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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 0-25796
STORMEDIA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0373062
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
385 REED STREET, SANTA CLARA, CALIFORNIA 95050-3118
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(408) 327-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $0.013 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 6, 1998, was approximately $33,720,812 based on the
last sale price reported for such date on the Nasdaq National Market System. For
purposes of this disclosure shares of Class A Common Stock held by each
executive officer and director and by each holder of 5% or more of the
outstanding shares of Class A Common Stock have been excluded from this
calculation because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 6, 1998, Registrant had 16,136,688 shares of Class A Common
Stock and 4,362,001 shares of Class B Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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PART 1
ITEM 1. BUSINESS
The discussion below contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
That May Affect Future Results" and elsewhere in this report, and other risks
detailed from time to time in the Company's report filed with the Securities and
Exchange Commission.
GENERAL
StorMedia Incorporated (the "Company") is a leading U.S. independent
supplier of thin film disks for hard disk drives used in portable and desktop
computers, network servers and workstations. The Company also manufactures
substrates for these disks. The Company designs, develops, manufactures and
sells disks in 2 1/2 inch and 3 1/2 inch sizes. Within each size, the Company
provides a range of coercivities, fly heights and disk thicknesses to meet
specific customer requirements. In 1996 and 1997, the Company sold its disks
primarily to Seagate Technology, Inc. ("Seagate"), Western Digital Corporation
("Western Digital"), Samsung Electronics Company, Ltd. ("Samsung"), Micropolis
(S) Pte. Ltd. ("Micropolis"), and Maxtor Corporation ("Maxtor") .
The Company was formed in May 1994 to acquire the thin film division (the
"Predecessor") of Nashua Corporation ("Nashua"). The Company purchased
substantially all of the assets (excluding certain accounts receivable) and
assumed certain liabilities (the "Acquisition") of the Predecessor. In December
1997, the Company acquired the outstanding shares of Akashic Memories
Corporation ("Akashic"), an indirect subsidiary of Kubota Corporation (the
"Merger") and a manufacturer of both thin film disks and media. The Company's
principal offices are located at 385 Reed Street, Santa Clara, California 95050
and its telephone number is (408) 327-8400. As used herein, the terms "Company"
and "StorMedia" refer to StorMedia Incorporated, a Delaware corporation, and,
when the context so requires, its wholly owned subsidiaries, StorMedia
International Ltd., a Cayman Islands corporation, Strates Pte Ltd., a Singapore
corporation, StorMedia Foreign Sales Corporation, a U.S. Virgin Islands
corporation, Akashic Memories Corporation, a California corporation and Akashic
Kubota Technologies Sdn. Bhd., a Malaysian corporation.
STORMEDIA STRATEGY
The Company's strategy is to combine leading disk and substrate technology
with high volume manufacturing expertise to serve the growing and
technologically demanding hard disk drive market. The Company seeks to address
the competitive pressures of the disk drive industry by providing advanced
products at competitive prices, and by developing new technologies and improving
manufacturing efficiency.
The Company is focusing its development efforts on increasing storage
capacity and disk durability to meet the requirements of advanced disk drives.
Efforts to increase storage capacity include enhancing magnetics and reducing
fly heights. The manufacturing of thin film disks involves the deposition of
extremely thin, uniform layers of magnetic film onto a disk substrate using a
vacuum sputtering process. The Company uses proprietary sputtering techniques
which permits the deposition of multiple layers of magnetic material, reducing
magnetic noise, thereby improving signal to noise ratios. In addition, the
Company has developed various magnetic alloys of cobalt, chromium, platinum and
tantalum designed to optimize the particular magnetic recording parameters
required by the Company's customers. These technologies have enabled the Company
to produce disks having coercivity levels of 2400 oersted ("oe") and above. The
Company has developed nonmechanical texture techniques using laser and
deposition technologies to produce more consistent surface finishes that allow
for lower flying heights. During 1997, the Company began volume shipments of
magnetoresistive ("MR") zone textured media that supports areal densities of
approximately 2.1GB per 3 1/2" disk. The Company is also providing samples of MR
zone textured media at approximately 4.0GB per 3 1/2" disk to certain customers
and is seeking customer qualifications on additional MR and Giant
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MR disk drive programs. The Company will continue to place significant emphasis
on MR product development and production processes and capabilities with a goal
of increasing volume production and yields. There can be no assurance that the
Company will be successful in attaining these goals. In addition, the market for
2 1/2 inch disks, the predominant disk used in portable and notebook computers,
has transitioned to glass/ceramic substrates, which have durability
characteristics superior to nickel plated aluminum substrates. The Company has
developed disks based on glass/ceramic substrates and has supplied these disks
to certain customers in volume.
An important component of the Company's strategy is to develop close
relationships with the major hard disk drive manufacturers and to collaborate
with them during the design phase of new disk drives. By forming close
relationships with its customers, understanding customers' product requirements
and rapidly developing the technology capable of meeting these requirements, the
Company believes it can effectively respond to customer needs and bring advanced
new products to market on a timely basis. The Company also believes that the
disk drive industry today demands bigger players with broader expertise to
satisfy customer requirements. In December 1997, the Company completed the
acquisition of Akashic. This acquisition provides the Company with not only
Akashic's unique substrate resources and expertise but also broadens the
Company's customer base while allowing for potential economics of scale and
further efficiencies from combined operations.
The Company's strategy is to locate its manufacturing and marketing
resources in close proximity to its customers in Singapore and Malaysia. While
other manufacturers, including Seagate, have recently announced their intention
to establish disk manufacturing facilities in Singapore, the Company is the
first and presently the only independent thin film disk supplier with a
manufacturing facility in Singapore, where, according to the Singapore Economic
Development Board, in 1997, approximately 40% of hard disk drives produced
worldwide were manufactured.
PRODUCTS
In 1997, the Company supplied thin film disks in 2 1/2 and 3 1/2 inch sizes
which are used in disk drives contained in mobile computers such as notebooks
and laptops as well as stationary computers such as desktop computers, servers
and workstations. Within each disk size, the Company offers disks with a range
of coercivities, fly heights and disk thicknesses to meet specified customer
requirements. Today's computer applications require large amounts of data
storage and the demand for greater data storage is increasing as new
applications arise. The Company's products seek to address these increasing
storage requirements.
In 1996, the Company formed Strates Pte Ltd. ("Strates") as a subsidiary of
StorMedia International Ltd., a wholly owned subsidiary of StorMedia
Incorporated and acquired an additional substrate facility, Akashic Kubota
Technologies ("AKT") as part of the Merger. In addition to the traditional
substrates they offer, Strates and AKT have developed and are beginning to offer
an advanced substrate to the disk industry to meet its evolving requirements.
Advanced disks, particularly those used in conjunction with magnetoresistive
("MR") heads, require higher areal densities and must support lower glide
heights, increased durability requirements and more stringent cleanliness
requirements than previous disks. To meet these new specifications, the Company
has made major improvements to the substrate in the area of flatness, smoothness
and uniformity. The Company has employed proprietary techniques together with
the most advanced equipment and facility to develop such a substrate which is
called "Super Polish." The Company believes that this substrate meets the needs
of MR and is currently sampling these substrates to outside customers.
CUSTOMERS AND MARKETING
The Company sells its products to independent OEM disk drive manufacturers
for incorporation into hard disk drives which are marketed under the
manufacturers' own labels. During 1996, sales to Seagate and Maxtor represented
71% and 25% of the Company's net sales, respectively. During 1997, the Company
sold products to three new major customers, Samsung, Western Digital and
Micropolis with sales to Seagate and Micropolis represented 62% and 18% of net
sales, respectively. The Merger has expanded the Company's customer base by
adding Syquest Technology, Inc. and JTS Corporation as new customers. Due to the
relatively small number of independent high performance disk drive
manufacturers, the Company's depen-
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dence on a few customers will continue for the foreseeable future. Additionally,
given the rapid development of new disk drive products, it is common in the
industry for the relative mix of customers to change rapidly, even from quarter
to quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Results -- Dependence on
Limited Number of Customers" and "-- Rapid Changes in Customer and Product Mix."
The Company believes that close technical collaboration with its customers
during the design phase of new disk drives facilitates integration of the
Company's products into new disk drives, improves the Company's ability to
rapidly reach high volume manufacturing and enhances the likelihood that the
Company will become a primary supplier of thin film disks for new disk drive
programs. However, the design-in process is ongoing and changes for each new
product design and the Company must compete for participation in each product
program, even those of existing customers.
In December 1996, the Company entered into a multi-year agreement with
Micropolis (S) Pte. Ltd., a manufacturer of digital audio/video disk drives
("Micropolis") and a wholly-owned subsidiary of Singapore Technologies. Under
the terms of the agreement, the Company set up and operated a 15,000 square foot
thin film manufacturing facility (the "Micropolis Facility") within Micropolis'
400,000 square foot disk drive manufacturing plant in Singapore (the "Micropolis
Agreement"). Micropolis had agreed to purchase all of the disks manufactured at
the Micropolis Facility through December 31, 1999. In November 1997, Singapore
Technologies, the parent of Micropolis, advised the Company that it was
liquidating Micropolis and closed the Micropolis Facility. Micropolis accounted
for approximately 18% of the Company's net sales in 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In June 1995, the Company entered into a Supply Agreement with Seagate (the
"Seagate Supply Agreement,") pursuant to which the Company established a
dedicated facility in Singapore to manufacture disks for Seagate ("Dedicated
Facility"). The Company has expended significant financial and management
resources to construct and operate such facility. While Seagate was required to
purchase the disks manufactured at the Dedicated Facility through March 31,
1999, Seagate and the Company recently amended the Seagate Supply Agreement (the
"Amended Agreement") to allow the Company to manufacture disks for Seagate at
any one of its facilities. The Dedicated Facility is currently idle. The Amended
Agreement also eliminates the pricing formula of the Seagate Supply Agreement.
All of the products manufactured under the Amended Agreement must still be
qualified by Seagate before products can be delivered to Seagate. As a result,
while Seagate continues to be obligated to purchase certain volumes and
continues to be a significant customer, the volumes purchased have been
significantly less than plan. To the extent the Company continues to operate at
less than full capacity, the Company's business, results of operating and
financial condition will continue to be materially adversely affected. See
"-- Variability in Gross Margins and Operating Results." See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Uncertainties Associated
with Supply Agreement with Seagate."
In November 1995, the Company entered into a multi-year Supply Agreement
with Maxtor pursuant to which the Company agreed to increase the supply of disks
to Maxtor significantly from current levels ("Maxtor Supply Agreement"). In June
1996, Maxtor notified the Company that it did not intend to purchase the full
committed volumes required by the Maxtor Supply Agreement and subsequently
repudiated the Maxtor Supply Agreement. In September 1996, the Company filed a
lawsuit in the United States District Court of Northern California, San Jose
Division, against Hyundai Electronic Industries Co., Ltd., seeking damages
caused by Hyundai's alleged breach of the volume purchase contract among the
Company, Hyundai, and its wholly-owned subsidiary, Maxtor. In February 1998, the
Company refiled this lawsuit in the Santa Clara County, California Superior
Court adding Maxtor as a party defendant. See "Item 3. Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Dependence on Limited a
Limited Number of Customers."
As a result of the foregoing, the Company has operated and continues to
operate with excess manufacturing capacity, which has had a material adverse
effect on the financial results. Additionally, given the small number of
independent disk drive manufacturers who require an independent source of thin
film
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disks, as well as the consolidations and changes which have occurred and are
occurring in the industry, there can be no assurance that the Company's efforts
to qualify into product programs for new and existing customers will be
successful. If they are not successful, the Company will continue to be
dependent on a relatively limited number of customers, the loss of, or the
reduction in orders by, any one of which could have a material adverse effect on
the Company's business results of operations and financial condition.
In each of 1995, 1996, and 1997 over 85% of the Company's net sales were
derived from sales to the Far East. Foreign sales are subject to certain risks
common to all export activities, such as government regulation and the
imposition of tariffs, licensing requirements or other trade barriers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Risks of International
Sales and Manufacturing."
RESEARCH AND DEVELOPMENT
The Company believes that its continued commitment to developing new
technologies is critical to remaining competitive in the industry. The Company
has focused its research and development efforts on enhancing existing product
designs and developing next-generation products and the materials and process
technologies necessary to produce them. The Company's development group is
investigating improvements in the composition of the magnetic layer, the use of
new protective overcoat materials and alternative substrates. The Company's
development programs are targeted at increasing storage capacity through lower
fly heights and improved magnetics, and satisfying increased durability and
friction requirements. During 1996, the Company began volume shipments of
magnetoresistive ("MR") zone textured media and in 1997 approximately 79% of the
Company's products were MR zone textured and supported areal densities of
approximately 2.1GB per 3 1/2" disk. The Company is also providing samples of MR
zone textured media at approximately 4.0GB per 3 1/2" disk to certain customers
and is seeking customer qualifications on additional MR disk drive programs. The
Company will continue to place significant emphasis on MR product development
and production processes and capabilities with a goal of increasing volume
production and yields.
In 1996, the Company formed Strates Pte Ltd. ("Strates") as a subsidiary of
StorMedia International Ltd., a wholly owned subsidiary of StorMedia
Incorporated and acquired an additional substrate facility, Akashic Kubota
Technologies ("AKT") as part of the Merger. In addition to the traditional
substrates they offer, Strates and AKT have developed and are beginning to offer
an advanced substrate to the disk industry to meet its evolving requirements.
Advanced disks, particularly those used in conjunction with magnetoresistive
("MR") heads, require higher areal densities and must support lower glide
heights, increased durability requirements and more stringent cleanliness
requirements than previous disks. To meet these new specifications, the Company
has made major improvements to the substrate in the area of flatness, smoothness
and uniformity. The Company has employed proprietary techniques together with
the most advanced equipment and facility to develop such a substrate which is
called "Super Polish." The Company believes that this substrate meets the needs
of MR and currently sampling these substrates to outside customers.
The thin film disk industry is characterized by rapid technological change,
short product life cycles and price erosion. There can be no assurance that the
Company will be able to anticipate new technological developments, to develop
products incorporating such developments in a timely manner, or to compete
effectively against competitor's new products. In addition, there can be no
assurance that the Company's new products can be produced in full volume at
reasonable yields, or that the Company will develop new products or processes
which ultimately are adopted by the industry. The Company's operating results
could be adversely affected if these efforts are not successful or if the
technologies that the Company has chosen not to develop prove to be competitive
alternatives. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Affect Future Results -- Rapid
Technological Change."
During 1995, 1996 and 1997, the Company incurred research and development
expenses of $9.3 million, $15.7 million, and $15.6 million, respectively. The
Company believes that its future success depends on its ability to continue to
enhance its existing products and to develop new products. Accordingly, the
Company intends to continue to increase its expenditures for research and
development for the foreseeable future.
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MANUFACTURING
The Company's operating results are highly dependent on its ability to
produce large volumes of thin film disks and substrates at acceptable yields.
The manufacturing of thin film disks is a multistep process using processes
similar to the production of silicon wafers. The process involves the deposition
of extremely thin, uniform layers of magnetic film onto a disk substrate using a
vacuum sputtering process, similar to that used to coat semiconductor wafers.
The basic process consists of many interrelated steps, and requires an extremely
clean environment with certain steps being performed in class 10 and class 100
cleanrooms, and tolerances of material structures at atomic levels. Minor
deviations in the manufacturing process, minute impurities in materials,
particulate contamination or other problems can cause significant numbers of
disks to be rejected, thereby causing significant yield loss. Impurities in the
water supply, such as organic build-up, can also cause a reduction in production
yields and, in extreme cases, result in suspension of production.
The Company believes that its internally developed manufacturing processes
and equipment allow it to develop new proprietary processes in response to
customers' increasing product requirements and to quickly implement such new
technologies into the manufacturing process. In addition, the Company has
developed a modular manufacturing system that has enabled the Company to build
smaller scale production lines that can be installed, modified or expanded
relatively quickly and comparatively inexpensively. This modular strategy allows
the Company to incrementally increase capacity, to rapidly adapt manufacturing
equipment to utilize new proprietary processes and to rapidly achieve high
volume manufacturing capabilities.
The Company has also designed its own in-house data collection process
control device to rapidly provide production information on each machine and
monitor yields and certification processes. The Company's ability to measure
quality at each phase of the manufacturing process is critical to correcting any
changes in yield or product quality.
The Manufacturing Process
The Company's manufacturing process for substrates and disks is briefly
summarized as follows:
Grinding. The initial input to the production of a ground substrate is
a substrate blank. The grinding process of a substrate blank involves a
chemical oxidation etch, mechanical grinding and a computer controlled
lathe process to produce an aluminum substrate to the proper size and
finish.
Plating, Polishing and Texturizing Substrate. The initial input to the
production of a thin film disk is a substrate. Presently, the Company uses
specialized aluminum alloy substrates which must be flat, smooth and free
of surface defects. Aluminum substrates are plated with electro-less
nickel. This coating is a non-magnetic layer critical to corrosion
resistance and serves to strengthen the disk and improve durability. Disks
are then polished to produce a mirror smooth surface and texturized.
Polishing enhances the nickel surface reducing its roughness and minimizing
edge rolloff, while maintaining the overall flatness of the disk. The
texturizing process is a method of producing a controlled roughness on the
disk's surface to improve its friction characteristics. The Company has
developed non-mechanical texture techniques using laser and deposition
technologies to produce more consistent surface finishes that allow for
lower flying heights. The Company's glass/ceramic substrates products, do
not require plating, polishing or mechanical texturizing.
Sputtering and Lube. The sputter process uses equipment and a process
similar to that used in silicon wafer fabrication, in which layers of
materials are deposited on the disk through a vacuum sputtering process.
The initial layers are various alloys including cobalt, chrome, platinum
and tantalum, which produce the magnetic qualities of the disk. The final
layer is a protective overcoat. The layers are of various thicknesses but
are all very thin, and are controlled to a molecular level. After
sputtering, a microscopic layer of lubrication is applied to the disk's
surface to improve durability and reduce surface friction.
