-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lx0UVg4A/Ani468ulhFm5sjKMxNJPLdIApnB+xDuRfPz+i5XIghWG7AqepslEYAt YxWj+EEDAknYrD8CPSzulA== 0000813347-98-000004.txt : 19980504 0000813347-98-000004.hdr.sgml : 19980504 ACCESSION NUMBER: 0000813347-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOMAG INC /DE/ CENTRAL INDEX KEY: 0000813347 STANDARD INDUSTRIAL CLASSIFICATION: MAGNETIC & OPTICAL RECORDING MEDIA [3695] IRS NUMBER: 942914864 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16852 FILM NUMBER: 98608544 BUSINESS ADDRESS: STREET 1: 1704 AUTOMATION PWY CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4089462300 MAIL ADDRESS: STREET 1: 275 S HILLVIEW DR CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 FORM 10-Q FOR PERIOD ENDED MARCH 29, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 29, 1998 Commission File Number 0-16852 KOMAG, INCORPORATED (Registrant) Incorporated in the State of Delaware I.R.S. Employer Identification Number 94-2914864 1704 Automation Parkway, San Jose, California 95131 Telephone: (408) 576-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On March 29, 1998, 52,894,878 shares of the Registrant's common stock, $0.01 par value, were issued and outstanding. Part 1. Financial Information Item 1. Financial Statements KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, except per share data) (Unaudited)
Three Months Ended ------------------- March 29, March 30, 1998 1997 --------- --------- Net sales $76,057 $167,242 Cost of sales 107,652 127,927 --------- --------- GROSS PROFIT (LOSS) (31,595) 39,315 Operating expenses: Research, development and engineering 14,944 12,013 Selling, general and administrative 4,611 10,145 --------- --------- 19,555 22,158 --------- --------- OPERATING INCOME (LOSS) (51,150) 17,157 Other income (expense): Interest income 2,552 1,185 Interest expense (4,554) (1,467) Other, net 4,323 687 --------- --------- 2,321 405 Income (loss) before income taxes, minority interest, and equity in joint venture income (loss) (48,829) 17,562 Provision for income taxes -- 2,986 --------- --------- Income (loss) before minority interest and equity in joint venture income (loss) (48,829) 14,576 Minority interest in net income (loss) of consolidated subsidiary (95) 182 joint venture (9,424) 3,405 --------- --------- NET INCOME (LOSS) ($58,158) $17,799 ========= ========= Basic income (loss) per share ($1.10) $0.34 ========= ========= Diluted income (loss) per share ($1.10) $0.33 ========= ========= Number of shares used in basic computation 52,875 51,811 ========= ========= Number of shares used in diluted computation 52,875 53,906 ========= ========= See notes to consolidated financial statements.
KOMAG, INCORPORATED CONSOLIDATED BALANCE SHEETS (In Thousands)
March 29, December 28, 1998 1997 ------------- ------------- (unaudited) (note) ASSETS Current Assets Cash and cash equivalents $96,951 $133,897 Short-term investments 76,700 32,300 Accounts receivable less allowances of $3,835 in 1998 and $4,424 in 1997 47,892 77,792 Accounts receivable from related parties 2,086 4,106 Inventories: Raw materials 32,043 33,730 Work-in-process 17,918 17,490 Finished goods 10,601 15,558 ------------- ------------- Total inventories 60,562 66,778 Prepaid expenses and deposits 3,790 3,697 Income taxes receivable 3,469 24,524 Deferred income taxes 28,595 28,595 ------------- ------------- Total current assets 320,045 371,689 Investment in Unconsolidated Joint Venture 18,775 30,126 Property, Plant and Equipment Land 7,785 9,526 Building 123,726 126,405 Equipment 831,151 793,561 Furniture 11,784 11,791 Leasehold improvements 138,977 141,111 ------------- ------------- 1,113,423 1,082,394 Less allowances for depreciation and amortization (430,286) (403,798) ------------- ------------- Net property, plant and equipment 683,137 678,596 Deposits and Other Assets 3,962 4,253 ------------- ------------- $1,025,919 $1,084,664 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $26,052 $40,043 Accounts payable to related parties 2,993 7,093 Accrued compensation and benefits 16,860 13,596 Other liabilities 5,046 3,605 Restructuring liability 10,128 11,253 ------------- ------------- Total current liabilities 61,079 75,590 Long-term Debt 260,000 245,000 Deferred Income Taxes 73,335 73,335 Other Long-term Liabilities 1,070 960 Minority Interest in Consolidated Subsidiary 3,500 3,595 Stockholders' Equity Preferred stock -- -- Common stock 529 528 Additional paid-in capital 402,704 401,869 Retained earnings 223,318 281,476 Accumulated foreign currency translation adjustments 384 2,311 ------------- ------------- Total stockholders' equity 626,935 686,184 ------------- ------------- $1,025,919 $1,084,664 ============= ============= Note: The balance sheet at December 28, 1997 has been derived from the audited financial statements at that date. See notes to consolidated financial statements.
KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Three Months Ended ------------------------ March 29, March 30, 1998 1997 ----------- ----------- OPERATING ACTIVITIES Net income (loss) ($58,158) $17,799 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 34,635 28,576 Provision for losses on accounts receivable (838) 1,034 Equity in net (income) loss of unconsolidated joint venture 9,424 (3,405) Gain on disposal of property, plant and equipment (2,728) (79) Deferred rent 110 123 Minority interest in net income (loss) of consolidated subsidiary (95) 182 Changes in operating assets and liabilities: Accounts receivable 30,738 (18,003) Accounts receivable from related parties 2,020 (5,164) Inventories 6,216 328 Prepaid expenses and deposits (93) (860) Trade accounts payable (13,991) (27,236) Accounts payable to related parties (4,100) 1,428 Accrued compensation and benefits 3,264 (1,966) Other liabilities 1,441 1,369 Income taxes receivable 21,055 12,194 Restructuring liability (1,125) -- ----------- ----------- Net cash provided by operating activities 27,775 6,320 INVESTING ACTIVITIES Acquisition of property, plant and equipment (41,378) (67,560) Purchases of short-term investments (196,800) (14,235) Proceeds from short-term investments at maturity 152,400 -- Proceeds from disposal of property, plant and equipment 4,930 327 Deposits and other assets 291 (320) Dividend distribution from unconsolidated joint venture -- 1,535 ----------- ----------- Net cash used in investing activities (80,557) (80,253) FINANCING ACTIVITIES Increase in long-term obligations 15,000 75,000 Sale of Common Stock, net of issuance costs 836 1,966 ----------- ----------- Net cash provided by financing activities 15,836 76,966 Increase (decrease) in cash and cash equivalents (36,946) 3,033 Cash and cash equivalents at beginning of year 133,897 90,741 ----------- ----------- Cash and cash equivalents at end of period $96,951 $93,774 =========== =========== See notes to consolidated financial statements.
KOMAG, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 29, 1998 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 29, 1998 are not necessarily indicative of the results that may be expected for the year ending January 3, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 28, 1997. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The three-month reporting periods for the comparable years included in this report are each comprised of thirteen weeks. NOTE 2 - INVESTMENT IN DEBT SECURITIES The Company invests its excess cash in high-quality, short-term debt and equity instruments. None of the Company's investments in debt securities have maturities greater than one year. The following is a summary of the Company's investments by major security type at amortized cost which approximates fair value: March 29, December 28, 1998 1997 (in thousands) ------------- ------------- Corporate debt securities $27,763 $56,837 Mortgage-backed securities 72,620 79,419 Municipal auction rate preferred stock 76,700 32,300 ------------- ------------- $177,083 $168,556 ============= ============= Amounts included in cash and cash equivalents $100,383 $136,256 Amounts included in short-term investments 76,700 32,300 ------------- ------------- $177,083 $168,556 ============= ============= The Company utilizes zero-balance accounts and other cash management tools to invest all available funds including bank balances in excess of book balances. NOTE 3 - INCOME TAXES The Company has not recorded an income tax provision or benefit in the first quarter of 1998 due to a projected 1998 pre-tax loss at its U.S. operations and various tax holidays in effect at its Malaysian operations. In the first quarter of 1997, the Company recorded a 17% estimated tax rate. The estimated tax rate at the end of the first quarter of 1997 anticipated taxable income in fiscal year 1997 for the Company's U.S. operations and the effect of tax holidays at the Company's Malaysian operations. In the third quarter of 1997, the Company revised its tax rate estimate in anticipation of a loss for fiscal year 1997 and recorded a tax benefit representing the utilization of available loss carrybacks associated with its U.S. operations. No additional utilization of loss carrybacks is available for the U.S. operations. The Company's wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"), operates under an initial five-year tax holiday which commenced in July 1993. Assuming KMS fulfills certain commitments under its license to operate within Malaysia, this initial tax