2,505 (5)
(2,509)(7)
(227,643)(6)
(2,466)(4) (10,883)
--------- --------- --------- ---------
Total stockholder's equity ............................. (211,604) 115,804 (215,979) 120,179
--------- --------- --------- ---------
$ 50,619 $ 196,120 $ (6,144) $ 252,883
========= ========= ========= =========
</TABLE>
- ------------
(1) To reclassify certain fixed assets as held for sale ($16,914).
(2) To write-off Akashic's remaining fixed assets ($3,236) as there is an
excess of the fair value of assets acquired over cost of the acquisition.
(3) To accrue for severance ($2,464) relating to excess workforce which was
terminated by January 31, 1998.
(4) To capitalize Akashic spares for consistency with StorMedia accounting
policy ($2,466).
(5) To accrue for the operating lease commitments for the facilities ($2,505)
which will be idle for the remaining term of the lease.
(6) To record forgiveness of debt and interest due to AII (debt $226 million;
interest $1,643).
(7) To record the purchase of 100% of the preferred stock of Akashic $27 par
value for $10 million and 2 million shares of StorMedia Class A Common
Stock ($4,348 additional paid-in capital) resulting in an excess of fair
value of assets over the cost of acquisition ($12,818) on a straight-line
basis over 5 years.
(8) To record minority interest in subsidiary ($21)
38
<PAGE> 39
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
OF STORMEDIA INCORPORATED AND AKASHIC INTERNATIONAL INCORPORATED
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
AKASHIC STORMEDIA,
INTERNATIONAL, INC. INCORPORATED PRO FORMA
DECEMBER 27, 1996 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
------------------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
Net Sales $ 223,243 $ 210,996 $ $434,239
Cost of Sales 196,315 174,562 (17,492)(1) 353,385
----------- ------- ------- --------
Gross margin 26,928 36,434 (17,492) 80,854
Operating expenses
Research and development 8,133 15,657 23,790
Selling, general, and administrative 8,910 10,561 (2,544)(3) 16,927
----------- ------- ------- --------
Total operating expenses 17,043 26,218 (2,544) 40,717
Other income (expense) (9,826) 429 (11,002)(2) 1,605
----------- ------- ------- --------
Income before income tax expense (benefit) 59 10,645 (31,038) 41,742
Income tax expense (benefit) (52) 2,187 52 (4) 2,187
----------- ------- ------- --------
Net earnings $ 111 $ 8,458 $30,986 $ 39,555
=========== ======= ======= ========
Net earnings per share
Basic $0.49 $2.05
======= =======
Diluted $0.46 $1.96
======= =======
Number of shares used in per share
computation (5):
Basic 17,285 19,285
======= =======
Diluted 18,209 20,209
======= =======
</TABLE>
(1) To eliminate historical Akashic depreciation expense which will not be
incurred by the combined company since no value was assigned to the fixed
assets acquired ($17,492)
(2) To eliminate related party interest expense which will not to be incurred
by the combined company ($11,002).
(3) To record amortization of the excess of fair value of assets acquired over
the cost of acquisition on a straight-line basis over 5 years ($2,544).
(4) To reverse the tax benefit allocation from Kubota USA to Akashic.
(5) The number of shares used in the pro forma combined share computation (both
basic and diluted) reflects 2 million shares of StorMedia common stock
issued in the acquisition.
39
<PAGE> 40
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
OF STORMEDIA INCORPORATED AND AKASHIC MEMORIES CORPORATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
AKASHIC MEMORIES STORMEDIA,
CORPORATION INCORPORATED PRO FORMA
SEPTEMBER 26,1997 SEPTEMBER 27, 1997 ADJUSTMENTS COMBINED
----------------- ----------------------- ----------- --------
<S> <C> <C> <C> <C>
Net Sales $174,959 $ 88,879 $ $263,838
Cost of Sales 182,459 108,339 (26,843)(1) 263,955
------- ------- ------- -------
Gross deficiency (7,500) (19,460) (26,843) (117)
Operating expenses
Research and development 6,830 10,922 17,752
Selling, general, and administrative 6,698 12,515 (1,908)(3) 17,305
------- ------ ------ ------
Total operating expenses 13,528 23,437 (1,908) 35,057
Other income (expense) net (9,389) (2,273) (8,372)(2) (3,290)
------- ------ ------ ------
Loss before income tax expense (benefit) (30,417) (45,170) 37,123 (38,464)
Income tax expense (benefit) 109 (1,647) (109)(4) (1,647)
------- ------- ------- -------
Net loss $(30,526) $(43,523) $37,232 $(36,817)
======= ======= ======= =======
Net loss per share
Basic $ (2.44) $ (1.85)
======= =======
Diluted $ (2.44) $ (1.85)
======= =======
Number of shares used in per share computation (5):
Basic 17,863 19,863
======= =======
Diluted 17,863 19,863
======= =======
</TABLE>
(1) To eliminate historical Akashic depreciation expense which will not be
incurred by the combined company since no value was assigned to the fixed
assets acquired ($26,843).
(2) To eliminate related party interest expense which will not be incurred by
the combined company ($8,372).