Test and Certification. In the test and certification process each
disk is electronically screened and certified as acceptable based on the
customer's specification. A robotically controlled tester electronically
writes information onto the disk, reads it back and erases it, simulating
performance in the customer's
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disk drive. The disk is tested for parametrics, errors in the read/erase
process, surface defects and glide performance.
The market for 2 1/2 inch disks, the predominant disk used in portable and
notebook computers, has transitioned to glass/ceramic substrates, which have
durability characteristics superior to nickel plated aluminum substrates. The
Company developed disks based on a glass/ceramic substrate and in the first
quarter of 1996, began volume shipments of such disks.
Facilities
The Company currently has five manufacturing facilities for thin film disks
and two substrate manufacturing facilities. The original production site is
located in Santa Clara, California on the same site as its research,
development, marketing and administrative functions. This facility became ISO
9001 registered for the design and manufacturing of thin film disks in February
1995. The Company has two additional media facilities in both California and
Singapore. The Company has one substrate facility in California, Singapore and
Malaysia. Due to the significant reduction in demand in the disk drive industry,
the Company has facilities in the United States and Southeast Asia which are
currently idle and has certain assets held for sale. The Company's disk
manufacturing facilities in Singapore are ISO 9002 registered for the
manufacturing of thin film disks.
Sources of Supply
The Company relies on a limited number of suppliers and, in some cases, a
sole supplier, for certain materials used in its manufacturing processes,
including glass/ceramic substrates, plating chemicals, tapes, slurries,
certifier heads, sputter targets and certain other materials. In addition, the
Company relies on a single source for most of its equipment. In the past, the
Company has had to provide financial assistance to equipment vendors in order to
maintain sources for such equipment. Shortages may occur in the future or
supplies could be available only with lead times of approximately three to six
months. Changing suppliers for certain materials such as the lube or buffing
tape used in the Company's products would require that the product be
requalified with each customer. Requalification could prevent early design-in
wins or could prevent or delay continued participation in disk drive programs
into which the Company's products have been qualified. In addition, long lead
times of three to six months are required to obtain many materials. Regardless
of whether these materials are available from established or new sources of
supply, these lead times could impede the Company's ability to respond quickly
to changes in demand. Any limitations on the supply of components, materials or
equipment could disrupt or limit the Company's production volume and could have
a material adverse effect on the Company's business, results of operations and
financial condition. Further, a significant increase in the price of one or more
of these components could adversely affect the Company's results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Dependence on
Suppliers."
COMPETITION
The disk drive industry and thin film disk industry are both characterized
by intense competition. The Company's primary media and substrate competitors
among independent disk and substrate manufacturers are Fuji Electric Company
Ltd., HMT Technology Corporation, Hoya Corporation, Komag Incorporated,
Mitsubishi Kasei Corporation and Showa Denko K.K. Most of these companies have
significantly greater financial, technical and marketing resources than the
Company. IBM and several disk drive manufacturers, including Seagate, Western
Digital and Hyundai, currently produce thin film disks internally for their own
use. Seagate's expressed corporate strategy is to be a vertically integrated
disk drive manufacturer and to pursue sales to third parties of its disk drive
components. During periods of downturn in the industry such occurred in as the
most recent past two quarters, these companies tend to utilize their internal
production to supply their requirements before purchasing from independent disk
suppliers which the Company believes has negatively impacted its results of
operations. Moreover, these companies could make their products available for
distribution in the market as direct competitors of the Company. Additionally,
other disk drive manufacturers, may decide to produce disks for internal use.
Any of these changes would reduce the already small number of
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current and potential customers and increase competition for the remaining
market. Such competition has materially adversely affected the Company's
business and results of operations and could continue to do so. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results; Dependence on a Limited
Number of Customers," "-- Consolidation Within the Disk Drive Industry," and
"-- Intense Competition."
The Company believes that during 1996 and the beginning of 1997 its
competitors and certain of its customers, including Seagate, were engaged in
substantial efforts to increase disk manufacturing capacity. These efforts have
resulted in significant additional capacity in the industry and increased levels
of competition which materially adversely impacted the Company's business,
results of operations and financial condition in 1997. This negative impact is
expected to continue at least through the first half of 1998.
The principal competitive factors in the thin film disk and substrate
markets which the Company addresses are rapidly advancing technology, product
performance and quality, volume manufacturing, responsiveness to customers and
price. The Company believes that it competes favorably with respect to these
factors, but there can be no assurance that it will continue to be able to do
so.
BACKLOG
The Company's sales are generally made pursuant to purchase orders which
are subject to modification or rescheduling without significant penalty. The
Company's backlog of purchase orders requesting delivery in the following
quarter was approximately $9.9 million as of December 31, 1997, as compared to
the Company's backlog of approximately $25.2 million as of December 31, 1996.
Because these purchase orders may be modified or rescheduled by customers on
short notice and without penalty, the Company does not believe that its backlog
as of any particular date should be considered indicative of sales for any
future period.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing process, product design
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and, increasingly, patent protection. The Company has had eight U.S.
patents issued to it, has had an additional patent application allowed and has
thirteen additional patent applications (one of which is a provisional
application) pending in the United States. In addition, the Company purchased a
number of patents and patents pending from Kubota Corporation in December 1997
in connection with the acquisition of Akashic. The Company intends to file
additional U.S. applications as appropriate for patents covering its products
and manufacturing processes. There can be no assurance that patents will be
issued with respect to any of the Company's allowed patent applications, that
patents will be issued or be allowed with respect to any of the Company's other
pending applications, or that claims allowed on any existing or future patents
will be sufficiently broad to protect the Company's technology. There can also
be no assurance that any patents now or hereafter held by the Company will not
be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company. In addition, the
laws of certain foreign countries may not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Although the
Company continues to implement protective measures and intends to defend its
proprietary rights, there can be no assurance that these measures will be
successful. The Company believes, however, that, because of the rapid pace of
technological change in the disk and disk drive industries, the legal
protections for its products are less significant factors in the Company's
success than the innovative skills, experience and technical competence of its
employees.
The Company has from time to time been notified of, or has otherwise been
made aware of, claims that it may be infringing upon patents or other
proprietary intellectual property owned by others. If it appears necessary or
desirable, the Company may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses, no
assurance can be given that licenses under such patents or proprietary
intellectual property will be offered or that the terms of any offered licenses
will be acceptable to the Company. The Company has been contacted by IBM
concerning the Company's interest in licensing a patent. Based upon an opinion
of its patent counsel, the Company believes that no license is
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required because the Company does not believe that it is practicing any
invention covered by the IBM patent. There can be no assurance, however, that
IBM will not pursue its claim. Additionally, Virgle L. Hedgcoth has allegedly
patented certain disk preparation techniques (the "Hedgcoth Patents") and has
asserted that the Company is infringing such patents. Mr. Hedgcoth has since
asserted patent infringement claims against certain disk drive manufacturers,
including one customer of the Company who has demanded that the Company defend
and indemnify it in the patent litigation. The Company believes that the
Hedgcoth Patents are not valid because of prior commercial activities by other
companies utilizing the technology covered. However, should Mr. Hedgcoth prevail
in such litigation and elect to pursue the Company, the Company would be forced
to either litigate any infringement claims, execute a license, if available, or
design around the patents, which the Company believes is possible, and may be
required to indemnify its customers. The failure to obtain a key patent license
or a license to key proprietary intellectual property from a third party could
cause the Company to incur substantial liabilities and possibly to suspend the
manufacture of the products utilizing the patented or proprietary invention
either of which could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Item 3. Legal Proceedings"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results--Intellectual Property and
Proprietary Rights."
EMPLOYEES
As of December 31, 1997, including the employees of Akashic, the Company
had approximately 1,000 employees located in California, with approximately 750
in manufacturing and approximately 250 in research and development and
administration and marketing. Giving effect to the Merger, at December 31, 1997
the Company also employed approximately 900 employees in Singapore and
approximately 500 in Malaysia. The Company believes it has good relations with
its employees. None of the Company's employees is represented by a labor union.
The Company believes that attracting and motivating skilled technical talent is
vital to its success. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Dependence on Personnel."
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
These laws and regulations relate to the Company's use, handling, storage,
discharge and disposal of certain hazardous materials and wastes, the
pre-treatment and discharge of process waste waters, and the control of process
air pollutants. The Company has from time to time been notified of minor
violations concerning its waste water discharge permits, air quality regulations
and hazardous material regulations. The Company has implemented corrective
action plans to remedy these violations and has put in place procedures to
effectuate continued compliance with these laws and regulations. The Company has
also initiated safety programs and training of personnel on safe storage and
handling of hazardous materials and wastes. The Company believes that it is in
compliance in all material respects with applicable environmental regulations
and does not anticipate any material capital expenditures for environmental
related matters. Environmental laws and regulations, however, may become more
stringent over time and there can be no assurances that the Company's failure to
comply with either present or future regulations would not subject the Company
to significant compliance expenses, production suspensions or delay,
restrictions on expansion at its present locations or the acquisition of costly
equipment.
The Company's Santa Clara, California facilities are located near major
earthquake faults. Disruption of operations at any of the Company's production
facilities for any reason, including work stoppages or natural disasters such as
fire, floods or earthquakes, would cause delays in or an interruption of
production and shipment of products and would negatively affect the Company's
business, results of operations and financial condition.
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<PAGE> 10
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William J. Almon..................... 65 Chairman of the Board of Directors, Chief
Executive Officer and President
Stephen M. Abely..................... 40 Vice President, Chief Financial Officer and
Assistant Secretary
Sherman Silverman.................... 56 Vice President, Sales and Marketing
Michael Bergkamp..................... 44 Vice President, Technology and Product
Development
Diane L. Wotus....................... 36 Vice President, Operations
</TABLE>
William J. Almon has served as Chairman of the Board of Directors and Chief
Executive Officer since the Company's organization in May 1994. Mr. Almon served
as the Company's President from the Company's organization in May 1994 until May
1995 and from April 1997 to present. Prior to joining the Company, Mr. Almon
served as an independent consultant from February 1993 until May 1994 and as
President, Chief Operating Officer and a director of Conner Peripherals, Inc.,
an independent disk drive manufacturer, from December 1988 to February 1993.
From 1958 to 1987, Mr. Almon served in various management positions with IBM
Corporation, most recently as Vice President, Low End Storage Products. Mr.
Almon holds a B.S. in Engineering from the U.S. Military Academy, West Point.
Mr. Almon also serves as a director of Read-Rite Corporation and Sigma Designs
Corporation.
Stephen M. Abely has served as Vice President, Chief Financial Officer and
Assistant Secretary since May 1994. From August 1983 until May 1994, Mr. Abely
served in various capacities at Nashua Corporation, an office supply and paper
company, most recently as Controller of the Predecessor. Mr. Abely holds a B.S.
in Business Administration from Northeastern University.
Sherman Silverman has served as Vice President, Sales and Marketing since
May 1994. From September 1969 until May 1994, Mr. Silverman served in various
capacities at the Predecessor, most recently as Vice President, Marketing and
Sales. Mr. Silverman holds a B.A. in Economics from Tulane University.
Michael Bergkamp has served as Vice President of Technology and Product
Development since April 1997. From May 1996 until March 1997, Dr. Bergkamp
served in various capacities at the Company, most recently as Vice President of
New Product Development. Prior to joining the Company, from 1982 to 1996, Dr.
Bergkamp served in various management positions with IBM Corporation, most
recently as Senior Disk Engineering Manager. Dr. Bergkamp holds a Ph.D. in
Chemistry from the University of California at Santa Barbara.
Diane L. Wotus has served as Vice President of Operations since October
1995. From 1983 until October 1995, Ms. Wotus served in various capacities at
Nashua Corporation, most recently as Director of Production/Engineering. Ms.
Wotus holds a B.S. in Chemical Engineering/Engineering and Public Policy from
Carnegie-Mellon University.
ITEM 2. PROPERTIES
Prior to the Merger, the Company had under lease approximately 100,000
square feet at its Santa Clara, California campus, which serves as the Company's
headquarters and also houses manufacturing and research and development
facilities. The primary leases for these properties have expiration dates
through 2000. Each lease has a renewal option with durations of two through six
years. The Company owns an approximately 12,000 square foot facility within its
campus in Santa Clara, California, which houses manufacturing operations.
The Company also has under lease its three facilities in Singapore,
totaling approximately 210,000 square feet, which house office and manufacturing
facilities. The primary leases for these properties have expirations through
1999, with renewal options through June 2002.
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<PAGE> 11
With the Merger, the Company assumed the leases of Akashic's domestic and
foreign facilities. Askashic has under lease approximately 233,000 square feet
at various sites in Milpitas, Santa Clara and San Jose, California. The primary
leases for these properties have expiration dates through 1998. Each lease has a
renewal option with durations of one through seven years.
Akashic also had under lease its land in Malaysia totaling approximately
740,000 square feet. The primary lease for this property has an expiration
through 2056, with renewal options through 2095.
Management believes that its facilities are adequate for its current needs
and that suitable additional space or alternative space will be available in the
future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
STORMEDIA INCORPORATED V. HYUNDAI ELECTRONICS INDUSTRIES CO., ET AL.
On July 23, 1996, the Company was informed by Maxtor Corporation that it
intended to terminate a November 17, 1995 Volume Purchase Agreement between
Maxtor and Hyundai Electronics Industries Co. Ltd., on the one hand, and the
Company. Prior to such notification, Maxtor had failed to purchase in the
Company's second quarter the disks required to be purchased by it under the
Volume Purchase Agreement. As a consequence of Maxtor and Hyundai's breach of
the Volume Purchase Agreement, the Company on September 25, 1996 filed suit in
the United States District Court for the Northern District of California against
Hyundai, C.S. Park, K.S. Yoo and Mong Hun Chung alleging breach of the Volume
Purchase Agreement and fraud. The Complaint seeks damages in excess of $206
million. In response to a motion to dismiss brought by Hyundai the Court
dismissed the Complaint because it found that Maxtor was an indispensable party
to the litigation. The Court, however, conditioned its dismissal on defendants
agreements to certain terms and conditions designed to preserve the progress
made in the federal action. In response, StorMedia has filed a substantially
similar complaint against Maxtor, Hyundai Electronics Industries and certain
individuals in California state court.
MAXTOR CORPORATION V. STORMEDIA, INC., ET AL.
On December 19, 1996, Maxtor Corporation filed an action in Colorado state
court for the County of Boulder against the Company, its subsidiary, StorMedia
International Limited, and William J. Almon alleging breach of contract, breach
of warranty, fraud and negligent misrepresentation. The action alleges that the
Company's products failed to meet certain of Maxtor's requirements under the
November 17, 1995 Volume Purchase Agreement. The action seeks compensatory
damages of $100 million. The Colorado state court stayed all proceedings in that
action in favor of the above-described federal action against Hyundai. In
response to the federal court's order dismissing StorMedia's complaint against
Hyundai, described above, Maxtor moved to lift the stay of its Colorado State
court proceeding. That motion is currently pending.
WERCZBERGER, ET AL. V. STORMEDIA INCORPORATED
On September 18, 1996, a purported securities class action complaint,
Werczberger, et al. v. StorMedia, Inc. et al., No. CV760825, was filed in the
Superior Court of the State of California in the County of Santa Clara. The
complaint alleges that StorMedia and certain of its officers and directors
violated California state securities laws by making false and misleading
statements of material fact about StorMedia's prospects between November 27,
1995 and August 9, 1996. Plaintiff purports to represent a class of persons who
purchased StorMedia stock during this period. In particular, the complaint
alleges that the StorMedia defendants made allegedly false statements regarding
volumes of disks to be purchased by Maxtor and Hyundai pursuant to the contract
that is the subject of the two above-described actions. On August 19, 1997, the
California Supreme Court granted review of the Superior Court's order overruling
the defendants' demurrer. In addition, on June 18, 1997, a federal securities
action, Werczberger v. StorMedia, et al., C-97 20538, was filed against the same
defendants in the United States District Court for the Northern District of
California, San Jose Division. The federal complaint alleges violations of
federal securities laws and contains
11
<PAGE> 12
virtually identical allegations to those in the state court complaint.
Defendants intend to continue to defend these cases vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON EQUITY
The Company's Class A Common Stock is traded on the Nasdaq National Market
System under the symbol "STMD." The following table sets forth for the periods
indicated the high and low closing sale prices for the Class A Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996
First Quarter............................................ $24.33 $15.00
Second Quarter........................................... 29.33 10.06
Third Quarter............................................ 13.75 10.25
Fourth Quarter........................................... 18.38 10.88
FISCAL 1997
First Quarter............................................ $22.38 $10.75
Second Quarter........................................... 15.75 6.88
Third Quarter............................................ 7.75 4.75
Fourth Quarter........................................... 6.13 2.00
FISCAL 1998
First Quarter (through March 6, 1998).................... $ 3.00 $ 2.19
</TABLE>
On March 6, 1998, the closing price on the Nasdaq National Market for the
Company's Class A Common Stock was $2.44 per share. As of March 6, 1998, there
were approximately 95 holders of record of the Company's Class A Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Class A Common Stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the payment of cash dividends by the Company to its stockholders is
currently prohibited by the Company's bank revolving line of credit. See "Note 7
of Notes to Consolidated Financial Statements."