holiday may be extended for an additional five-year period by the Malaysian government. KMS has also been granted a ten- year tax holiday for its second and third plant sites in Malaysia. The commencement date for this new tax holiday has not been determined as of March 29, 1998. NOTE 4 - TERM DEBT AND LINES OF CREDIT The Company's credit facilities total $345,000,000 and are comprised of five agreements: a five-year term loan that expires in 2002, two separate revolving line of credit agreements that expire in 2002 and two separate four-year revolving line of credit agreements that expire in 1999 and 2000. These agreements may be extended, subject to bank approvals, annually for an additional year, thus perpetuating their multiyear tenors. In January 1998, the Company borrowed an additional $15,000,000 under its unsecured credit facilities. At March 29, 1998, $85,000,000 remained available under these unsecured credit facilities. The availability of funds under these lines of credit is subject to compliance with certain financial covenants, including limitations on the number and size of consecutive quarterly losses and maintenance of minimum tangible net worth balances. The Company anticipates that it may need to amend certain covenants before the end of the year to avoid being out of compliance. There can be no assurance that these funds will remain available should the Company violate its existing loan covenants or be unable to favorably amend such covenants at any future date. NOTE 5 - COMPREHENSIVE INCOME (LOSS) As of the beginning of fiscal year 1998, the Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income (loss) or stockholders' equity. SFAS 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, be included in other comprehensive income (loss). The following are the components of comprehensive income (loss): Three Months Ended --------------------------- March 29, March 30, 1998 1997 (in thousands) ------------- ------------- Net income (loss) ($58,158) $17,799 Foreign currency translation adjustments (1,927) (1,556) ------------- ------------- Comprehensive income (loss) ($60,085) $16,243 ============= ============= Accumulated foreign currency translation adjustments on the accompanying Consolidated Balance Sheets account for all of the Company's accumulated other comprehensive income at March 29, 1998 and December 28, 1997. NOTE 6 - RESTRUCTURING LIABILITY During the third quarter of 1997, the Company implemented a restructuring plan based on an evaluation of the size and location of its existing production capacity relative to the short-term market demand outlook. Under the restructuring plan, the Company consolidated its U.S. manufacturing operations onto its new campus in San Jose, California and closed two older factories in Milpitas, California. The first of the two Milpitas factories was closed at the end of the third quarter of 1997 and the second factory was closed in January 1998. Over time the Company expects that its Malaysian manufacturing operations will account for an increasing portion of the Company's production output. These facilities are closer to customers' disk drive assembly plants in Southeast Asia and enjoy certain cost and tax advantages over the Company's U.S. manufacturing facilities. The planned restructuring actions resulted in a charge of $52.2 million and included reducing headcount, vacating leased facilities, consolidating operations and disposing of assets. The restructuring charge included $3.9 million for severance costs associated with approximately 330 terminated employees, $33.0 million for the write- down of the net book value of equipment and leasehold improvements, $10.1 million related to equipment order cancellations and other equipment-related costs, and $5.2 million for facility closure costs. Non-cash items included in the restructuring charge totaled approximately $33.0 million. At March 29, 1998, $10.1 million related to the restructuring activities remained in current liabilities. The Company has made cash payments totaling approximately $9.1 million primarily for severance and equipment- related costs. The majority of the remaining restructuring liability, primarily related to equipment order cancellations and facility closure costs, is expected to be settled in 1998. NOTE 7 - EARNINGS (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128 (FAS 128), "Earnings per Share", which the Company adopted for its fiscal year ending December 28, 1997. FAS 128 replaced the calculation for primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported primary earnings per share. Earnings per share amounts for all periods presented have been restated to conform to FAS 128 requirements. Three Months Ended --------------------------- March 29, March 30, 1998 1997 ------------- ------------- (in thousands, except per share amounts) Numerator: Net income (loss) ($58,158) $17,799 ------------- ------------- Denominator for basic income (loss) per share weighted-average shares 52,875 51,811 ------------- ------------- Effect of dilutive securities: Employee stock options -- 2,095 ------------- ------------- Denominator for diluted income (loss) per share 52,875 53,906 ------------- ------------- Basic income (loss) per share ($1.10) $0.34 ============= ============= Diluted income (loss) per share ($1.10) $0.33 ============= ============= NOTE 8 - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make extimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. KOMAG, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: The following discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. While this outlook represents the Company's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. Factors that could cause actual results to differ include the following: industry supply-demand relationship and related pricing for enterprise and desktop disk products; successful product qualification of next-generation products; successful deployment of new process technologies into manufacturing; utilization of manufacturing facilities; rate of improvement in manufacturing efficiencies; extensibility of process equipment to meet more stringent future product requirements; availability of sufficient cash resources, including continuing access to its bank credit facilities; vertical integration and consolidation within the Company's limited customer base; increased competition; availability of certain sole-sourced raw material supplies; and the risk factors listed in the Company's Form 10-K for the fiscal year ended December 28, 1997 filed in March 1998. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview Operating results for the first quarter of 1998 were significantly lower than the first quarter of 1997. Adverse market conditions, which began late in the second quarter of 1997, intensified in the first quarter of 1998. Late in the second quarter of 1997, demand for thin- film media products fell abruptly as an excess supply of enterprise- class disk drives caused drive manufacturers to reduce build plans for this class of drives. The decrease in demand for enterprise-class media, combined with a major expansion of media production capacity at both independent media suppliers and captive media operations of disk drive manufacturers, resulted in an excess supply of enterprise-class media. Orders for the Company's enterprise-class media products were reduced in the third quarter of 1997 as drive manufacturers reduced drive production and relied more heavily on their own captive media operations. Net sales decreased sharply to $129.7 million in the third quarter of 1997, down sequentially from $175.1 million in the second quarter of 1997. The gross margin percentage fell to 0.2% in the third quarter of 1997, down from 20.4% in the second quarter of 1997. Net sales and the gross margin percentage improved to $159.0 million and 11.6%, respectively, for the fourth quarter of 1997. In December 1997, several disk drive manufacturers initiated cutbacks in their desktop product manufacturing plans for early 1998 in response to supply and demand imbalances within that industry segment. Weakened demand for desktop media products, combined with the continuing slow recovery of the enterprise-class market segment, lowered media demand at independent media suppliers as captive media operations supplied a larger share of the industry's media requirements. The resulting excess supply of media heightened price competition among independent media suppliers. Net sales in the first quarter of 1998 dropped 52% sequentially to $76.1 million as a result of both lower unit sales volumes and a decrease of approximately 10% in the overall average selling price for the Company's products. Low utilization of the Company's factories during the first quarter of 1998 pushed unit production costs up substantially as fixed costs were spread over fewer production units. The combination of the lower overall average selling price and significantly higher average unit production cost resulted in a negative gross margin percentage of 41.5% for the first quarter of 1998. Revenue Net sales decreased 55% in the first quarter of 1998 relative to the first quarter of 1997. The year-over-year decrease was due to a combination of a 47% decrease in unit sales volume and a 14% decrease in the overall average selling price. First quarter 1998 unit sales declined to 7.2 million disks from 13.8 million disks in the first