(3) To record amortization of the excess of fair value of assets acquired over
the cost of acquisition on a straight-line basis over 5 years ($1,908).
(4) To reverse the tax benefit allocation from Kubota USA to Akashic ($109)
(5) The number of shares used in the pro forma combined share computation (both
basic and diluted) reflects 2 million shares of StorMedia common stock
issued in the acquisition.
40
<PAGE> 41
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
OF STORMEDIA AND AKASHIC MEMORIES CORPORATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
AKASHIC
MEMORIES STORMEDIA
CORPORATION INCORPORATED
DECEMBER 28, DECEMBER 31, PRO FORMA
1997 1997 ADJUSTMENTS COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................ $ 213,881 $109,687 $ $ 323,568
Cost of sales ............................ 251,646 143,259 (35,790)(1) 359,115
-------- -------- -------- --------
Gross deficiency ................... (37,765) (33,572) (35,790) (35,547)
Operating expenses:
Research and development ........... 13,674 15,574 29,248
Selling, general, and administrative 10,475 19,169 (2,544)(3) 27,100
Nonrecurring charges ............... 148,402 29,000 (146,702)(4) 30,700
--------- --------- --------- ---------
Total operating expenses ...... 172,551 63,743 (149,296) 87,048
Operating earnings ............ (210,316) (97,315) (185,036) (122,595)
Other income (expense), net .............. (10,906) (3,386) (9,671)(2) (4,621)
--------- --------- --------- ---------
Loss before income tax expense
(benefit) .......................... (221,222) (100,701) (194,707) (127,216)
Income tax expense (benefit) ............. 124 (1,647) (124)(5) (1,647)
--------- --------- --------- ---------
Net loss ................................. $(221,346) $ (99,054) $(194,831) $(125,569)
========= ========= ========= =========
Loss per share:
Basic .............................. $ (5.49) $ (6.27)
========= =========
Diluted ............................ $ (5.49) $ (6.27)
========= =========
Shares used in per share computation (6):
Basic .............................. 18,031 20,031
========= =========
Diluted ............................ 18,031 20,031
========= =========
</TABLE>
- ----------
(1) To eliminate historical Akashic depreciation expense which will not be
incurred by the combined company since no value was assigned to the fixed
assets acquired ($35,790).
(2) To eliminate related party interest expense which will not be incurred by
the combined company ($9,671).
(3) To record amortization of the excess of fair value of assets acquired over
the cost of acquisition on a straight-line basis over 5 years ($2,544).
(4) To eliminate the fixed asset write-down since no value will be assigned
to the fixed assets ($146,702).
(5) To reverse the tax benefit allocation from Kubota USA to Akashic ($124)
(6) The number of shares used in the pro forma combined share computation (both
basic and diluted) reflects 2 million shares of StorMedia common stock
issued in the acquisition.
41
<PAGE> 42
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STORMEDIA INCORPORATED
Dated: March __, 1998 By: /s/ Stephen M. Abely
--------------------
Stephen M. Abely
Chief Financial Officer
42
<PAGE> 43
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
2.1 Agreement and Plan of Reorganization, dated as of December 15,
1997, among the Registrant, AII, Akashic, and StorMedia
Acquisition Corporation. (Incorporated by reference to
Registrant's current report on Form 8-K filed on January 13,
1998, File No. 0-25796.)
2.2 Form of Agreement of Merger between Akashic and StorMedia
Acquisition Corporation. (Incorporated by reference to
Registrant's current report on Form 8-K filed on January 13,
1998, File No. 0-25796.)
24.1 Consent of Deloitte & Touche LLP
24.2 Consent of KPMG Peat Marwick LLP
43
<PAGE> 1
EXHIBIT 24.1
CONSENT OF DELOITTE & TOUCHE LLP
The Board of Directors
Akashic Memories Corporation:
We consent to the incorporation by reference in Registration Statement No.
33-95230 of StorMedia, Inc. on Form S-8 of our report dated February 7, 1997
(December 31, 1997 as to Note 11), with respect to the consolidated financial
statements of Akashic Memories Corporation and subsidiaries for the period from
September 30, 1996 (inception) to December 31, 1996, and our report dated
February 7, 1997 (December 31, 1997 as to Note 10), with respect to the
consolidated financial statements of Akashic International, Inc. and
subsidiaries (formally Akashic Memories Corporation) for the years ended
December 31, 1996 and 1995, which reports appear in this Current Report on Form
8-K/A of StorMedia, Inc. dated January 13, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
March 13, 1998
<PAGE> 1
EXHIBIT 24.2
The Board of Directors
Akashic Memories Corporation:
We consent to the incorporation by reference in the registration statement
(No. 33-95230) on Form S-8 on StorMedia, Inc. of our report dated February
23,1998, with respect to the consolidated balance sheet of Akashic Memories
Corporation and subsidiaries as of December 28, 1997, and the related
consolidated statement of operations, and cash flows for the year ended December
28, 1997, which report appears in the Form 8-K of StorMedia, Inc. dated March
13, 1998.
(signed) KPMG Peat Marwick LLP
Mountain View, California
March 13, 1998