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA COMPANY PREDECESSOR
PREDECESSOR/ ------------ ---------------------------
PERIOD FROM PERIOD FROM
COMPANY
------------------- COMPANY COMBINED
-------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, MAY 20 TO JANUARY 1 TO DECEMBER 31,
------------------------------ YEAR ENDED DECEMBER 31, MAY 15, ------------
1997 1996 1995 DECEMBER 31, 1994(1) 1994 1994 1993
-------- -------- -------- -------------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $109,687 $210,996 $161,455 $81,766 $55,598 $26,128 $ 77,145
Gross profit (deficit)....... (33,572) 36,434 43,628 16,257 11,803 4,091 12,793
Operating earnings (loss).... (97,315) 10,216 28,924 7,364 6,135 384 (24,657)
Net earnings (loss).......... (99,055) 8,458 21,158 3,895 3,393 384 (24,657)
Basic earnings (loss) per
share...................... $ (5.49) $ 0.49 $ 1.89 $ 1.82 $ 1.59 -- --
Diluted earnings (loss) per
share...................... $ (5.49) $ 0.46 $ 1.39 $ 0.36 $ 0.32 -- --
Shares used in basic earnings
(loss) per share
computation................ 18,031 17,285 11,210 2,138 2,138 -- --
Shares used in diluted
earnings (loss) per share
computation................ 18,031 18,209 15,175 10,756 10,756 -- --
</TABLE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
---------------------------------------- ------------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
-------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $194,026 $241,736 $181,597 $46,767 $22,708
Long-term debt, less current portion(2)..................... 78 45,024 111 12,806 --
Redeemable preferred stock.................................. -- -- -- 4,750 --
Put options................................................. -- -- 20,605 -- --
Total equity................................................ $ 64,922 $157,560 $132,614 $ 3,599 $18,405
</TABLE>
- ---------------
(1) Includes the results of operations for (i) the Predecessor for the period
from January 1, 1994 through May 19, 1994 and (ii) the Company for the
period May 20, 1994 through December 31, 1994, as if the Acquisition had
been consummated on January 1, 1994 and reflects for the period January 1,
1994 through May 19, 1994 an increase in interest expense for debt issued in
connection with the Acquisition and upon the initial capitalization of the
Company, a decrease in depreciation and charges by Nashua, and related pro
forma income tax effect. The pro forma statement of operations may not be
indicative of future operating results.
(2) In 1997 long-term debt has been classified as current because the Company is
in default of its loan agreements and the debt to the banks in the amount of
$48.3 million is due on demand.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations' contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
That May Affect Future Results" and elsewhere in this Report, and other risks
detailed from time to time in the Company's reports filed with the Securities
and Exchange Commission.
OVERVIEW
During 1996 and 1997, the Company sold its disks primarily to Seagate
Technology, Inc. ("Seagate"), Western Digital Corporation ("Western Digital"),
Samsung Electronics Corporation ("Samsung"), Micropolis (S) Ptd. Lte.
("Micropolis") and Maxtor Corporation ("Maxtor").
The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as excess capacity
and a general downturn in the industry, as well as the level of utilization of
the Company's production capacity, changes in product mix, average selling
prices, demand or manufacturing yields, increases in production and engineering
costs associated with initial production of new programs, changes in the cost of
or limitations on availability of materials and labor shortages. During 1996
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<PAGE> 15
and 1997, the Company reported a gross margin of 17.3% and a gross deficiency of
30.6%, respectively. The Company's gross margins were lower during 1997 than
levels experienced in 1996 due primarily to the under-utilization of production
capacity as a result of the liquidation of Micropolis and the overall decrease
in demand in the disk drive industry. In November 1997, Singapore Technologies
announced without notice that it was closing its Micropolis operations. This
resulted in a precipitous cancellation of orders of the Company's products as
well as a writeoff by the Company of certain assets and equipment which the
Company had installed in the Micropolis Facility in Singapore.
The Company expects that a substantial portion of the Company's shipments
in 1998 will consist of new products, including high performance
magnetoresistive (MR) disks. While new products generally have higher average
selling prices than more mature products, new products also have lower
manufacturing yields and consequently are initially produced in lower quantities
than more mature products. There can be no assurance that the Company's gross
margins will not be negatively impacted by the introduction and shipment of new
products in the first half of 1998.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 130.6 82.7 73.0
----- ----- -----
Gross profit (deficit)................................. (30.6) 17.3 27.0
Research and development.................................... 14.2 7.4 5.7
Selling, general and administrative......................... 10.6 3.7 3.4
Bad debt expense............................................ 6.9 1.3 --
Nonrecurring charges........................................ 26.4 -- --
----- ----- -----
Total operating expenses............................... 58.1 12.4 9.1
----- ----- -----
Operating earnings (loss)................................... (88.7) 4.9 17.9
Other income (expense), net................................. (3.1) 0.2 0.1
----- ----- -----
Earning (loss) before income tax expense.................... (91.8) 5.1 18.0
Income tax expense (benefit)................................ (1.5) 1.0 4.9
----- ----- -----
Net earnings (loss)............................... (90.3)% 4.1% 13.1%
===== ===== =====
</TABLE>
1997 Compared to 1996
Net sales. Net sales decreased 48% to $109.7 million for the year ended
1997 from $211.0 million in 1996. The decrease in net sales was primarily due to
a decrease in unit volume caused by the liquidation of Micropolis and continued
weakness in demand in the disk drive industry as well as a slight decrease in
average selling prices. The Company's customers during 1997 were Seagate,
Micropolis, Western Digital and Samsung. The Company's customers during 1996
were Seagate and Maxtor. As a result of the Merger, the Company acquired the
Akashic thin film disk and substrate business which has expanded its customer
base and has increased the range of products which it is offering. As a result,
the Company expects its net sales to increase in 1998 although it anticipates
continued pressure on its cost of sales and operating expenses.
Gross profit (deficit). The Company's gross deficit was $33.6 million
compared to a gross profit of $36.4 million in 1996. Gross deficit as a
percentage of net sales for the year ended 1997 was 30.6% as compared to a gross
profit of 17.3% for the year ended 1996. The Company's gross margins in 1997
were lower than the levels experienced in 1995 and 1996 principally due to the
Company's inability to replace sales which it had expected to make to Maxtor
under the Maxtor Supply Agreement and the resulting under-utilization of its
facilities and the liquidation of Micropolis which resulted in both a
precipitous termination of orders and a writeoff of assets and equipment
installed by the Company in the Micropolis Facility. In addition, the Company
took a $6 million charge primarily related to the writedown of certain
inventories to net realizable value. While the
15
<PAGE> 16
Company has taken steps to better align its resources and expenses with sales
expectations and reduce its costs and expenses, its operations have a high level
of fixed costs and expenses. Despite the temporary closure of certain
facilities, continued under-utilization of capacity has had a significant
negative impact on gross margins. If the Company continues to have excess
capacity, the Company's business, results of operations and financial condition
will continue to be materially affected. In response to these factors, the
Company has taken actions to reduce its costs and expenses, including the
temporary closure of certain of its facilities. However, the Company expects
gross margins in the first half of 1998 to remain at levels below those
experienced in 1996 in part because the Company's customer base is still limited
and because the Company was unable to complete some product qualifications that
were expected to be completed in 1997.
An increase in net sales (other than as a result of the Merger) depends on
industry demand improving and the Company's ability to successfully qualify
products with new and existing customers. In an effort to utilize the excess
capacity created by Hyundai's repudiation of the Maxtor contract and the
resulting excess capacity, the Company accelerated qualification and production
of new products during the second half of 1996 with new and existing customers.
There can be no assurance that demand in the disk drive industry will improve or
that the Company will be able to successfully qualify products with new and
existing customers. The failure to do so will have a material adverse effect on
the Company's business, results of operations, and financial condition. The
Company expects that a substantial portion of its shipments in 1998 will be of
new products. Initially, new products often have lower manufacturing yields, are
produced in lower quantities than more mature products and, as a result, have
lower gross margins. Manufacturing yields and gross margins generally improve as
the product matures and production volumes increase. There can be no assurance
that the Company's gross margins will not be negatively impacted by the shipment
of these new products.
Research and development. Research and development expenses of $15.6
million in 1997 were relatively unchanged as compared to $15.7 million for the
year ended 1996, increasing as a percentage of net sales to 14.2% for the year
ended 1997 from 7.4% for the year ended 1996. The increase in research and
development expense as a percentage of net sales for 1997 was due principally to
reduced sales levels and a slight increase in research and development activity.
Selling, general & administrative. Selling, general & administrative
expenses increased as a percentage of net sales to 10.6%, or $11.6 million for
the year ended 1997 from 3.7% or $7.9 million for the year ended 1996. The
increase in selling, general and administrative expenses from 1996 was primarily
due to an increase in professional fees related to the Company's existing bank
debt and increased litigation.
Bad debt expense. Bad debt expenses increased as a percentage of net sales
to 6.9%, or $7.6 million for the year ended 1997 from 1.3% or $2.7 million for
the year ended 1996. In 1996 the Company took a one-time charge of $2.7 million,
principally related to the write-off of loans due from a supplier for plated and
polished substrates to the Company. During 1997, the Company charged $7.6
million to bad debt expense of which $2.6 million was related to the liquidation
of Micropolis. The remainder was principally due to an increase in reserves
related to receivables on sales of certain products for which the Company does
not expect to receive payment.
Nonrecurring charges. During 1997, the Company experienced difficult
conditions in the thin film industry resulting in a reduction of orders with
certain customers. As a result, the Company's fixed assets were determined to be
impaired and the Company took a noncash pretax charge of $20.0 million to
reflect this impairment. In November 1997, Singapore Technologies advised the
Company that it was liquidating its wholly-owned subsidiary, Micropolis. As a
result, the Company took a noncash pretax charge of $9.0 million to reflect the
writeoff of the equipment installed at the Micropolis Facility.
Other income (expense), net. Other income (expense), net was $3.4 million
expense for the year ended 1997 as compared to $0.4 million income for the year
ended 1996. The net change was principally due to a higher average outstanding
debt balance for the year ended 1997 as compared to the year ended 1996 as the
CIBC Credit Facility was funded in August 1996, a higher weighted average
interest rate for 1997 as compared to 1996, and lower average investment
balances in 1997 as compared to 1996. The Company also recorded a gain of $0.8
million in 1997 from the remeasurement of its Singapore subsidiaries' financial
statements into U.S. dollars. This compares to a remeasurement loss of $0.2
million in 1996.
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<PAGE> 17
Income tax expense. The Company's effective tax rate (which includes
federal and state income tax expense) changed from 20.5% in 1996 to 1.6% in 1997
primarily due to the minimal amount of carryback available due to the 1997 loss.
1996 Compared to 1995
Net sales. Net sales increased 30.7% to $211.0 million in 1996 from $161.5
million in 1995. The increase in net sales was primarily due to an increase in
unit volume and secondarily due to a slight increase in average selling prices.
The principal factor contributing to the increase in unit volumes was additional
capacity of the Company's operations in Singapore. The Company completed its
Dedicated Facility in Singapore to manufacture disks for Seagate in the third
quarter of 1996. The increase in average selling prices was principally
attributed to the introduction of new products.
Net sales for the year ended December 31, 1996 were negatively impacted by
the failure of Maxtor and Hyundai to purchase the volumes committed under the
Maxtor Supply Agreement. Overall unit shipments to Maxtor decreased for the year
ended December 31, 1996 as compared to the year ended December 31, 1995. In June
1996, Maxtor notified the Company that it did not intend to purchase the full
committed volumes required by the Maxtor Supply Agreement. Maxtor and Hyundai
subsequently repudiated the Maxtor Supply Agreement. However, in the third
quarter of 1996 the Company continued to ship products to Maxtor (although in
lesser volumes and at lower average selling prices than in the second quarter of
1996 and the comparable prior year quarter). In September 1996, the Company
filed a lawsuit in the United States District Court of Northern California, San
Jose Division, against Hyundai Electronic Industries Co., Ltd., seeking damages
caused by Hyundai's alleged breach of the volume purchase contract among the
Company, Hyundai, and its wholly-owned subsidiary, Maxtor Corporation. See "Item
3. Legal Proceedings" and "-- Factors That May Affect Future
Results -- Dependence on a Limited Number of Customers."
Gross profit. The Company's gross profit decreased 16.5% to $36.4 million
in 1996 from $43.6 million in 1995, decreasing as a percentage of net sales to
17.3% in 1996 from 27.0% in 1995. The principal factors contributing to the
decrease in gross profit for the year ended December 31, 1996 compared to the
year ended December 31, 1995 were decreased unit volumes as a result of the
failure of Maxtor to purchase the volumes committed to under the Maxtor Supply
Agreement and the resulting under-utilization of production capacity. In
addition, the introduction of new products at lower yields contributed to lower
gross margins. As a result of Maxtor's failure to purchase committed volumes,
the Company's Tuas facility in Singapore was significantly underutilized during
the second half of 1996.
Research and development. Research and development expenses increased 68.9%
to $15.7 million in 1996 from $9.3 million in 1995, increasing as a percentage
of net sales to 7.4% in 1996 from 5.7% in 1995. The principal factors
contributing to the increase in research and development expense were increased
staffing and spending on development work related to volume manufacturing of MR
disks, alternative substrates, new magnetic alloys and sputtering techniques.
Selling, general & administration expenses. Selling, general &
administrative expenses increased 44.6% to $7.9 million in 1996 from $5.4
million in 1995, increasing as a percentage of net sales to 3.7% in 1996 from
3.4% in 1995. The increase in selling, general & administrative expense is
mainly the result of increased staffing due primarily to the expanded operations
in Singapore and higher professional fees.
Bad debt expense. In 1996, the Company charged $2.7 million to write-off
the loans due from a supplier for plated and polished substrates to the Company.
Other income (expense), net. Other income (expense) net was $0.4 million
income for the year ended 1996 as compared to $0.1 million income for the year
1995. The slight increase was principally due to higher average investment
balances in 1996 as compared to 1995 and a lower weighted average interest rate
on its outstanding debt for 1996 as compared to 1995. The Company also recorded
losses in 1996 and 1995 of $0.2 million and $0.1 million, respectively from the
remeasurement of its Singapore subsidiaries' financial statements into U.S.
dollars.
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<PAGE> 18
Income tax expense. The Company's effective tax rate (which includes
federal and state income tax expense) decreased to 20.5% in 1996 from 27% in
1995 primarily due to increased earnings in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $8.8 million as of December
31, 1997 as compared to cash and cash equivalents and short-term investments
totaling $47.7 million at December 31, 1996, the decrease of $38.9 million is
principally due to the Company's net cash loss of $39.7 million (after add back
of depreciation and amortization of $30.3 million and nonrecurring charges of
$29.0 million) and the acquisition of plant and equipment of $23.1 million,
offset by a decrease in accounts receivable of $24.2 million.
For the year ended 1997, the Company used $23.1 million in investing
activities for capital expenditures primarily for facilities expansion at its
Singapore operations, including its substrate facility, offset by $23.9 million
as a result of the sale of short-term investments. While the Company has
invested $23.1 million in acquisition of plant and equipment for the year ended
December 31, 1997, the Company continues to reduce capital expenditures to
better align resources and expenses with sales expectations. The Company expects
to incur no more than $20 million in capital expenditures during 1998, primarily
for maintenance capital in Singapore and Santa Clara. The Company had $51.1
million of noncancellable purchase commitments outstanding at December 31, 1997.
Recent working capital needs have been financed through a combination of
existing cash resources, improved management of accounts receivable, and the
extension of trade terms with vendors.
The Company's liquidity may be adversely effected in the future by
continued losses from operations and factors such as higher interest rates,
inability to borrow without collateral, availability of capital financing
transactions and a reduction of terms with vendors. Further, significant
fluctuations in quarterly operating results has had and, in the future, may
continue to have a negative effect on the Company's liquidity. Factors such as
weakness in industry demand, price reductions, unsuccessful product
qualifications, the introduction and market acceptance of new products, product
returns, availability of critical components have had and may continue to have
an adverse effect on the Company's products and have contributed and may
continue to contribute to this quarterly variability. As such, the results of
operations in some future period may be below the expectations of investors,
which would likely result in a significant reduction in the market price of the
Common Stock. A decline in the market price of the Common Stock would have a
negative effect on the Company's ability to raise needed capital on acceptable
terms and conditions to Management.
The Company's principal sources of cash at December 31, 1997 consisted of
$8.8 million of cash and cash equivalents. In August 1996, the Bank Group led by
CIBC Wood Gundy, an affiliate of Canadian Imperial Bank of Commerce and Banque
National de Paris (the "Banks") funded the $50.0 million Term Loan Facility. The
Term Loan Facility has a three-year term, bears an interest rate of LIBOR plus
3% and is secured by the Company's assets located in Singapore and is guaranteed
by StorMedia Incorporated. In July 1997, the Company terminated its $25.0
million Revolving Credit Facility with the Banks which had also been extended by
the Banks in August 1996. During 1997, the Company repaid $1.7 million of the
required $5.0 million of outstanding principal due and has not repaid the
required $5.0 million of outstanding principal for the first quarter of 1998 but
remains current on its interest payments. The Company is currently in default of
its Term Loan Facility and is in active discussions with the Banks to amend the
terms of the facility. The
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amendment contemplates among other things, a change to the amortization schedule
of principal, extension of the maturity date, repayment of a portion of
principal outstanding from the successful completion of new debt and equity
financings and the sale of certain assets. The amendment will also require
compliance with various financial covenants.
The Company is implementing various cash generation measures including a
program to significantly reduce inventories and the sale of certain fixed assets
acquired in the Akashic Acquisition in order to meet its ongoing liquidity
requirements. In addition, management's financial plans for fiscal 1998
anticipate raising additional debt and/or equity capital. There can be no
assurance, however, that such financing would be available when needed, if at
all, or on favorable terms and conditions. The precise amount and timing of the
funding needs cannot be determined accurately at this time, and will depend on a
number of factors, including completion of ongoing discussions with debt and
equity financing sources and its current bank group. If management is unable to
raise additional financing the Company may not be able to continue as a going
concern.
FACTORS THAT MAY AFFECT FUTURE RESULTS
StorMedia operates in a rapidly changing environment that involves a number
of risks, some of which are beyond StorMedia's control. The following discussion
highlights some of these risks.
Sustained Losses; Need for Additional Financing; Future Capital Needs. The
Company incurred a net loss during fiscal year 1997 totaling $99.1 million.
There can be no assurances that the Company will cease incurring losses despite
new product introductions, as there can be no assurances that the Company's
products will be accepted in the marketplace. Continued losses would result in
liquidity and cash flow problems and could affect product delivery efforts.
Further sustained losses will necessitate future additional financings that if
raised through the issuance of equity securities, will reduce the percentage
ownership of the stockholders of the Company. Existing stockholders may
experience additional dilution, and securities issued in conjunction with new
financings may have rights, preferences and privileges senior to those of
holders of the Company's Common Stock. There can be no assurance, however, that
additional financing will be available when needed, if at all, or on favorable
terms.