quarter of 1997. The majority of the decrease in the overall average selling price occurred between the fourth quarter of 1997 and the first quarter of 1998 due to the adverse market conditions for both desktop and enterprise-class media products discussed above. Price reductions are common on individual product offerings in the thin-film media industry. The Company has traditionally prevented significant reductions in its overall average selling price through transitions to higher- priced, more technologically advanced product offerings. Unit sales of magnetoresistive ("MR") products increased to 73% of unit sales from 43% of unit sales in the first quarter of 1997. In the first quarter of 1998, the effect of pricing pressures generated by the imbalance in supply and demand for thin-film media, however, more than offset the effect of continuing transition to MR product offerings. In addition to sales of internally produced disk products, the Company has historically resold products manufactured by its Japanese joint venture, Asahi Komag Co., Ltd. (AKCL). Distribution sales of thin-film media manufactured by AKCL were $2.4 million in the first quarter of 1998 compared to $2.7 million in the first quarter of 1997. The Company expects that distribution sales of AKCL product will remain at a similar level throughout 1998. During the first quarter of 1998 four customers accounted for 90% of consolidated net sales: Maxtor Corporation (33%), Western Digital Corporation (33%), Quantum Corporation, together with its Japanese manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") (14%), and Seagate Technologies, Inc. (10%). The Company expects that it will continue to derive a substantial portion of its sales from relatively few customers. The distribution of sales among customers may vary from quarter to quarter based on the match of the Company's product capabilities with specific disk drive programs of the customers. The Company expects that net sales will increase sequentially in the second quarter of 1998 to the $100-$125 million range. Higher unit production volumes and expected yield improvements should reduce the average unit production cost. Price competition, however, is expected to continue into the second quarter of 1998. The Company believes that the overall average selling price will most likely fall sequentially, but that the rate of decline will be less than the 10% decline of the first quarter of 1998. As a result of the continuing price pressures, the Company expects to incur a net loss in the second quarter of 1998. Gross Margin The Company incurred a negative gross margin percentage of 41.5% in the first quarter of 1998 compared to a gross margin of 23.5% in the first quarter of 1997. The combination of the lower overall average selling price and substantial period costs related to underutilized capacity resulted in the negative gross margin percentage for the first quarter of 1998. Unit production decreased to 6.5 million disks in the first quarter of 1998 from 13.6 million disks in the first quarter of 1997. The Company operated well below capacity in order to match unit production to the sharply lower demand for its products in the first quarter of 1998. The Company idled its Malaysian production operations for approximately two weeks during the first quarter of 1998 and accelerated the closure of its second Milpitas manufacturing facility. The Company initially planned to close this facility in June 1998. From a capacity standpoint the Company believes it is currently staffed to produce approximately 13 million disks per quarter and has equipment in place to process approximately 20 million disks per quarter. Overall manufacturing yields declined in the first quarter of 1998 relative to the first quarter of 1997. The Company is currently deploying a new front end processing technology that generates improved polished substrates. Internal manufacturing yields are beginning to show improvement as these new polished substrates are introduced into the Company's production process. The Company plans to exit the second quarter of 1998 with approximately three-quarters of its products manufactured using this new front end processing technology. During the second quarter of 1998, the Company expects to begin high volume shipments of its new higher density disks that store 2.8 gigabytes per disk platter. Initial volumes of these new disks will be manufactured with either the Company's existing or new epitaxial sputtering process. While the Company believes the relatively slow deposition rate achieved in its in-line sputtering machines will provide a competitive advantage, the Company will also purchase and use static sputtering lines. The timely and