Difficulties of Integrating Akashic. The anticipated benefits of the Merger
will not be achieved unless the operations of Akashic are successfully combined
with those of StorMedia on a timely and cost-effective manner. The successful
combination of the two companies will also require integration of the companies'
product offerings and the coordination of their research and development and
sales and marketing efforts, and may require the Company to close certain of its
facilities and reorganize the Company's operations in order to achieve cost
savings from economies of scale. The difficulties of assimilation may be
increased by the need to integrate personnel and to combine different corporate
cultures. The combination of StorMedia and Akashic has required and will
continue to require substantial attention from management. Any difficulties
encountered in the transition process will divert the attention of management
away from the Company's business, which could have an adverse impact on the
revenues and operating results of the Combined Company. In addition, the process
of combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have a material adverse effect on their combined operations. There
can be no assurance that the companies can be successfully integrated or that
such integration will take place in a timely and cost-effective manner, or that
it will realize any of the anticipated benefits of the Merger.
Just In Time Inventory. The disk drive industry supplies components for
client server and PC manufacturers. Until recently, component suppliers have
been characterized by long product cycles, built up inventories and production
based on forecasts. With the recent slowdown in the disk drive industry, disk
drive manufacturers have reduced inventories, shortened product cycles and based
production on actual customer orders. While the long term benefits of such
streamlined production may be shorter, milder business cycles, the short-term
effect has been to significantly reduce demand for components, such as those
supplied by the Company. This just in time inventory strategy has exacerbated
the impact of the overall reduction in demand in the disk drive industry. While
the Company is modifying its product cycles and production processes to adapt to
the just in time inventory strategy of its customers, there can be no assurance
that the Company will
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successfully do so. The failure of the Company to adapt its product cycles and
production processes to the just in time strategy of its customers may result in
reduced sales and the inability of the Company to successfully qualify its
products, which would have a material adverse effect on the Company.
Fluctuations in Quarterly Operating Results. StorMedia's and Akashic's
quarterly results have fluctuated in the past and the Combined Company's
operating results may continue to fluctuate in the future. The Company's
operating results are dependent on many factors, including the economic
conditions in the disk drive industry, the size and timing of the receipt of
orders from current customers, product qualifications for new and existing
customers, utilization of production capacity, manufacturing yields, customer
cancellations or delays of shipments, the Company's ability to develop,
introduce and market new and enhanced products on a timely basis, the
introduction of new products by its competitors and changes in average selling
prices and product mix, among others. The Company's expense levels will be
based, in part, on expectations of future revenues. Both StorMedia and Akashic
derive their revenues primarily from the sale of thin film media and plated and
polished substrates. The Company's results of operations for a particular
quarter could be adversely affected if anticipated product orders or
qualifications are not received, if anticipated shipments are delayed or
canceled by one or more customers or if shipments are delayed or rejected. The
slowdown in the disk drive industry in general and in the construction of new
media and substrate facilities have resulted in decreased demand for media and
substrates and consequently, overcapacity and underutilization of existing
facilities. There can be no assurance that this slowdown will not continue.
There can be no assurance that these and other factors will not materially
adversely affect the Company's business, results of operations and financial
results.
During 1995 and 1996, the Company reported a gross margin of 27.0% and
17.3%, respectively and reported a gross deficit of (30.6)% during 1997. The
Company's gross margins in 1997 were lower than the levels experienced in 1995
and 1996 principally due to the Company's inability to replace sales which it
had expected to make to Maxtor under the Maxtor Supply Agreement and the
resulting under-utilization of its facilities, as well as the liquidation of
Micropolis which resulted in both a precipitous termination of orders and a
writeoff of assets and equipment installed by the Company in the Micropolis
Facility. While the Company has taken steps to better align its resources and
expenses with sales expectations and reduce its costs and expenses, its
operations have a high level of fixed costs and expenses. Despite the temporary
closure of certain facilities, continued under-utilization of capacity has had a
significant negative impact on gross margins. If the Company continues to have
excess capacity, the Company's business, results of operations and financial
condition will continue to be materially adversely affected.
In addition, new products generally have higher average selling prices than
more mature products. Therefore, the Company's ability to introduce new
products, which have been designed into its customers' products, in a timely
fashion is an important factor in its ability to maintain gross and operating
margins. However, initially new products often have lower manufacturing yields,
are produced in lower quantities than more mature products and, therefore,
generally have lower gross margins. The Company expects that a substantial
portion of its shipments in 1998 will be of new products, which will negatively
impact the Company's overall yield at least for that period and, consequently,
the Company's gross margins. Manufacturing yields also vary depending on the
complexity and uniqueness of product specifications. Because the thin film disk
industry is capital intensive and requires a high level of fixed costs, gross
margins are also extremely sensitive to changes in volume. Assuming fixed
product prices, small variations in manufacturing yields and productivity
generally have a significant impact on gross margins. Additionally, decreasing
demand for the Company's products generally results in reduced average selling
prices and low capacity utilization which, in turn, adversely affects gross
margins and operating results. Even during periods of reduced revenues, in order
to remain competitive, the Company will be required to continue to invest in
research and development and to maintain a level of manufacturing capacity
capable of addressing increased demand. Despite the Seagate Supply Agreement, as
amended, a significant portion of the Company's business is also characterized
by short term orders and shipment schedules which typically can be modified or
rescheduled without significant penalty to the customer. Therefore, the Company
typically plans its production and inventory based on forecasts of customer
demands, which often fluctuate substantially. These factors have caused and will
continue to cause fluctuations in the Company's gross margins and results of
operations. See "-- Just In Time Inventory" and "Dependence on a Limited Number
of Customers."
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Current Slowdown and Volatility in the Disk Drive Industry. Both
StorMedia's and Akashic's businesses have depended and the business of the
Company will continue to depend upon the current and anticipated market demand
for disk drives and products utilizing disk drives. The disk drive industry has
been cyclical in nature and is currently has experiencing a downturn. The disk
drive industry also has been characterized by periods of oversupply, reductions
in customer forecasts, price erosion and reduced production levels. The effect
of these cycles on suppliers, including thin film media and plated and polished
substrate manufacturers, has been magnified by hard disk drive manufacturers'
practice of ordering components in excess of their needs during periods of rapid
growth, which increases the severity of the drop in the demand for components
during periods of contraction. During 1995 and early 1996, the Company's
principal customers and many of its competitors and potential customers engaged
in substantial efforts to increase disk manufacturing capacity in light of the
imbalance between previously existing levels of demand for disks and existing
industry capacity. These efforts, along with the adoption by disk drive
manufacturers of "Just In Time" inventory practices, have resulted in
significant additional capacity in the industry which has exacerbated the
negative impact on the Company of the slowdown in demand for media and
substrates. To the extent industry capacity continues to exceed demand, the
Company will continue to experience increased levels of competition which could
materially adversely impact the Company's business, results of operations, and
financial condition. In addition, in the event of an oversupply of disks,
customers who have developed an internal supply of disks are likely to utilize
their internal capacity prior to purchasing disks from independent suppliers.
These conditions have adversely affected StorMedia's and Akashic's, and may
continue to adversely affect the Company's revenues, margins and operating
results, and no assurance can be given that the Company's revenue, margins and
operating results will not be adversely affected by future downturns in the disk
drive industry.
Dependence on a Limited Number of Customers. During 1997, shipments to
Seagate and Micropolis represented 62% and 18%, respectively, of net sales.
During 1996, the Company sold its disks primarily to Seagate and Maxtor.
Aggregate shipments to Seagate and Maxtor in 1996 represented 71% and 25%
respectively, of net sales. As discussed above, Maxtor terminated the Maxtor
Supply Agreement in 1996 and Micropolis was liquidated in 1997. While Seagate
and other new customers such as Western Digital and Samsung have taken a portion
of the Company's capacity which became available as a result of these
terminations and the Company is now shipping to additional new customers as a
result of the Merger, the Company continues to have excess manufacturing
capacity as it seeks to qualify its products in additional product programs of
both new and existing customers. Qualification is a costly and time-consuming
process and the Company continues to experience increased levels of competition
in the qualification process. There can be no assurance that the Company will
continue to qualify products with its present customers, continue to find new
customers or successfully qualify its products in the product programs of such
new customers on a timely basis or with acceptable yields. Accordingly, the
Company expects excess capacity to continue to negatively impact its results of
operation's at least during 1998.
Given the relatively small number of independent high performance disk
drive manufacturers, the Company's dependence on a few customers will continue
for the foreseeable future. The Company's existing and several of its potential
customers have expanded their ability to produce thin film disks internally. As
a result, these customers could reduce the level of purchases and could cease
purchasing from suppliers such as the Company, could sell thin film disks in
competition with the Company or decrease their level of orders as
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the slowdown in the industry continues. Specifically, Seagate currently produces
a portion of its own thin film disk requirements internally and historically has
produced a majority of its requirements. Seagate's expressed corporate strategy
has been to significantly increase its internal capacity to manufacture disks.
In 1996, Seagate completed its merger with Conner Peripherals, Inc. ("Conner"),
acquired Conner's internal disk production capacity and completed construction
of a disk manufacturing facility in Singapore. If Seagate were to continue to
reduce the level of orders from the Company as a result of the expansion of its
internal disk production, an acquisition of, or the establishment of a strategic
relationship with, another disk supplier or otherwise, or if Seagate were to
begin selling disks in competition with the Company, the Company's business,
results of operations and financial condition would be materially adversely
affected.
Recently, there has been a slowdown in demand for disk drive products and a
commensurate decrease in demand for thin film media. The extent that a decrease
in demand has created excess industry capacity, which in turn has caused
customers, such as Seagate, who have developed an internal supply of disks to
utilize their internal capacity prior to purchasing disks from independent
suppliers such as the Company. Additionally, due to the lengthy product
qualification process, changes in customers and product mix have had and could
continue to have a material adverse effect on the Company's business, results of
operations and financial condition during such transition. Consequently, any
loss of Seagate or one or more of the Company's current or potential customers
through consolidations, adverse financial or market circumstances or otherwise,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Rapid Changes in Customer and Product Mix. Due to the rapid and frequent
development of new disk drive products, it is common in the industry for the
relative mix of customers and products to change rapidly, even from quarter to
quarter. For example, in the fourth quarter of 1996 sales to Seagate represented
approximately 95% of net sales, while in the first quarter of 1997 sales to
Seagate and Micropolis represented approximately 56% and 21% of net sales,
respectively. In addition, the Company's unit sales of MR disks represented 0%
of units sold in the second quarter of 1996 compared to 77% of units sold for
the comparable quarter of 1997. At any one time the Company typically supplies
disks in volume for only five to ten disk drive products, with the mix of such
products shifting continually. Disk drive manufacturers demand a variety of thin
film disks with differing design, performance and cost characteristics. Thin
film disk suppliers, such as the Company, are required to work closely with such
manufacturers in order to develop products that will be used in the
manufacturers' designs. Thin film disk suppliers seek to have their products
"designed in" to a particular disk drive and to be qualified as a primary
supplier for new programs. The design-in process is ongoing, lengthy and
frequent and the Company must compete for participation in each product program
including those of existing customers. As discussed above, due to the downturn
in demand in the disk drive industry, liquidation of Micropolis and excess
capacity, the Company continues to seek additional customers to utilize its
manufacturing capacity. While Seagate and other customers have taken a portion
of this capacity, the Company continues to have excess manufacturing capacity as
it seeks to qualify its products in product programs of both new and existing
customers. Qualification is a costly and time consuming process and there can be
no assurance that the Company will successfully find new customers or
successfully qualify its products in their product programs on a timely basis or
with acceptable yields. In the event the Company's products do not become
designed into or qualified in a particular disk drive program on a timely basis,
the Company could be excluded as a supplier of disks for such program entirely
or could become a secondary source of supply for such program, which typically
results in lower sales and lower gross margins. Consistent inability to become
designed into a disk drive program would have a material adverse effect on the
Company's business results of operations and financial condition.
Uncertainties Associated with Supply Agreement with Seagate. In June 1995,
the Company entered into a Supply Agreement with Seagate (the "Seagate Supply
Agreement,") pursuant to which the Company has established the Dedicated
Facility in Singapore to manufacture disks for Seagate. The Company has expended
significant financial and management resources to construct and operate at such
facility. While Seagate was required to purchase the disks manufactured at the
Dedicated Facility through March 31, 1999, Seagate and the Company amended the
Seagate Supply Agreement (the "Amended Agreement") to allow the Company to
manufacture disks for Seagate at any one of its three facilities. The Amended
Agreement also eliminates the pricing formula of the Seagate Supply Agreement.
All of the products manufactured under the Amended
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Agreement must still be qualified by Seagate before products can be delivered to
Seagate. As a result, while Seagate continues to be obligated to purchase
certain volumes and continues to be a significant customer, the volumes
purchased have not been sufficient to fill plants and the Company has facilities
that are currently idle in Singapore. To the extent the Company's facilities
continue to operate at less then full capacity, the Company's business, results
of operating and financial condition will continue to be materially adversely
affected. See "-- Variability in Gross Margins and Operating Results."
Rapid Technological Change. The thin film disk industry is characterized by
rapid technological change, short product life cycles, and price erosion.
Product lives are typically six to twelve months in duration. Although the
Company is continually developing new products and production techniques, there
can be no assurance that the Company will be able to anticipate technological
advances and develop products incorporating such advances in a timely manner,
with acceptable yields or to compete effectively against competitors' new
products. In addition, there can be no assurance that the Company's new products
can be produced in full volume at reasonable yields or that the Company will
develop new products or processes which ultimately are adopted by the industry.
The Company's operating results and financial condition could be materially
adversely affected if these efforts are not successful or if the technologies
that the Company has chosen not to develop prove to be competitive alternatives.
See "-- Variability in Gross Margins and Operating Results."
Intense Competition. The disk drive industry and thin film disk industry
are both characterized by intense competition. The Company's primary competitors
are Fuji Electric Company Ltd., HMT Technology Corporation, Hoya Corporation,
Komag Incorporated, Mitsubishi Kasei Corporation and Showa Denko K.K. among
independent disk manufacturers. Most of these companies have significantly
greater financial, technical and marketing resources than the Company. IBM and
several disk drive manufacturers, including Seagate and Western Digital
Corporation, currently produce thin film disks internally for their own use.
Seagate's expressed corporate strategy is to be vertically integrated for a
majority of its disk drive components and to pursue sales to third parties of
its disk drive components. Hyundai has built a manufacturing facility to produce
disks for use in Maxtor disk drives to supplement Maxtor's current supplier
base. These companies could increase their internal production to supply their
requirements and cease purchasing from independent disk suppliers. Moreover,
these companies could make their products available for distribution in the
market as direct competitors of the Company. Additionally, other disk drive
manufacturers, such as Quantum, may decide to produce disks for internal use.
Any of these changes would reduce the already small number of current and
potential customers and increase competition for the remaining market. Such
competition could materially adversely affect the Company's business and results
of operations. See "-- Dependence on a Limited Number of Customers."
Dependence on Suppliers. The Company relies on a limited number of
suppliers and, in some cases, a sole supplier, for certain materials used in its
manufacturing processes, including glass/ceramic substrates, plating chemicals,
tapes, slurries, certifier beads, sputter targets and certain other materials.
In addition, the Company relies on a single source for most of its equipment. In
the past, the Company has had to provide financial assistance to equipment
vendors in order to maintain sources for such equipment. Shortages may occur in
the future or supplies could be available only with lead times of approximately
three to six months. Changing suppliers for certain materials such as the lube
or buffing tape used in the Company's products would require that the product be
requalified with each customer. Requalification could prevent early design-in
wins or could prevent or delay continued participation in disk drive programs
into which the Company's products have been qualified. In addition, long lead
times of three to six months are required to obtain many materials. Regardless
of whether these materials are available from established or new sources of
supply, these lead times could impede the Company's ability to respond quickly
to changes in demand. Any limitations on the supply of components, materials or
equipment could disrupt or limit the Company's production volume and could have
a material adverse effect on the Company's business, results of operations and
financial condition. Further, a significant increase in the price of one or more
of these components could adversely affect the Company's results of operations.
Risks Associated With Substrate Manufacturing. The Company's substrate
manufacturing facility in Singapore became fully operational during the third
quarter of 1997 and the Company acquired a substrate
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facility located in Malaysia as part of the Merger. These facilities require the
expenditure of significant management resources. Additionally, the Company is
vertically expanding its business to include the process of grinding aluminum
blanks which occurs prior to the nickel plating process. While the Company
believes it has the expertise to establish this process, it has incurred delays
and lower yields than expected during its start-up phase. There can be no
assurance that these facilities will produce high quality and low cost aluminum
substrates. Manufacturing and other problems which may occur in connection with
the operation at these facilities could materially adversely affect the
Company's results of operations and financial condition.
Liability Related to Year 2000 Compliance. The Year 2000 Issue arises from
computer programs that use two digits rather than four to define the applicable
year. Such computer programs may cause computer systems to recognize a date
using "00" as the calendar year 1900 rather than the calendar year 2000. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail.
The Company is in the process of conducting a comprehensive review of its
internal computer systems to identify the systems that could be affected by the
Year 2000 Issue and is developing an enterprise-wide implementation plan to
resolve the issue. The Company believes that, with modifications to existing
operational software, the Year 2000 Issue will not pose significant operational
problems for the Company's internal computer systems. The Company expects to
incur internal staff costs as well as consulting and other expenses related to
the enhancements necessary to prepare the systems for the Year 2000. The Company
cannot estimate the amount of costs that will be associated with the transition
of the Company's remaining systems. While the Company currently expects that the
Year 2000 Issue will not pose significant operational problems, delays in the
modification or conversion of its systems or the failure to fully identify all
Year 2000 dependencies in the Company's systems could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the Company cannot be sure that systems of suppliers to the Company
or of other companies on which the Company's systems rely will be converted in a
timely manner. The failure of these other companies to convert their systems,
may have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's products do not have embedded
calendars and therefore the Company does not expect the Year 2000 problem to
impact its products.