effective deployment of the new substrate and epitaxial sputtering process technologies into the Company's manufacturing operations and continued success with new product qualifications are essential to the Company's financial performance in the second half of 1998. Operating Expenses Research and development ("R&D") expenses increased 24% ($2.9 million) in the three-month period of 1998 relative to the comparable period of 1997. Increased R&D staffing, higher facility and equipment costs, and additional operating supplies accounted for most of the year- over-year increase. The additional R&D efforts were directed toward the introduction of new product generations, process changes to manufacture such products, and process improvements to increase yields of products currently in volume production. Selling, general and administrative ("SG&A") expenses decreased approximately 55% ($5.5 million) in the first quarter of 1998 relative to the first quarter of 1997. Lower provisions for bonus and profit sharing programs (decrease of $3.3 million) and lower provisions for bad debt (decrease of $1.9 million) resulted in the overall decrease in SG&A expenses between the quarters. Due to the operating loss in the first quarter of 1998, the Company did not record a provision for its bonus and profit sharing programs. The decrease in the provisions for bad debt was primarily due to the lower outstanding trade accounts receivable balance at the end to the first quarter of 1998. Excluding provisions for bonus and profit sharing programs and provisions for bad debt, SG&A expenses decreased $0.3 million. In the third quarter of 1997, the Company implemented a restructuring plan involving the consolidation of its U.S. manufacturing operations and recorded a restructuring charge of $52.2 million. The restructuring charge included $3.9 million for severance costs associated with approximately 330 terminated employees, $33.0 million for the write-down of the net book value of equipment and leasehold improvements, $10.1 million related to equipment order cancellations and other equipment-related costs, and $5.2 million for facility closure costs. Non-cash items included in the restructuring charge totaled approximately $33.0 million. At March 29, 1998, $10.1 million related to the restructuring activities remained in current liabilities. The Company has made cash payments totaling approximately $9.1 million primarily for severance and equipment-related costs. The majority of the remaining restructuring liability, primarily related to equipment order cancellations and facility closure costs, is expected to be settled in 1998. Interest and Other Income/Expense Interest income increased $1.4 million in the first quarter of 1998 relative to the first quarter of 1997. The increase was due to a higher average cash and short-term investment balance in the first quarter of 1998 relative to the first quarter of 1997. Interest expense increased $3.1 million in the first quarter of 1998 compared to the first quarter of 1997. The Company borrowed $190.0 million under its credit facilities between the last week of March 1997 and early January 1998. Other income increased $3.6 million in the first quarter of 1998 compared to the first quarter of 1997. Other income in the first quarter of 1998 included a $3.1 million gain on the sale of vacant land located in Milpitas, California. Income Taxes The Company has not recorded an income tax provision or benefit in the first quarter of 1998 due to a projected 1998 pre-tax loss at its U.S. operations and various tax holidays in effect at its Malaysian operations. In the first quarter of 1997, the Company recorded a 17% estimated tax rate. The estimated tax rate at the end of the first quarter of 1997 anticipated taxable income in fiscal year 1997 for the Company's U.S. operations and the effect of tax holidays at the Company's Malaysian operations. In the third quarter of 1997, the Company revised its tax rate estimate in anticipation of a loss for fiscal year 1997 and recorded a tax benefit representing the utilization of available loss carrybacks associated with its U.S. operations. No additional utilization of loss carrybacks is available for the U.S. operations. The Company's wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"), operates under an initial five-year tax holiday which commenced in July 1993. Assuming KMS fulfills certain commitments under its license to operate within Malaysia, this initial tax holiday may be extended for an additional five-year period by the Malaysian government. KMS has also been granted a ten-year tax holiday for its second and third plant sites in Malaysia. The commencement date for this new tax holiday has not been determined as of March 29, 1998. Minority Interest in KMT/Equity in Net Income (Loss) of AKCL The minority interest in the net income (loss) of consolidated subsidiary represented Kobe Steel USA Holdings Inc.'s ("Kobe USA's") 20% share of Komag Material Technology, Inc.'s ("KMT's") net income (loss). KMT recorded a net loss of $0.5 million in the first quarter of 1998 and net income of $0.9 million in the first quarter of 1997. The Company records 50% of AKCL's net income (loss) as equity in net income (loss) of unconsolidated joint venture. The Company recorded $9.4 million as its equity in AKCL's net loss for the first quarter of 1998, compared to the equity in AKCL's net income of $3.4 million recorded in the first quarter of 1997. AKCL's results for the first quarter of 1997 included a $5.3 million net of tax gain on AKCL's March 1997 sale of its investment in Headway Technologies, Inc. The Company's equity in this gain was $2.6 million. Excluding the gain, the Company reported $0.8 million as its equity in AKCL's net income in the first quarter of 1997. Manufacturing yield, equipment utilization, and customer qualification issues adversely affected AKCL's financial results for the first quarter of 1998. Additionally, AKCL wrote down certain underutilized equipment, including two of its five in-line sputtering systems. The Company's share of these write-downs was $2.8 million. AKCL recorded no tax benefit for the first quarter of 1998. The tax rate in effect for the first quarter of 1997 was 53%. The Company anticipates that AKCL will likely continue to incur losses through at least the third quarter of 1998. AKCL plans to use a combination of static and in-line sputtering machines to manufacture its disk products. AKCL believes that the products produced by a static sputtering process will be technically similar to those produced by other Japanese media suppliers, thus improving AKCL's ability to meet specific requirements of certain Japanese customers on a timely basis. AKCL may also implement the new epitaxial process on certain of AKCL's in-line sputtering equipment. However, as a result of Japanese customer preference toward static sputtering equipment, AKCL may convert the majority of its capacity to static equipment. The relative mix of in-line and static sputtering machines will depend on the Japanese market acceptance of products manufactured using in-line equipment and AKCL's ability to implement the epitaxial process on its in-line equipment. AKCL's current financing arrangements may not be sufficient in light of AKCL's expected continuing losses and capital costs to implement the new epitaxial sputtering process. There can be no assurance that additional financing will be available to AKCL. Failure to secure additional financing could have a material adverse affect on AKCL's business and financial results. Liquidity and Capital Resources: Cash and short-term investments of $173.7 million at the end of the first quarter of 1998 increased $7.5 million from the end of the prior fiscal year. Consolidated operating activities generated $27.8 million in cash during the first three months of 1998. First quarter's operating loss of $58.2 million, net of non-cash depreciation charges of $34.6 million and the non-cash equity loss from AKCL of $9.4 million, consumed $14.1 million. The net change in certain working capital accounts provided $42.0 million. Reductions in accounts receivable ($32.8 million) and inventories ($6.2 million) related to the lower sales volume in the first quarter of 1998 offset a decrease in accounts payable ($18.1 million) related to the lower production volume. Additionally, the Company received $21.1 million in U.S. and California income tax refunds during the first quarter of 1998. The Company borrowed $15.0 million under its credit facilities and spent $41.4 million on capital requirements during the first three months of 1998. Proceeds from sales of property, plant and equipment (primarily the sale of vacant land in Milpitas, California) generated $4.9 million. Sales of Common Stock under the Company's stock option programs generated $0.8 million. Total capital expenditures for 1998 are currently planned at approximately $120 million. Three-quarters of the capital expenditure plan is targeted for process improvements, including costs to modify the Company's in-line equipment for the new epitaxial sputtering process, and productivity enhancements. Current noncancellable capital commitments total approximately $68 million. The Company currently has $85 million available under its $345 million unsecured, multi-year bank lines of credit. The availability of funds under these lines of credit is subject to compliance with certain