Dependence on Personnel. The Company's future operating results depend in
significant part upon the continued contributions of its officers and personnel,
many of whom would be difficult to replace. At present the Company does not have
employment agreements with any employee. The Company maintains a $4.0 million
key person life insurance policy (with $3.0 million of proceeds payable to the
Company) on the life of its Chairman of the Board and Chief Executive Officer,
William J. Almon, but not on the lives of other key persons. The loss of any of
its officers or other key personnel could have a material adverse effect on the
business, financial condition and results of operations of the Company. In
addition, the production of thin film disks requires employees skilled in highly
technical and precise production processes with expertise specific to thin film
disk production. The Company's future operating results depend in part upon its
ability to attract, train, retain and motivate other qualified management,
technical, manufacturing, sales and support personnel for its operations both in
California and in Singapore. Competition for such personnel is intense,
especially since many of the Company's competitors are located near the
Company's facilities in Santa Clara, California. There can be no assurance that
the Company will be successful in attracting or retaining such personnel. Hiring
qualified personnel in Singapore is made more difficult because Singapore has
substantially full employment at the present time and because the Company was
the first manufacturer of thin film disks and is the first manufacturer of
substrates with operations in Singapore. The loss of the services of existing
personnel as well as the failure to recruit, train and retain additional
personnel in a timely manner could have a material adverse effect on the
Company's business, results of operations and financial condition.
Intellectual Property and Proprietary Rights. The Company regards elements
of its manufacturing process, product design and equipment as proprietary and
seeks to protect its proprietary rights through a combination of employee and
third party non-disclosure agreements, internal procedures and, increasingly,
patent protection. The Company has had ten U.S. patents issued to it, has an
additional application allowed and has twelve additional patent applications
(one of which are provisional applications) pending in the United States. In
addition, the company purchased over one hundred patents issued and applications
pending from Kubota Corporation in December 1997 in conjunction with the
acquisition of Akashic. The Company
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intends to file additional U.S. applications as appropriate for patents covering
its products and manufacturing processes. There can be no assurance that patents
will be issued with respect to any of the Company's allowed patent applications,
that patents will be issued or be allowed with respect to any of the Company's
other pending applications, or that claims allowed on any existing or future
patents will be sufficiently broad to protect the Company's technology. There
can also be no assurance that any patents now or hereafter held by the Company
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company. In addition, the
laws of certain foreign countries may not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Although the
Company continues to implement protective measures and intends to defend its
proprietary rights, there can be no assurance that these measures will be
successful. The Company believes, however, that, because of the rapid pace of
technological change in the disk and disk drive industries, the legal
protections for its products are less significant factors in the Company's
success than the innovative skills, experience and technical competence of its
employees.
The Company has from time to time been notified of, or has otherwise been
made aware of, claims that it may be infringing upon patents or other
proprietary intellectual property owned by others. If it appears necessary or
desirable, the Company may seek licenses under such patents or proprietary
intellectual property. Although patent holders commonly offer such licenses, no
assurance can be given that licenses under such patents or proprietary
intellectual property will be offered or that the terms of any offered licenses
will be acceptable to the Company. The Company has been contacted by IBM
concerning the Company's interest in licensing a patent. Based upon an opinion
of its patent counsel, the Company believes that no license is required because
the Company does not believe that it is practicing any invention covered by the
IBM patent. There can be no assurance, however, that IBM will not pursue its
claim. Additionally, Virgle L. Hedgcoth has allegedly patented certain disk
preparation techniques (the "Hedgcoth Patents") and has asserted that the
Company is infringing such patents. Mr. Hedgcoth has since asserted patent
infringement claims against certain disk drive manufacturers, including one
customer of the Company who has demanded that the Company defend and indemnify
it in the patent litigation. The Company believes that the Hedgcoth Patents are
not valid because of prior commercial activities by other companies utilizing
the technology covered. However, should Mr. Hedgcoth prevail in such litigation
and elect to pursue the Company, the Company would be forced to either litigate
any infringement claims, execute a license, if available, or design around the
patents, which the Company believes is possible, and may be required to
indemnify its customers. The failure to obtain a key patent license or a license
to key proprietary intellectual property from a third party could cause the
Company to incur substantial liabilities and possibly to suspend the manufacture
of the products utilizing the patented or proprietary invention either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Item 3. Legal Proceedings" and
"Business -- Intellectual Property and Proprietary Rights."
Environmental Issues. The Company's operations and manufacturing processes
are subject to certain federal, state, local and foreign environmental
protection laws and regulations. These laws and regulations relate to the
Company's use, handing, storage, discharge and disposal of certain hazardous
materials and wastes, the pre-treatment and discharge of process waste waters,
and the control of process air pollutants. The Company has from time to time
been notified of minor violations concerning its waste water discharge permits,
air quality regulations and hazardous material regulations. The Company has
implemented corrective action plans to remedy these violations and has put in
place procedures to effectuate continued compliance with these laws and
regulations. The Company has also initiated safety programs and training of
personnel on safe storage and handling of hazardous materials and wastes. The
Company believes that it is in compliance in all material respects with
applicable environmental regulations and does not anticipate any material
capital expenditures for environmental related matters. Environmental laws and
regulations, however, may become more stringent over time and there can be no
assurances that the Company's failure to comply with either present or future
regulations would not subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion at its present
locations or the acquisition of costly equipment.
The Company's California facilities are located near major earthquake
faults. Disruption of operations at any of the Company's production facilities
for any reason, including work stoppages or natural disasters such
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as fire, floods or earthquakes, would cause delays in or an interruption of
production and shipment of products and would negatively affect the Company's
business, results of operations and financial condition.
Risks of International Sales and Manufacturing. In 1995, 1996 and 1997,
international sales (sales delivered to customers in the Far East and Ireland,
including foreign subsidiaries of domestic companies) accounted for over 85% of
the Company's net sales, and the Company anticipates that international sales
will continue to represent the substantial majority of its net sales.
Accordingly, the Company's operating results are subject to the risks inherent
in international sales, including compliance with or changes in the law and
regulatory requirements of foreign jurisdictions, fluctuations in exchange
rates, tariffs or other barriers, exposure to taxes in multiple jurisdictions
and transportation delays and interruptions. Although presently all of the
Company's sales are made in U.S. dollars, including sales from its Singapore and
Malaysia facilities, a portion of the Company's expenses must be paid in
Singapore dollars and Malaysia. Future international sales may be denominated in
foreign currencies. Gains and losses on the conversion to U.S. dollars of
accounts receivable and accounts payable arising from international operations
may contribute to fluctuations in the Company's results of operations.
Additionally, the Company's international business may be materially adversely
affected by fluctuations in currency exchange rates, increases in duty rates,
exchange or price controls or other restrictions on foreign currencies and
difficulties in obtaining export licenses. Moreover, the Company's efforts to
expand its manufacturing operations are concentrated in Southeast Asia. This
expansion requires the Company to implement and monitor new systems, procedures
and controls and to attract, train, motivate and manage qualified employees
effectively. These risks are exacerbated by the distance of the Southeast Asian
facilities from the Company's California headquarters. These risks will increase
as production increases at the Southeast Asian facilities. Due to the
anticipated expansion of the Company's manufacturing operations in Southeast
Asia, the impact of the foregoing factors on the Company's business, results of
operations and financial condition could be material and adverse.
Volatility of Stock Price. The trading price of the Company's Class A
Common Stock has been volatile since the Company's initial public offering in
May 1995 and has been and is likely to continue to be subject to wide
fluctuations in response to a variety of factors, including quarterly variations
in operating results, revised earnings estimates, general conditions in the disk
drive or computer industry, announcements of changes in capacity, the level of
orders from new or existing customers, consolidations in the industry,
technological innovations or new products by the Company or its competitors,
developments in patents or other intellectual property rights, comments or
recommendations issued by analysts who follow the Company, its competitors or
the disk drive industry and general economic and market conditions. In addition,
it is possible that from time to time the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Class A Common Stock could be materially adversely
affected. Additionally, the stock market in general, and the market for
technology stocks in particular, have experienced extreme price volatility in
recent years. Volatility in price and volume has had a substantial effect on the
market prices of many technology companies for reasons unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations could have a significant impact on the market price of the
Class A Common Stock.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,753 $ 23,788
Short-term investments.................................... -- 23,923
Accounts receivable, less allowances of $9,171 at December
31, 1997 and $1,177 at December 31, 1996............... 20,363 31,047
Inventories............................................... 37,775 14,848
Assets held for sale...................................... 16,914 --
Prepaid expenses.......................................... 8,523 6,794
Deferred income taxes..................................... -- 2,819
-------- --------
Total current assets.............................. 92,328 103,219
Plant and equipment, net.................................... 100,694 137,162
Deposits and other assets................................... 1,004 1,355
-------- --------
$194,026 $241,736
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable.................................... $ 33,531 $ 25,234
Bank borrowings and current portion of long-term debt..... 53,324 5,014
Other accrued liabilities................................. 21,657 1,952
Accrued salaries and benefits............................. 6,689 4,151
Income taxes payable...................................... 1,126 2,556
-------- --------
Total current liabilities......................... 116,327 38,907
Deferred income taxes....................................... -- 245
Long-term debt, less current portion........................ 78 45,024
Excess of fair value of assets acquired over purchase
price..................................................... 12,699 --
Commitment and contingencies
Equity:
Preferred Stock, $.01 par value; 1,000 shares authorized;
none issued or outstanding............................. -- --
Class A Common Stock, $.013 par value; 50,000 shares
authorized; 15,919 and 13,199 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 212 175
Convertible Class B Common Stock; $.013 par value; 5,000
shares authorized; 4,362 shares outstanding at December
31, 1997 and 1996...................................... 58 58
Additional paid-in capital................................ 131,066 124,686
Retained earnings (accumulated deficit)................... (66,414) 32,641
-------- --------
Total equity...................................... 64,922 157,560
-------- --------
$194,026 $241,736
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $109,687 $210,996 $161,455
Cost of sales.............................................. 143,259 174,562 117,827
-------- -------- --------
Gross profit (deficit)................................... (33,572) 36,434 43,628
Operating expenses:
Research and development................................. 15,574 15,657 9,269
Selling, general and administrative...................... 11,580 7,861 5,435
Bad debt expense......................................... 7,589 2,700 --
Nonrecurring charges..................................... 29,000 -- --
-------- -------- --------
Total operating expenses.............................. 63,743 26,218 14,704
-------- -------- --------
Operating earnings (loss)............................. (97,315) 10,216 28,924
Other income (expense)................................... (3,387) 429 76
-------- -------- --------
Earnings (loss) before income tax expense.................. (100,702) 10,645 29,000
Income tax expense (benefit)............................... (1,647) 2,187 7,842
-------- -------- --------
Net earnings(loss)....................................... $(99,055) $ 8,458 $ 21,158
======== ======== ========
Earnings (loss) per share:
Basic.................................................... $ (5.49) $ 0.49 $ 1.89
======== ======== ========
Diluted.................................................. $ (5.49) $ 0.46 $ 1.39
======== ======== ========
Number of shares used in per share computation:
Basic.................................................... 18,031 17,285 11,210
======== ======== ========
Diluted.................................................. 18,031 18,209 15,175
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL NET EARNINGS
---------------- PAID-IN DEFERRED UNREALIZED (ACCUMULATED TOTAL
SHARES AMOUNT CAPITAL COMPENSATION GAIN (LOSS) DEFICIT) EQUITY
------- ------ ---------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994....... 2,138 $ 28 $ 368 $ -- $ -- $ 3,203 $ 3,599
Proceeds from exercise of common
stock options..................... 908 12 275 -- -- -- 287
Proceeds from sale of Class A Common
Stock............................. 7,087 95 118,051 -- -- -- 118,146
Conversion of Redeemable Preferred
Stock to Common Stock............. 7,087 95 4,655 -- -- -- 4,750
Proceeds from sale of put options... -- -- 1,918 -- -- -- 1,918
Reclassification of put option
obligation........................ -- -- (20,605) -- -- -- (20,605)
Deferred compensation............... -- -- 86 (10) -- -- 76
Tax benefit arising from early
dispositions of stock issued upon
exercise of stock options......... -- -- 3,368 -- -- -- 3,368
Preferred Stock dividends ($.01 per
share)............................ -- -- -- -- -- (178) (178)
Net unrealized gain................. -- -- -- -- 95 -- 95
Net earnings........................ -- -- -- -- -- 21,158 21,158
------- ---- -------- ---- ---- -------- --------
BALANCES AT DECEMBER 31, 1995....... 17,220 230 108,116 (10) 95 24,183 132,614
Proceeds from exercise of common
stock options..................... 422 5 732 -- -- -- 737
Proceeds from sale of Class A Common
Stock............................. 182 2 1,739 -- -- -- 1,741
Proceeds from settlement of put
options........................... -- -- (1,994) -- -- -- (1,994)
Reclassification of put option
obligations....................... -- -- 20,605 -- -- -- 20,605
Repurchase of Class A Common Stock.. (263) (4) (7,212) -- -- -- (7,216)
Deferred compensation............... -- -- -- 2 -- -- 2
Tax benefit arising from early
dispositions of stock issued upon
exercise of stock options......... -- -- 2,708 -- -- -- 2,708
Net unrealized gain (loss).......... -- -- -- -- (95) -- (95)
Net earnings........................ -- -- -- -- -- 8,458 8,458
------- ---- -------- ---- ---- -------- --------
BALANCES AT DECEMBER 31, 1996....... 17,561 233 124,694 (8) -- 32,641 157,560
Proceeds from exercise of common
stock options..................... 566 8 1,101 -- -- -- 1,109
Proceeds from sale of Class A Common
Stock............................. 154 2 923 -- -- -- 925
Issuance of Class A Common Stock for
acquisition of Akashic Memories
Corporation....................... 2,000 27 4,348 -- -- -- 4,375
Deferred compensation............... -- -- -- 8 -- -- 8
Net loss............................ -- -- -- -- -- (99,055) (99,055)
------- ---- -------- ---- ---- -------- --------
BALANCES AT DECEMBER 31, 1997....... 20,281 $270 $131,066 $ -- $ -- $(66,414) $ 64,922
======= ==== ======== ==== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
STORMEDIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss)....................................... $(99,055) $ 8,458 $ 21,158
Adjustments to reconcile net earnings (loss) to net cash
provided by
(used in) operating activities:
Depreciation and amortization........................... 30,316 18,806 4,355
Nonrecurring charges.................................... 29,000 -- --
Deferred income taxes................................... 2,591 -- (612)
Net loss on disposition of plant and equipment.......... 352 -- --
Changes in operating assets and liabilities:
Accounts receivable................................. 24,223 (933) (14,405)
Inventories......................................... (2,909) (5,037) (4,195)
Prepaid expenses.................................... 1,759 (2,243) (1,690)
Other assets........................................ 334 (492) (575)
Trade accounts payable.............................. (4,159) 6,237 8,413
Accrued liabilities................................. 3,831 287 3,084
Tax benefit arising from early dispositions of stock
issued upon
exercise of stock options......................... -- 2,708 3,368
Income taxes payable................................ (2,556) (851) 1,338
-------- -------- --------
Net cash provided by (used in) operating
activities.......................................... (16,273) 26,940 20,239
-------- -------- --------
INVESTING ACTIVITIES
Acquisition of plant and equipment........................ (23,105) (78,110) (60,321)
Interest capitalized on plant and equipment............... -- -- (197)
Acquisition of Akashic Memories Corporation............... 69 -- --
Purchase of short-term investments........................ -- (47,220) (71,326)
Sales of short-term investments........................... 23,923 41,623 53,000
-------- -------- --------
Net cash provided by (used in) investing
activities.......................................... 887 (83,707) (78,844)
-------- -------- --------
FINANCING ACTIVITIES
Increase in short-term borrowings......................... -- 10,000 7,739
Repayment of short-term borrowings........................ -- (10,000) (16,522)
Issuance of long-term obligations......................... -- 50,000 79
Payment of long-term debt obligations..................... (1,683) (120) (17,812)
Proceeds from sale of Class A Common Stock, net of
issuance costs.......................................... 2,034 2,478 118,433
Proceeds from (settlement of) put options................. -- (1,994) 1,918
Preferred Stock dividends paid............................ -- -- (178)
Repurchase of Class A Common Stock........................ -- (7,216) --
-------- -------- --------
Net cash provided by financing activities........... 351 43,148 93,657
-------- -------- --------
Decrease in cash and cash equivalents..................... (15,035) (13,619) 35,052
Cash and cash equivalents at beginning of year............ 23,788 37,407 2,355
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 8,753 $ 23,788 37,407
======== ======== ========
Cash paid for interest.................................... $ 4,227 $ 1,271 1,827
======== ======== ========
Cash paid for income taxes................................ -- $ 332 3,748
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital lease obligations........ 87 -- 2,141
======== ======== ========
Equipment acquired under short-term borrowings............ -- -- 1,500
======== ======== ========
Conversion of Preferred Stock to Common Stock............. -- -- 4,750
======== ======== ========
Acquisition of Akashic Memories Corporation
Assets acquired......................................... $(64,028) -- --
Liabilities assumed..................................... 49,653 -- --
Issuance of Class A Common Stock........................ 4,375 -- --
-------- -------- --------
Cash paid............................................... (10,000) -- --
Less cash acquired...................................... 10,069 -- --
-------- -------- --------
Net cash received................................... $ 69 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- BASIS OF PRESENTATION
StorMedia Incorporated (the "Company") develops, manufactures and sells
sputtered thin film disks to independent hard disk manufacturers.
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. During 1997, the
Company incurred a net loss from operations of $99,055. Working capital at
December 31, 1997 was ($23,999) as compared to $64,312 at December 31, 1996. As
of December 31, 1997 the Company was in default of its loan agreement (see Note
7).
Management's financial plans for fiscal 1998 call for raising additional
debt and equity capital, the sale of certain assets to generate cash and the
renegotiation of its bank agreement. While management believes it can achieve
these plans, there can be no assurances that management's financial plans will
be fully executed. If management is unable to execute its' plans, the Company
may not be able to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 -- AKASHIC ACQUISITION
On December 31, 1997, the Company acquired all of the outstanding stock of
Akashic Memories Corporation ("Akashic"), an indirect subsidiary of Kubota
Corporation (the "Merger") for $10 million and 2 million shares of StorMedia
Class A Common Stock valued at approximately $4,375 according to the terms of
the purchase agreement. The acquisition was accounted for as a purchase. The
purchase price of $14,375 was allocated as follows:
<TABLE>
<S> <C>
Cash........................................................ $10,069
Accounts receivable......................................... 13,539
Assets held for sale........................................ 16,914
Inventories................................................. 20,018
Other current assets........................................ 3,488
-------
64,028
Trade accounts payable...................................... 12,456
Short-term debt............................................. 4,960
Accrued liabilities......................................... 19,538
Excess of fair value of assets acquired over purchase
price..................................................... 12,699
-------
49,653
Net assets acquired......................................... $14,375
=======
</TABLE>
The excess of fair value of assets acquired over the purchase price is
being amortized on a straight line basis over 5 years.
The effects of the Akashic acquisition are reflected in the accompanying
balance sheet of StorMedia at December 31, 1997. Assets held for sale
principally include manufacturing equipment for rigid disks and are based on a
preliminary valuation by an independent appraiser, subject to final adjustment.
Changes in valuation of such assets may result in a material change in the
excess of fair value of assets acquired over purchase price. Management expects
the disposal of such equipment to be completed during fiscal 1998.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Akashic as if the merger had occurred at the
beginning of the years presented, after giving effect to certain adjustments.
The pro forma results have been prepared for comparative purposes only and do
31
<PAGE> 32
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
not purport to indicate the results of operations which would actually have
occurred had the combination been in effect on the dates indicated, or which may
occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Net sales............................................. $ 323,568 $434,239
Net earnings (loss)................................... $(125,569) $ 39,555
Basic earnings (loss) per share....................... $ (6.27) $ 2.05
Diluted earnings (loss) per share..................... $ (6.27) $ 1.96
</TABLE>
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with maturities of less than three months at date of purchase to be
cash equivalents. Cash equivalents are stated at cost which approximates market.
Short-term investments: As of December 31, 1996 all short-term investments
were designated as available for sale and they are recorded at market which
approximates cost. Interest on the investments are included in interest income.
The maturities of these investments is between three and twelve months.
Concentration of credit risk: A majority of the Company's trade
receivables are derived principally from export sales to the Far East operations
of a few large U.S. 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. (See Note 13.)
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method. Provisions to reduce the
carrying value of obsolete, slow moving and non-usable inventory to net
realizable value are charged to operations.
Prepaid expenses: The Company includes in prepaid expenses the cost of
consumable spare parts and the recoverable amount of sputtering materials which
are used in production. Spare parts and sputtering materials are charged to
manufacturing costs when used over the Company's normal operating cycle, which
is less than twelve months.
Plant and equipment: Plant and equipment is carried at cost of acquisition
which includes capitalized interest on construction in progress. Depreciation is
computed on a straight-line basis generally over five years, representing the
shorter of the estimated useful lives of the equipment or the lease term in the
case of assets under capital leases. Leasehold improvements are depreciated over
the shorter of the estimated useful lives of the assets, or the term of the
leased property, computed on a straight-line basis.
Excess of fair value of assets acquired over purchase price: The excess of
fair market value of assets acquired over the cost of the acquisition of Akashic
Memories Corporation is being amortized on a straight-line basis over five
years. (See Note 2.)
Revenue recognition: The Company records sales when shipped and provides
an allowance for estimated costs associated with returns of nonconforming
product.
32
<PAGE> 33
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Foreign currency accounting: The functional currency of its Singapore and
Malaysia subsidiaries is the U.S. dollar. Gains and losses which result from the
remeasurement of foreign currency financial statements into U.S. dollars are
included in results of operations.
Comprehensive Income: In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. It does not, however, require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Foreign exchange gains and losses: The Company enters into foreign forward
exchange contracts for firm commitments on equipment and
construction-in-progress to hedge foreign exchange risk. Any gains or losses on
these instruments are recognized in accordance with SFAS No. 52, "Foreign
Currency Translations" and SFAS No. 80, "Accounting for Futures Contracts." The
Company does not enter into derivative financial instruments for trading
purposes. As of December 31, 1997, there were no foreign forward exchange
contracts outstanding.
Business segments: In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. The Company is in the process of evaluating its disclosure
requirements under this standard. SFAS No. 131 is effective for annual financial
statements for periods beginning after December 15, 1997 and for interim periods
after the first year of adoption.
Income taxes: Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax basis and the
financial reporting basis of assets and liabilities. The measurement of deferred
tax assets is reduced if necessary by a valuation allowance.
Impairment of Long-Lived Assets: 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 the asset exceeds its fair value.
(See Note 6)
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Boards released Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which became
effective for the Company's fiscal 1996 year. The new standard allows companies
to continue to follow APB Opinion 25 "Accounting for Stock Issued to Employees"
(APBO 25), but requires additional disclosures. The Company accounts for its
stock option plans using the intrinsic value method in accordance with APBO 25
while providing additional disclosures required by SFAS 123. (See Note 10)
Earnings (loss) per share: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
earnings per share is computed using weighted average number of shares
outstanding, and diluted earnings per share is computed using weighted average
shares outstanding after giving effect to potential dilutive securities such as
convertible debt, options, and warrants. In February 1998, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 98
which changes the calculation of earnings per share in periods prior to initial
public offerings as previously applied
33
<PAGE> 34
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
under SAB No. 83. When a registrant issued common stock, warrants, options, or
other potentially dilutive instruments for consideration or with exercise prices
below the initial public offering price within a one year period prior to the
initial filing of a registration statement relating to an initial public
offering, SAB No. 83 required such equity instruments to be treated as
outstanding for all periods presented in the filing using the anticipated
initial public offering price and the treasury stock method. Under SAB No. 98,
when common stock option, warrants, or other potentially dilutive instruments
have been issued for nominal consideration during the periods covered by income
statements in the filing, those nominal issuances are to be reflected in
earnings per share calculations for all periods presented. The Company believes
that during all periods prior to the Company's initial public offering, no
equity instruments were issued for nominal consideration. Per share results for
periods prior to or including the Company's initial public offering have been
restated in accordance with SFAS 128 SAB No. 98.
Use of estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
NOTE 4 -- BALANCE SHEET COMPONENTS
Cash, Cash Equivalents and Short-Term Investments:
As of December 31, 1997 and 1996 fair value estimated gross amortized cost.
The fair value of securities available for sale classified as cash and cash
equivalents as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
FAIR VALUE
----------
<S> <C>
Money market instruments.................................... 737
====
</TABLE>
The fair value of securities available-for-sale as of December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
FAIR VALUE
----------
<S> <C>
Corporate bonds............................................. $15,025
U.S. government obligations................................. 10,801
Commercial paper............................................ 3,212
Certificates of deposits.................................... 1,677
Money market instruments.................................... 8,924
Municipal bonds............................................. 4,517
-------
Total............................................. $44,156
=======
Included in cash and cash equivalents....................... $20,233
Included in short-term investments.......................... 23,923
-------
Total............................................. $44,156
=======
</TABLE>
34
<PAGE> 35
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Inventories:
Raw materials............................................ $ 9,226 $ 6,586
Work-in process.......................................... 15,480 5,638
Finished goods........................................... 13,069 2,624
-------- --------
Total inventories................................ $ 37,775 $ 14,848
======== ========
Prepaid expenses:
Spare parts (see Note 3)................................. $ 4,752 $ 3,775
Other prepaids........................................... 3,771 3,019
-------- --------
$ 8,523 $ 6,794
======== ========
Plant and equipment:
Land..................................................... $ 220 $ 220
Building and leasehold improvements...................... 31,582 32,009
Machinery and equipment.................................. 82,366 95,982
Construction-in-progress................................. 20,413 32,161
-------- --------
$134,581 $160,372
Less allowance for depreciation and amortization......... (33,887) (23,210)
-------- --------
Plant and equipment, net......................... $100,694 $137,162
======== ========
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
The Company purchased equipment from a company controlled by the
brother-in-law of the former President and Chief Operating Officer. Such
purchases amounted to approximately $1.1 million and $5.2 million during 1997
and 1996 respectively. All transactions were conducted on an arms-length basis.
NOTE 6 -- NONRECURRING CHARGES
During 1997, the Company experienced difficult conditions in the thin film
media industry resulting in a reduction of orders with certain customers. As a
result, the Company's fixed assets were determined to be impaired and the
Company took a noncash pretax charge of $20.0 million to reflect this
impairment.
In November 1997, Singapore Technologies advised the Company that it was
liquidating its wholly-owned subsidiary, Micropolis (S) Pte Ltd. As a result,
the Company took a noncash pretax charge of $9.0 million to reflect the
write-off of the equipment at the Micropolis Facility.
NOTE 7 -- SHORT-TERM BORROWINGS AND DEBT
In August 1996, the Company entered into a credit agreement (the "CIBC
Agreement") with a bank group led by CIBC Wood Gundy, an affiliate of Canadian
Imperial Bank of Commerce, and Banque Nationale de Paris (the "Banks") which
include a $25.0 million revolving credit facility ("Revolving Credit Facility").
Borrowings under the Revolving Credit Facility carry interest at LIBOR plus
3.00%. In July 1997, the Company terminated its Revolving Credit Facility with
the Banks.
The Revolving Credit Facility replaces the revolving credit facility
agreement or, as amended, (the "BOA Agreement") with Bank of America National
Trust and Savings Association. Under the BOA Agreement, the Company was
permitted to borrow up to $10,000 (the "BOA Credit Facility") on a revolving
basis through August 30, 1996. The Company fully repaid the BOA Credit Facility
plus accrued interest upon funding by
35
<PAGE> 36
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the Banks. The weighted average interest rate for the year ended December 31,
1996 for the BOA Credit Facility was 8.25%.
Long-term debt at December 31, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CIBC term loan.............................................. $48,333 $50,000
Note payable to customer.................................... 4,960 --
Other....................................................... 109 38
------- -------
Total long-term borrowings................................ 53,402 50,038
Less current portion...................................... 53,324 5,014
------- -------
Total long-term portion................................ $ 78 $45,024
======= =======
</TABLE>
Under the CIBC Agreement, the Banks provided the Company a $50,000 term
loan (the "CIBC Term Loan Facility") in August 1996. The CIBC Term Loan Facility
has a three-year term with 7 quarterly principal payments of $5,000 plus accrued
interest beginning in the fourth quarter of 1997, with a $15,000 balloon payment
due in August 1999. During 1997, the Company repaid $1,666 of the required
$5,000 of outstanding principal due and has not repaid the required $5,000 of
outstanding principal for the first quarter of 1998 but remains current on its
interest payments. The CIBC Term Loan Facility accrued interest upon funding at
LIBOR plus 3.00% per annum, payable quarterly. The weighted average interest
rate for the year ended December 31, 1997 was 8.05%. The CIBC Term Loan Facility
requires the continued compliance of various financial covenants. At December
31, 1997, the Company was in default of its CIBC Term Facility. Because the
default has not been waived or remedied, the associated debt has been classified
as current in the accompanying consolidated balance sheet.
The Company is currently in active discussions with the Banks to amend the
terms of the CIBC Term Loan Facility. The amendment contemplates among other
things, a change to the amortization schedule of principal, extension of the
maturity date, repayment of a portion of principal outstanding from various
sources of funds upon the successful completion of new debt and equity
financings and the sale of certain assets. The amendment will also require
compliance with various financial covenants.
Note payable to customer is a loan from a customer of Akashic that was
assumed in the Merger. The loan calls for maximum borrowings of $7,500, which
must be drawn in $500 increments, based on certain milestone achievements. The
line bears interest of 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. Beginning April 30, 1997, Akashic
was required to make quarterly payments of $528, less the amount of any Product
Credit for the prior quarter. The customer has certain rights of offset against
outstanding accounts receivables. All unpaid interest and principal balance is
due in full on March 30, 2000. At December 31, 1997, the Company was in default
of this agreement and no further borrowings were available. Because the default
has not been waived or remedied, the associated debt has been classified as
current in the accompanying consolidated balance sheet.
36
<PAGE> 37
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
NOTE 8 -- OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Interest expense................................ $(4,498) $(1,598) $(880)
Interest income and other, net.................. 7 2,170 1,103
Remeasurement gain (loss)....................... 1,104 (143) (147)
------- ------- -----
$(3,387) $ 429 $ 76
======= ======= =====
</TABLE>
NOTE 9 -- COMMITMENTS
Operating Leases
The Company leases all its facilities under noncancelable operating leases
which expire at various dates during the next three years. Rent expense for the
year ended December 31, 1997, 1996 and 1995 were $2,665, $2,030, and $1,286,
respectively. Future minimum payments under noncancelable operating leases as of
December 31, 1997 are:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
1998.................................................... $5,220
1999.................................................... 3,852
2000.................................................... 1,501
2001.................................................... 641
2002.................................................... 107
</TABLE>
Capital Expenditures
At December 31, 1997, the Company had noncancelable purchase commitments
totaling $51.1 million.
401(k) Plan
During 1994, the Company established a 401(k) employee salary deferral plan
(the "Plan") that allows voluntary contributions by all full-time U.S. employees
upon employment. Under the Plan, eligible employees may contribute from 1% to
15% of their pretax earnings, up to the Internal Revenue Service's annual
contribution limit. The Company matches employee contributions at 50% of the
first 6% contributed with an annual maximum employer match of twenty five
hundred dollars. The Company's contributions to the Plan for the year ended
December 31, 1997 and 1996 were $494 and $549, respectively and are paid
semi-annually.
NOTE 10 -- EQUITY
Common Stock
The Class B Common Stock is convertible into shares of Class A Common Stock
on a one for one basis at the discretion of the holder based upon the occurrence
of certain conversion events.
Rights Plan
In August 1996, the Board of Directors declared a dividend distribution of
one Preferred Share Purchase Right (the "Right") on each outstanding share of
the Company's Common Stock. Each right will entitle
37
<PAGE> 38
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
stockholders to buy 1/1000th of a share of the Company's Series A Participating
Preferred Stock at an exercise price of $75.00. The Rights will become
exercisable following the tenth day after a person or group announces
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of the
Company's Common Stock. The dividend distribution was made on August 16, 1996,
payable to stockholders of record on August 16, 1996. The Rights will expire on
August 15, 2006.
Put Options
In October 1995, the Company's Board of Directors authorized a share
repurchase program. Pursuant to this program, the Company sold put options for
$1,918 in private placements during October 1995. The put options granted the
holder the right to require the Company to repurchase up to 750 shares of its
Class A Common Stock at an aggregate price of $20,605, of which the Company
repurchased 263 shares at an aggregate cost of $7,216. The Company closed the
remaining 487 put options by cash settlement at an aggregate cost of $1,994 in
January and April 1996.
Stock-based Compensation
At December 31, 1997, the Company has two stock option plans for its
employees: the 1994 Incentive Stock Option Plan ("ISO Plan") and the 1994
Non-Qualified Stock Option Plan ("NSO Plan") and one stock option plan for
non-employee directors, the 1995 Director Option Plan (the "Director Plan").
Each plan is described below. The Company applies the intrinsic value method in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option purchase plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income and earnings per share would have been reduced to pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- ------ -------
<S> <C> <C> <C>
Net income:
As reported.............................. $ (99,055) $8,458 $21,158
========= ====== =======
Pro forma................................ $(103,530) $6,359 $20,562
========= ====== =======
Basic earnings per share:
As reported.............................. $ (5.49) $ 0.49 $ 1.89
========= ====== =======
Pro forma................................ $ (5.74) $ 0.37 $ 1.83
========= ====== =======
Diluted earnings per share:
As reported.............................. $ (5.49) $ 0.46 $ 1.39
========= ====== =======
Pro forma................................ $ (5.74) $ 0.35 $ 1.36
========= ====== =======
</TABLE>
Compensation cost is recognized for the value of employees under the
Purchase Plan, 1994 Stock Option Plans, and the 1995 Director Option Plan on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995: no dividend
yield for all years; expected volatility of 90 percent for 1997 and 50 percent
for 1996 and 1995; risk-free interest rate of 6.0 percent for 1997 and 6.2
percent for 1996 and 1995; and expected lives of 4.1 years for all years.
1994 Stock Option Plans
The Company has adopted two stock option plans: the 1994 Incentive Stock
Option Plan ("ISO Plan") and the 1994 Non-Qualified Stock Option Plan ("NSO
Plan"). At December 31, 1997, the Company had reserved 4,650 shares of Class A
Common Stock for issuance under the employee plans and 545 shares
38
<PAGE> 39
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
remained available for future option grants. Eligible individuals under the
Plans may be granted options to purchase the Company's Class A Common Stock at
an exercise price per share of at least 100% of fair market value at date of
grant for an incentive stock option and at least 85% of fair market value for a
non-qualified stock option. Options under the ISO Plan may be granted to
employees and consultants of the Company and generally vest monthly over a four
year period from the date of grant. Options under the NSO Plan may be granted to
employees, directors, contractors or other individuals affiliated with the
Company and generally vest seven years from the date of grant with vesting
accelerated upon the achievement of certain financial objectives. Options under
both plans have a maximum term of ten years.
1995 Director Option Plan
At December 31, 1997, the Company had reserved 75 shares of Class A Common
Stock for issuance under the Director plan and 57 shares remained available for
future option grants. Under the Director Plan each Outside Director is
automatically granted a non-qualified option to purchase 12 shares of Class A
Common Stock on the last to occur of the date of adoption of the plan or the
date upon which such person first becomes a director ("Initial Option") with an
exercise price equal to the fair market value of the Company's Class A Common
Stock as of the date of grant. Thereafter, each Outside Director is
automatically granted an option to purchase 3 shares of Class A Common Stock on
April 1 of each year, except in the year the Director Plan was adopted
("Subsequent Option"), provided he or she has served as a director for at least
six months as of such date.
Options granted under the Director Plan generally have a term of ten years
and are evidenced by an option agreement between the Company and the director to
whom the option is granted. The exercise price of each option granted under the
Director Plan is equal to the fair market value of the Class A Common Stock on
the date of grant. Initial Options granted under the Director Plan generally
vest cumulatively as to 12/48ths of the shares on the first anniversary date of
the date of grant and as to 1/48th of the shares subject to the option each
month thereafter. Subsequent Options generally vest entirely on the fourth
anniversary of the date of grant. In the event of a merger of the Company with
or into another corporation or an acquisition of assets involving the Company,
or a change of control, each option shall become fully vested and exercisable,
including shares which would not otherwise be exercisable, immediately prior to
the closing. Unless terminated sooner, the Director Plan will terminate in 2005.
The Board has certain authority to amend or terminate the Director Plan.
The following summarizes the transactions under the various plans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year...... 2,273 $6.01 2,167 $ 5.06 1,965 $0.19
Options granted................... 2,066 7.23 1,553 14.02 1,169 9.49
Options terminated................ (1,300) 9.76 (1,025) 17.91 (59) 3.26
Options exercised................. (566) 1.96 (422) 1.75 (908) 0.32
------ ------ ------
Options at end of year............ 2,473 5.44 2,273 6.01 2,167 5.06
====== ====== ======
Options exercisable at end of
year............................ 943 807 658
====== ====== ======
Weighted-average fair value of
options granted during the
year............................ $3.12 $ 5.54 $4.62
===== ====== =====
</TABLE>
In June 1997, the Board of Directors adopted a resolution allowing
employees, excluding executive officers, to exchange all (but not less than all)
of their existing options (vested and unvested) to purchase
39
<PAGE> 40
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
StorMedia common stock having an exercise price of $6.88, with retained vesting,
and a 6-month lock-up. Approximately 991 options were repriced under this
program.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------- ------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING AS REMAINING AVERAGE EXERCISABLE AS OF AVERAGE EXERCISE
PRICES OF 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 PRICE
- ----------------- -------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.19 468 6.45 $ 0.19 406 $ 0.19
$0.89 - $2.19 414 8.56 1.98 88 1.78
$2.67 - $5.50 210 8.12 3.33 67 2.82
$6.88 1,039 8.90 6.88 286 6.88
$10.69 - $10.88 110 8.56 10.75 39 10.72
$11.50 3 9.25 11.50 -- --
$11.75 1 8.27 11.75 -- 11.75
$12.75 25 8.91 12.75 7 12.75
$15.50 200 8.99 15.50 50 15.50
$16.17 3 8.25 16.17 -- --
----- ---
$0.19 - $16.17 2,473 8.30 $ 5.44 943 $ 3.89
===== ===
</TABLE>
1995 Employee Stock Purchase Plan
In April 1995, the Board of Directors and the stockholders of the Company
approved the 1995 Employee Stock purchase Plan (the "Purchase Plan") which
became effective on May 4, 1995. The purpose of the Purchase Plan is to provide
employees who are employed by the Company on the first day of a given offering
period an opportunity to purchase Class A Common Stock of the Company through
accumulated payroll deductions. The Purchase Plan was amended in March 1996 and
the amendment was subsequently approved by the stockholders at the 1996 annual
meeting. A total of 413 shares of Class A Common Stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, was initially
implemented with an offering period which commenced simultaneously with the
initial public offering and ended approximately 12 months later on May 10, 1996.
As amended, the Purchase Plan provides for overlapping 24-month offering periods
which commence on the first trading day on or after May 15, and November 15 of
each year. Each offering period consists of four purchase periods of
approximately six months in length and four exercise dates which occur on the
last day of each purchase period. The first purchase period commences on the
enrollment date and ends approximately 6 months later. The purchase price for
the shares is an amount equal to 85% of the fair market value of a share of
Class A Common Stock (as defined in the Purchase Plan) on either the enrollment
date or the exercise date, whichever is lower. The valuation of those rights
granted in 1997, 1996 and 1995 were $2.86, $3.81 and $3.88, respectively.
As of December 31, 1997, 335 shares had been purchased under the Purchase
Plan and 78 shares remained available for future purchases. In November 1997,
the Company suspended the Purchase Plan indefinitely as the fixed amount of
shares reserved for the Purchase Plan was depleted to an insufficient level to
continue for another purchase period.
40
<PAGE> 41
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 1997 includes
the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Federal........................................ $(4,131) $2,248 $(1,883)
State.......................................... (107) 343 236
Foreign........................................ -- -- --
------- ------ -------
Total................................ $(4,238) $2,591 $(1,647)
======= ====== =======
</TABLE>
Income tax expense (benefit) for the year ended December 31, 1996 includes
the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal.......................................... $ (154) $ -- $ (154)
State............................................ (394) -- (394)
Foreign.......................................... 27 -- 27
Charge in lieu of taxes for early dispositions of
stock issued upon exercise of stock options.... 2,708 -- 2,708
------ ------ ------
Total.................................. $2,187 $ -- $2,187
====== ====== ======
</TABLE>
Income tax expense (benefit) for the year ended December 31, 1995 includes
the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal.......................................... $3,077 $ (475) $2,602
State............................................ 1,773 (137) 1,636
Foreign.......................................... 236 -- 236
Charge in lieu of taxes for early dispositions of
stock issued upon exercise of stock options.... 3,368 -- 3,368
------ ------ ------
Total.................................. $8,454 $ (612) $7,842
====== ====== ======
</TABLE>
Income taxes reconcile to the amount computed by applying the federal
statutory rate to income before income taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax computed at federal statutory rate.................... 35% 35% 35%
State income taxes (net of federal benefit)............... -- 1 4
Foreign earnings taxed at rates less than U.S. rate....... -- (15) (10)
Net operating loss for which no benefit realized.......... (32) -- --
Other, net................................................ (1) -- (2)
--- --- ---
Total provision........................................... 2% 21% 27%
=== === ===
</TABLE>
41
<PAGE> 42
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Significant components of deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax asset:
Property and equipment........................... $ 46,812 $ --
Accrual and reserve accounts..................... 14,114 2,819
State taxes...................................... 7 --
Net operating loss carryforward.................. 12,656 17
-------- ------
Total gross deferred tax assets.................... 73,589 2,836
Valuation allowance................................ (73,145) --
-------- ------
Net deferred tax asset............................. 444 2,836
-------- ------
Deferred tax liabilities:
Property and equipment........................... -- (245)
Other............................................ (444) --
-------- ------
Total gross deferred tax liabilities............... (444) (245)
-------- ------
Net deferred tax assets............................ $ -- $2,591
======== ======
</TABLE>
The Company's accounting for deferred taxes under Statement No. 109
involves the evaluation of a number of factors concerning the realizability of
the Company's deferred tax assets. To support the Company's conclusion that a
100% valuation allowance was required, management primarily considered such
factors as the Company's history of operating losses, the nature of the
Company's deferred tax assets, the lack of significant firm sales backlog, no
significant excess of appreciated asset value over the tax basis of the
Company's net assets and the absence of taxable income in prior carryback years.
NOTE 12 -- LITIGATION
On July 23, 1996, the Company was informed by Maxtor Corporation that it
intended to terminate a November 17, 1995 Volume Purchase Agreement between
Maxtor and Hyundai Electronics Industries Co. Ltd., on the one hand, and the
Company. Prior to such notification, Maxtor had failed to purchase in the
Company's second quarter the disks required to be purchased by it under the
Volume Purchase Agreement. As a consequence of Maxtor and Hyundai's breach of
the Volume Purchase Agreement, the Company on September 25, 1996 filed suit in
the United States District Court for the Northern District of California against
Hyundai, C.S. Park, K.S. Yoo and Mong Hun Chung alleging breach of the Volume
Purchase Agreement and fraud. The Complaint seeks damages in excess of $206
million. In response to a motion to dismiss brought by Hyundai the Court
dismissed the Complaint because it found that Maxtor was an indispensable party
to the litigation. The Court, however, conditioned its dismissal on defendants
agreements to certain terms and conditions designed to preserve the progress
made in the federal action. In response, StorMedia has filed a substantially
similar complaint against Maxtor, Hyundai Electronics Industries and certain
individuals in California state court.
MAXTOR CORPORATION V. STORMEDIA, INC., ET AL.
On December 19, 1996, Maxtor Corporation filed an action in Colorado state
court for the County of Boulder against the Company, its subsidiary, StorMedia
International Limited, and William J. Almon alleging breach of contract, breach
of warranty, fraud and negligent misrepresentation. The action alleges that the
Company's products failed to meet certain of Maxtor's requirements under the
November 17, 1995 Volume Purchase Agreement. The action seeks compensatory
damages of $100 million. The Colorado state court
42
<PAGE> 43
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
stayed all proceedings in that action in favor of the above-described federal
action against Hyundai. In response to the federal court's order dismissing
StorMedia's complaint against Hyundai, described above, Maxtor moved to lift the
stay of its Colorado State court proceeding. That motion is currently pending.
On September 18, 1996, a purported securities class action complaint,
Werczberger, et al. v. StorMedia, Inc., et al., No. CV760825, was filed in the
Superior Court of the State of California in the County of Santa Clara. The
Complaint alleges that StorMedia and certain of its officers and directors
violated California state securities laws by making false and misleading
statements of material fact about StorMedia's prospects between November 27,
1995 and August 9, 1996. Plaintiff purports to represent a class of persons who
purchased StorMedia stock during this period. In particular, the complaint
alleges that the StorMedia defendants made allegedly false statements regarding
volumes of disks to be purchased by Maxtor and Hyundai pursuant to the contract
that is the subject of the two above-described actions. On August 19, 1997, the
California Supreme Court granted review of the Superior Court's order overruling
the defendants' demurrer. In addition, on June 18, 1997, a federal securities
action, Werczberger v. StorMedia, et al., C-97 20538, was filed against the same
defendants in the United States District Court for the Northern District of
California, San Jose Division. The federal complaint alleges violations of
federal securities laws and contains virtually identical allegations to those in
the state court complaint. Defendants intend to continue to defend these cases
vigorously.
The preceding two actions are in a preliminary stage, and it is not
possible for the Company to determine the ultimate outcome of these matters.
The Company is also involved in other legal actions arising in the ordinary
course of business. While the outcome of such matters are currently not
determinable, it is management's opinion that these matters will not have a
material adverse effect on the Company's consolidated financial condition or
results of its operations.
NOTE 13 -- SIGNIFICANT CUSTOMERS AND SEGMENT INFORMATION
The Company operates in one industry segment and is engaged in the
development, manufacture and sale of thin film disks to the disk drive industry.
The Company began manufacturing and selling product from its initial
manufacturing site in Singapore in the fourth quarter of 1994. The following
table summarizes geographic information on the Company's operations:
<TABLE>
<CAPTION>
CAYMAN
YEAR ENDED DECEMBER 31, 1997 U.S. SINGAPORE MALAYSIA ISLANDS ELIMINATIONS CONSOLIDATED
- ---------------------------- -------- --------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total net sales............ $ 37,072 $ 82,699 $ -- $ -- $(10,084) $109,687
======== ======== ====== ======= ======== ========
Operating loss............. $(41,100) $(56,215) $ -- $ -- $ -- $(97,315)
======== ======== ====== ======= ======== ========
Identifiable assets........ $108,883 $ 79,281 $4,804 $ 1,058 $ -- $194,026
======== ======== ====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
CAYMAN
YEAR ENDED DECEMBER 31, 1996 U.S. SINGAPORE MALAYSIA ISLANDS ELIMINATIONS CONSOLIDATED
- ---------------------------- -------- --------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total net sales............ $123,811 $140,175 $ -- $ -- $(52,990) $210,996
======== ======== ====== ======= ======== ========
Operating profit (loss).... $ (8,790) $ 19,006 $ -- $ -- $ -- 10,216
======== ======== ====== ======= ======== ========
Identifiable assets........ $ 94,286 $127,004 $ -- $20,446 $ -- $241,736
======== ======== ====== ======= ======== ========
</TABLE>
43
<PAGE> 44
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAYMAN
YEAR ENDED DECEMBER 31, 1995 U.S. SINGAPORE MALAYSIA ISLANDS ELIMINATIONS CONSOLIDATED
- ---------------------------- -------- --------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total net sales............ $121,384 $ 76,024 $ -- $ -- $(35,953) $161,455
======== ======== ====== ======= ======== ========
Operating profit........... $ 7,048 $ 21,876 $ -- $ -- $ -- 28,924
======== ======== ====== ======= ======== ========
Identifiable assets........ $115,180 $ 66,417 $ -- $ -- $ -- $181,597
======== ======== ====== ======= ======== ========
</TABLE>
Sales from domestic operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Far East.................................. $20,477 $52,070 $82,879
United States............................. 6,552 4,807 5,122
Europe.................................... -- 15,129 --
------- ------- -------
Total................................ $27,029 $72,006 $88,001
======= ======= =======
</TABLE>
Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES:
Customer A........................................... 62% 71% 54%
Customer B........................................... -- 25% 45%
Customer C........................................... 18% -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ACCOUNTS RECEIVABLES:
Customer A........................................... 13% 93% 45%
Customer B........................................... -- -- 50%
</TABLE>
44
<PAGE> 45
STORMEDIA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- NUMBER OF SHARES USED IN PER SHARE COMPUTATION
The following table reconciles the number of shares used in basic net
income (loss) per share computation and the number of shares used in the diluted
net income (loss) per share computation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Basic:
Weighted average common shares used in
computing basic net income (loss) per
share....................................... 18,031 17,285 11,210
======== ======= =======
Diluted:
Weighted average common shares outstanding..... 18,031 17,285 11,210
Diluted options outstanding.................... -- 924 1,602
Weighted average of preferred stock outstanding
on an as if converted basis................. -- -- 2,363
-------- ------- -------
Shares used in computing diluted net income
(loss) per share............................ 18,031 18,209 15,175
======== ======= =======
</TABLE>
NOTE 15 -- QUARTERLY SUMMARIES (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
RESULTS
1997
Net sales.................................... $34,100 $ 32,553 $ 22,226 $ 20,808
Gross deficit................................ (4,904) (8,671) (5,885) (14,112)
Net loss..................................... (9,319) (20,903) (13,301) (55,532)
Basic loss per share......................... $ (0.52) $ (1.16) $ (0.74) $ (3.02)
Diluted loss per share....................... $ (0.52) $ (1.16) $ (0.74) $ (3.02)
1996
Net sales.................................... $61,156 $ 57,652 $ 41,575 $ 50,613
Gross profit (deficit)....................... 17,109 14,891 (2,555) 6,989
Net earnings (loss).......................... 9,469 7,795 (9,128) 322
Basic earnings (loss) per share.............. $ 0.56 $ 0.45 $ (0.52) $ 0.02
Diluted earnings (loss) per share............ $ 0.52 $ 0.42 $ (0.52) $ 0.02
</TABLE>
The 1997 fourth quarter results include $29 million of nonrecurring pre-tax
charges for the closure of certain manufacturing operations (See Note 6). In
addition the Company took a $1 million charge for severance to reduce its
workforce in response to the supply/demand imbalance within the industry; $4.4
million write-off of outstanding receivables and inventories related to the
liquidation of Micropolis (S) Pte Ltd by Singapore Technologies; and a $6
million charge primarily related to the writedown of certain inventories to net
realizable value.
45
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
StorMedia Incorporated:
We have audited the accompanying consolidated balance sheets of StorMedia
Incorporated (the Company) and its subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
Our audits included the related financial statement Schedule II as listed in the
index under Item 14(a). These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has incurred significant losses from operations in 1997 and has a
significant working capital deficiency, all of which raise substantial doubt
about its ability to continue as a going concern. The financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Mountain View, California
January 27, 1998
46
<PAGE> 47
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
The information required by this Part III is incorporated by reference to
the Company's proxy statement for its 1998 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission within 120 days of
December 31, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by reference
to "ELECTION OF DIRECTORS -- Nominees" in the Company's Proxy Statement for the
Company's 1998 Annual Meeting of Stockholders. The information concerning
current executive officers of the Registrant found under the caption "Executive
Officers of the Registrant" in Part I hereof is also incorporated by reference
into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed in Part II of this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
PAGE IN
FORM 10-K
REPORT
---------
<S> <C> <C>
1. FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company as of December
31, 1997 and 1996........................................... 27
Consolidated Statements of Operations of the Company for the
years ended December 31, 1997, 1996 and 1995................ 28
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997, 1996 and 1995.......... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................ 30
Notes to Consolidated Financial Statements.................. 31
2. FINANCIAL STATEMENT SCHEDULE
For the three years ended December 31, 1997, 1996 and 1995
II -- Valuation and Qualifying Accounts..................... 52
</TABLE>
Other schedules have been omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
47
<PAGE> 48
3. EXHIBITS
INDEX TO EXHIBITS
FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
2.1(4) Agreement and Plan of Reorganization dated as of December
15, 1997, among the Registrant, AII, Akashic, and StorMedia
Acquisition Corporation
2.2(4) Form of Agreement of Merger between Akashic and StorMedia
Acquisition Corporation
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant, as amended
3.3(1) Amended Bylaws of Registrant
3.4(5) Amendment to Bylaws of Registrant
3.5(5) Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock and
Series B Participating Preferred Stock
4.1(1) See Certificate of Incorporation (Exhibit 3.l) for
definition of the rights of the Class A and Class B Common
Stock
10.1(1) Subordinated Promissory Note issued by the Registrant to
Nashua on May 20, 1994
10.2(1) Subordinated Promissory Note dated May 20, 1994 issued by
StorMedia International to Nashua
10.3(1) Non-Competition Agreement dated May 20, 1994 between the
Registrant and Nashua
10.4(1) Procurement and Supply Agreement dated May 20, 1994 by and
between the Registrant and Nashua
10.5(1) License Agreement dated May 20, 1994 by and between the
Registrant and Nashua
10.6(1) Technology License Agreement dated May 20, 1994 by and
between the Registrant and Nashua
10.7(1) Subordinated Guaranty by the Registrant in favor of Nashua
dated May 20, 1994
10.8(1) Lease dated May 18, 1994 by and between Reed Street
Associates and the Registrant
10.9(1) Addendum to Lease Between Mancini-Mills, Inc. and Nashua
Computer Products Division of Nashua dated May 19, 1994
10.10(1) Ground Lease dated May 19, 1994 by and between Tom Rivera
and the Registrant
10.11(1) Lease dated May 19, 1994 between Advanced Printed Circuit
Technology and the Registrant
10.12(1) Assignment and Assumption of Lease dated May 19, 1994 by and
between Nashua and the Registrant
10.13(1) Securities Purchase Agreement dated May 20, 1994 by and
among the Registrant, Prudential Private Equity Investors
III, L.P. ("PPEI") and Almon Family Partners, L.P ("Almon")
10.14(1) Shareholders Agreement dated May 20, 1994 by and among the
Registrant, PPEI and Almon
10.15(1) Registration Rights Agreement dated as of May 20, 1994 by
and among the Registrant, PPEI and Almon
10.16(1) Amended and Restated Loan and Security Agreement dated June
15, 1994 between the Registrant and CoastFed Business Credit
Corporation ("CoastFed"), as amended on January 27, 1995
10.17(1) Letter Agreement dated May 20, 1994 between the Registrant
and CoastFed
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
10.18(1) Amended and Restated Accounts Collateral Security Agreement
dated June 15, 1994 between the Registrant and CoastFed
10.19(1) Subordination Agreement dated May 20, 1994 by and among the
Registrant, Nashua and CoastFed
10.20(1) Deed of Debenture dated November 4, 1994 between StorMedia
International Ltd. and Sembawang Leasing Pte Ltd.
("Sembawang")
10.21(1) Factoring Agreement dated November 4, 1994 between StorMedia
International Ltd. and Sembawang
10.22(1) Facility Agreement dated November 4, 1994 between StorMedia
International Ltd. and Sembawang
10.23(1) Master Lease Agreement dated November 4, 1994 between
Sembawang and StorMedia International Ltd.
10.24(1) Guaranty dated as of November 4, 1994 by Registrant in favor
of Sembawang
10.25(1) Guaranty dated as of November 4, 1994 by William J. Almon in
favor of Sembawang
10.26(1) 1994 Non-Qualified Stock Option Plan and form of option
agreement
10.27(3) 1994 Incentive Stock Option Plan and form of option
agreement, as amended
10.28(1) 1995 Director Option Plan and forms of option agreements
10.29(1) Form of Indemnification Agreement
10.30(1) Tenancy Agreement for an 'E8' type factory building relating
to private lot A14 765 at 9 Tuas Avenue 5, Jurong Industrial
Estate between Jurong Town Corporation and StorMedia
International Ltd.
10.32(2) Supply Agreement between the Registrant and Seagate
Technology, Inc.
10.35(3) 1995 Employee Stock Purchase Plan, as amended
10.36(3) Credit Agreement dated December 1, 1995 between Registrant
and Bank of America National Trust and Savings Association
10.37(3) Purchase Agreement dated November 17, 1995 between
Registrant, Maxtor Corporation and Hyundai Electronics
Industries Co., Ltd.
10.38(3) Letter Agreement dated October 3, 1995 between Registrant
and Morgan Stanley & Co. Incorporated
10.39(4) Facility Agreement dated as of February 21, 1996 between
StorMedia International Ltd and DBS Bank
10.40(4) Guaranty dated as of February 26, 1996 by Registrant in
favor of DBS Bank
10.41(5) Rights Agreement dated July 31, 1996 between Registrant and
Bank Boston
10.42(6) Addendum "A" to Lease dated September 1, 1996 for property
at 365 Reed Street, Santa Clara, California
10.43(6) Addendum "A" to Lease dated September 1, 1996 for property
at 340 Martin Avenue, Santa Clara, California
10.44(8) Credit Agreement dated as of January 24, 1997 by and among
the Registrant, Canadian Imperial Bank of Commerce, as
Agent, Banque National de Paris as Co-Agent Canadian
Imperial Bank of Commerce, Singapore Branch as Designated
Issuer and certain financial institutions
21.1(1) Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick, LLP
24.1 Power of Attorney (See page 51)
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
27.1 Financial Data Schedule
27.2 1996 Restated Financial Data Schedule
27.3 1995 Restated Financial Data Schedule
99.1(7) Press release dated January 5, 1998.
99.2(7) Patent Purchase Agreement dated as of December 15, 1997
between Kubota, Registrant and StorMedia International Ltd.
99.3(7) Kubota Guaranty and Indemnification dated as of December 15,
1997 between Kubota and Registrant.
99.4(7) Assignment from Registrant to FSC dated December 31, 1997.
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Incorporated by reference to the like-numbered exhibits filed with the
Registration Statement on Form S-1 (No. 33-90530) which was declared
effective on May 4, 1995.
(2) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended September 30, 1995.
(3) Incorporated by reference to the exhibits in Registrant's Report on Form
10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended June 20, 1996.
(6) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended September 30, 1996.
(7) Incorporated by reference to the exhibits in Registrant's current Report on
Form 8-K filed January 13, 1998.
(8) Incorporated by reference to the exhibits in Registrant's Report on Form
10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
On December 2, 1997, the Company filed a current Report on Form 8-K
reporting its press release dated November 28, 1997.
On January 13, 1998, the Company filed a current Report on Form 8-K
reporting the acquisition of all of the outstanding shares of Akashic Memories
Corporation effective on December 31, 1997.
On March 13, 1998, the Company filed an Amendment to its current Report on
Form 8-K, filing the financial statements of Akashic Memories Corporation and
the pro forma financials.
On November 3, 1997, the Company filed a current Report on Form 8-K
reporting its press release dated November 12, 1997.
Trademark Acknowledgments
The StorMedia logo is a registered trademark of the Company. All other
trademarks or trade names appearing in the Form 10-K are the property of their
respective owners.
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara, State
of California, on the Thirty First day of March, 1998.
STORMEDIA INCORPORATED
By: /s/ WILLIAM J. ALMON
------------------------------------
William J. Almon,
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William J. Almon and Stephen M. Abely,
jointly and severally, their attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratifying and confirming all that each of said attorneys-in-fact, of his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<C> <S> <C>
/s/ WILLIAM J. ALMON Chairman of the Board and March 31, 1998
- ----------------------------------------------------- Chief Executive Officer
(William J. Almon) (Principal Executive
Officer)
/s/ STEPHEN M. ABELY Chief Financial Officer, March 31, 1998
- ----------------------------------------------------- Vice President, Finance
(Stephen M. Abely) and Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ JOHN A. DOWNER Director March 31, 1998
- -----------------------------------------------------
(John A. Downer)
/s/ FRANCIS J. LUNGER Director March 31, 1998
- -----------------------------------------------------
(Francis J. Lunger)
/s/ MARK S. ROSSI Director March 31, 1998
- -----------------------------------------------------
(Mark S. Rossi)
/s/ GREGORIO REYES Director March 31, 1998
- -----------------------------------------------------
(Gregorio Reyes)
</TABLE>
51
<PAGE> 52
SCHEDULE II
STORMEDIA INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
CHARGED TO
BALANCE CHARGED TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) OF PERIOD
----------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for sales returns and
doubtful accounts.............. $1,177 $15,731 $-- $7,737 $9,171
====== ======= === ====== ======
Year ended December 31, 1996
Allowance for sales returns and
doubtful accounts.............. $1,555 $ 6,759 $-- $7,137 $1,177
====== ======= === ====== ======
Year ended December 31, 1995
Allowance for sales returns and
doubtful accounts.............. $ 253 $ 1,974 $-- $ 672 $1,555
====== ======= === ====== ======
</TABLE>
- ---------------
(1) Deductions represent sales returns and doubtful accounts charged against the
allowance.
52
<PAGE> 53
EXHIBITS TO INDEX
FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
2.1(4) Agreement and Plan of Reorganization dated as of December
15, 1997, among the Registrant, AII, Akashic, and StorMedia
Acquisition Corporation
2.2(4) Form of Agreement of Merger between Akashic and StorMedia
Acquisition Corporation
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant, as amended
3.3(1) Amended Bylaws of Registrant
3.4(5) Amendment to Bylaws of Registrant
3.5(5) Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock and
Series B Participating Preferred Stock
4.1(1) See Certificate of Incorporation (Exhibit 3.l) for
definition of the rights of the Class A and Class B Common
Stock
10.1(1) Subordinated Promissory Note issued by the Registrant to
Nashua on May 20, 1994
10.2(1) Subordinated Promissory Note dated May 20, 1994 issued by
StorMedia International to Nashua
10.3(1) Non-Competition Agreement dated May 20, 1994 between the
Registrant and Nashua
10.4(1) Procurement and Supply Agreement dated May 20, 1994 by and
between the Registrant and Nashua
10.5(1) License Agreement dated May 20, 1994 by and between the
Registrant and Nashua
10.6(1) Technology License Agreement dated May 20, 1994 by and
between the Registrant and Nashua
10.7(1) Subordinated Guaranty by the Registrant in favor of Nashua
dated May 20, 1994
10.8(1) Lease dated May 18, 1994 by and between Reed Street
Associates and the Registrant
10.9(1) Addendum to Lease Between Mancini-Mills, Inc. and Nashua
Computer Products Division of Nashua dated May 19, 1994
10.10(1) Ground Lease dated May 19, 1994 by and between Tom Rivera
and the Registrant
10.11(1) Lease dated May 19, 1994 between Advanced Printed Circuit
Technology and the Registrant
10.12(1) Assignment and Assumption of Lease dated May 19, 1994 by and
between Nashua and the Registrant
10.13(1) Securities Purchase Agreement dated May 20, 1994 by and
among the Registrant, Prudential Private Equity Investors
III, L.P. ("PPEI") and Almon Family Partners, L.P ("Almon")
10.14(1) Shareholders Agreement dated May 20, 1994 by and among the
Registrant, PPEI and Almon
10.15(1) Registration Rights Agreement dated as of May 20, 1994 by
and among the Registrant, PPEI and Almon
10.16(1) Amended and Restated Loan and Security Agreement dated June
15, 1994 between the Registrant and CoastFed Business Credit
Corporation ("CoastFed"), as amended on January 27, 1995
10.17(1) Letter Agreement dated May 20, 1994 between the Registrant
and CoastFed
10.18(1) Amended and Restated Accounts Collateral Security Agreement
dated June 15, 1994 between the Registrant and CoastFed
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
10.19(1) Subordination Agreement dated May 20, 1994 by and among the
Registrant, Nashua and CoastFed
10.20(1) Deed of Debenture dated November 4, 1994 between StorMedia
International Ltd. and Sembawang Leasing Pte Ltd.
("Sembawang")
10.21(1) Factoring Agreement dated November 4, 1994 between StorMedia
International Ltd. and Sembawang
10.22(1) Facility Agreement dated November 4, 1994 between StorMedia
International Ltd. and Sembawang
10.23(1) Master Lease Agreement dated November 4, 1994 between
Sembawang and StorMedia International Ltd.
10.24(1) Guaranty dated as of November 4, 1994 by Registrant in favor
of Sembawang
10.25(1) Guaranty dated as of November 4, 1994 by William J. Almon in
favor of Sembawang
10.26(1) 1994 Non-Qualified Stock Option Plan and form of option
agreement
10.27(3) 1994 Incentive Stock Option Plan and form of option
agreement, as amended
10.28(1) 1995 Director Option Plan and forms of option agreements
10.29(1) Form of Indemnification Agreement
10.30(1) Tenancy Agreement for an 'E8' type factory building relating
to private lot A14 765 at 9 Tuas Avenue 5, Jurong Industrial
Estate between Jurong Town Corporation and StorMedia
International Ltd.
10.32(2) Supply Agreement between the Registrant and Seagate
Technology, Inc.
10.35(3) 1995 Employee Stock Purchase Plan, as amended
10.36(3) Credit Agreement dated December 1, 1995 between Registrant
and Bank of America National Trust and Savings Association
10.37(3) Purchase Agreement dated November 17, 1995 between
Registrant, Maxtor Corporation and Hyundai Electronics
Industries Co., Ltd.
10.38(3) Letter Agreement dated October 3, 1995 between Registrant
and Morgan Stanley & Co. Incorporated
10.39(4) Facility Agreement dated as of February 21, 1996 between
StorMedia International Ltd and DBS Bank
10.40(4) Guaranty dated as of February 26, 1996 by Registrant in
favor of DBS Bank
10.41(5) Rights Agreement dated July 31, 1996 between Registrant and
Bank Boston
10.42(6) Addendum "A" to Lease dated September 1, 1996 for property
at 365 Reed Street, Santa Clara, California
10.43(6) Addendum "A" to Lease dated September 1, 1996 for property
at 340 Martin Avenue, Santa Clara, California
10.44(8) Credit Agreement dated as of January 24, 1997 by and among
the Registrant, Canadian Imperial Bank of Commerce, as
Agent, Banque National de Paris as Co-Agent Canadian
Imperial Bank of Commerce, Singapore Branch as Designated
Issuer and certain financial institutions
21.1(1) Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick, LLP
24.1 Power of Attorney (See page 51)
27.1 Financial Data Schedule
27.2 1996 Restated Financial Data Schedule
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------- -------------
<S> <C>
27.3 1995 Restated Financial Data Schedule
99.1(7) Press release dated January 5, 1998.
99.2(7) Patent Purchase Agreement dated as of December 15, 1997
between Kubota, Registrant and StorMedia International Ltd.
99.3(7) Kubota Guaranty and Indemnification dated as of December 15,
1997 between Kubota and Registrant.
99.4(7) Assignment from Registrant to FSC dated December 31, 1997.
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Incorporated by reference to the like-numbered exhibits filed with the
Registration Statement on Form S-1 (No. 33-90530) which was declared
effective on May 4, 1995.
(2) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended September 30, 1995.
(3) Incorporated by reference to the exhibits in Registrant's Report on Form
10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended June 20, 1996.
(6) Incorporated by reference to the exhibits in Registrant's Report on Form
10-Q for the quarter ended September 30, 1996.
(7) Incorporated by reference to the exhibits in Registrant's current Report on
Form 8-K filed January 13, 1998.
(8) Incorporated by reference to the exhibits in Registrant's Report on Form
10-K for the year ended December 31, 1997.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
StorMedia, Inc.
We consent to the incorporation by reference in the registration statement
(No. 33-04567 and 33-90530) on Form S-8 of StorMedia, Inc. of our report dated
January 27, 1998, with respect to the consolidated balance sheets of StorMedia,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statement of operations, and cash flows for each of the years in
the three year period ended December 31, 1997 and the related schedule which
report appears in the December 31, 1997 annual report on Form 10-K of StorMedia
Inc. Our report dated January 27, 1998 contains an explanatory paragraph that
states that the Company has suffered a substantial loss from operations and has
a net working capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. The consolidated financial statements
and financial statement schedule do not include any adjustment that might result
from the outcome of that uncertainty
KPMG PEAT MARWICK LLP
Mountain View, California
March 31, 1998
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,753
<SECURITIES> 0
<RECEIVABLES> 29,534
<ALLOWANCES> 9,171
<INVENTORY> 37,775
<CURRENT-ASSETS> 92,328
<PP&E> 134,581
<DEPRECIATION> 33,887
<TOTAL-ASSETS> 194,026
<CURRENT-LIABILITIES> 116,327
<BONDS> 53,402
0
0
<COMMON> 270
<OTHER-SE> 64,652
<TOTAL-LIABILITY-AND-EQUITY> 194,026
<SALES> 109,687
<TOTAL-REVENUES> 109,687
<CGS> 143,259
<TOTAL-COSTS> 143,259
<OTHER-EXPENSES> 63,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,387)
<INCOME-PRETAX> (100,702)
<INCOME-TAX> (1,647)
<INCOME-CONTINUING> (99,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,055)
<EPS-PRIMARY> (5.49)
<EPS-DILUTED> (5.49)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23,788
<SECURITIES> 23,923
<RECEIVABLES> 32,224
<ALLOWANCES> 1,177
<INVENTORY> 14,848
<CURRENT-ASSETS> 103,219
<PP&E> 160,372
<DEPRECIATION> 23,210
<TOTAL-ASSETS> 241,736
<CURRENT-LIABILITIES> 38,907
<BONDS> 50,038
0
0
<COMMON> 233
<OTHER-SE> 157,327
<TOTAL-LIABILITY-AND-EQUITY> 157,560
<SALES> 210,996
<TOTAL-REVENUES> 210,996
<CGS> 174,562
<TOTAL-COSTS> 174,562
<OTHER-EXPENSES> 26,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429
<INCOME-PRETAX> 10,645
<INCOME-TAX> 2,187
<INCOME-CONTINUING> 8,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,458
<EPS-PRIMARY> 0.49<F1>
<EPS-DILUTED> 0.46
<FN>
<F1>For Purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 37,407
<SECURITIES> 18,421
<RECEIVABLES> 31,669
<ALLOWANCES> 1,555
<INVENTORY> 9,811
<CURRENT-ASSETS> 102,319
<PP&E> 82,455
<DEPRECIATION> 4,599
<TOTAL-ASSETS> 181,597
<CURRENT-LIABILITIES> 28,267
<BONDS> 0
0
0
<COMMON> 230
<OTHER-SE> 132,384
<TOTAL-LIABILITY-AND-EQUITY> 181,597
<SALES> 161,455
<TOTAL-REVENUES> 161,455
<CGS> 117,827
<TOTAL-COSTS> 117,827
<OTHER-EXPENSES> 14,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 29,000
<INCOME-TAX> 7,842
<INCOME-CONTINUING> 21,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,158
<EPS-PRIMARY> 1.89<F1>
<EPS-DILUTED> 1.39
<FN>
<F1>For Purpose of this Exhibit, Primary means Basic.
</FN>
</TABLE>