financial covenants, including limitations on the number and size of consecutive quarterly losses and maintenance of minimum tangible net worth balances. The Company currently expects to remain in compliance with its financial covenants through at least the first half of 1998. There can be no assurance that these funds will remain available should the Company violate its existing loan covenants or be unable to favorably amend such covenants at any future date. The Company intends to evaluate and pursue other alternative sources of funding to supplement its current bank credit facilities. There can be no assurance that any such additional funds will be sufficient for the Company's needs. If the Company is unable to obtain sufficient capital, it could be required align its operations with the available funding. Such action could have a material adverse affect on the Company's results of operations. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings-Not Applicable. ITEM 2. Changes in Securities-Not Applicable. ITEM 3. Defaults Upon Senior Securities-Not Applicable. ITEM 4. Submission of Matters to a Vote of Security Holders-Not Applicable. ITEM 5. Other Information-Not Applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 10.20-Second Amendment to Amended and Restated Credit Agreement by and among Komag, Incorporated and BankBoston, N.A. as agent. Exhibit 27-Financial Data Schedule. (b) Not Applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KOMAG, INCORPORATED (Registrant) DATE: May 1, 1998 BY: /s/ William L. Potts, Jr. ----------------- -------------------------------------- William L. Potts, Jr. Senior Vice President and Chief Financial Officer DATE: May 1, 1998 BY: /s/ Stephen C. Johnson ----------------- -------------------------------------- Stephen C. Johnson President and Chief Executive Officer EX-10.20 2 BANK CREDIT AMENDMENT SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into as of March 23, 1998 by and among KOMAG, INCORPORATED, a Delaware corporation ("Borrower"), the banks from time to time party to the Credit Agreement described below, together with their respective successors and assigns (each a "Bank" and collectively the "Banks"), and BANKBOSTON, N.A., a national banking association ("BankBoston"), as agent for the Banks (in such capacity, the "Agent"), with reference to the following facts: A. The Borrower, the Banks, and the Agent are parties to that certain Amended and Restated Credit Agreement dated as of June 20, 1997, by and among the Borrower, the Banks, and the Agent, as amended by that certain First Amendment to Amended and Restated Credit Agreement dated as of October 9, 1997, by and among the Borrower, the Banks, and the Agent (as amended, the "Credit Agreement"). The Credit Agreement and all related and supporting documents collectively are referred to in this Amendment as the "Loan Documents." B. The parties desire to amend certain provisions contained in the Credit Agreement as set forth below. NOW, THEREFORE, in consideration of the promises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Credit Agreement. 2. Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows: (a) The following defined terms are added to Section 1.1 in their proper alphabetical order: "'Consolidated Current Liabilities': At any date of determination, the Consolidated Liabilities which may properly be classified as current liabilities in accordance with GAAP." "'Consolidated Liabilities': At any date of determination, the total liabilities of the Borrower and its Consolidated Subsidiaries on a consolidated basis determined in accordance with GAAP (including (i) any balance sheet liability with respect to a Pension Plan recognized pursuant to Financial Accounting Standards Board Statements 87 or 88 and (ii) any withdrawal liability under Section 4201 of ERISA with respect to a withdrawal from a Multiemployer Plan, as such liability may be set forth in a notice of withdrawal liability under Section 4219 (and as adjusted from time to time subsequent to the date of such notice))." "'Consolidated Quick Assets': At any date of determination, the total cash, marketable securities and accounts receivable of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP." "'Minimum Quick Ratio': At any date of determination during a Quick Ratio Measurement Period, a Quick Ratio equal to or greater than the correlative amount indicated below: Period Quick Ratio March 23, 1998 through March 29, 1998 0.70 : 1.00 March 30, 1998 through June 28, 1998 0.65 : 1.00 June 29, 1998 through September 27, 1998 0.675 : 1.00 September 28, 1998 through January 3, 1999 0.80 : 1.00 January 4, 1999 through April 4, 1999 0.90 : 1.00 April 5, 1999 and thereafter 1.00 : 1.00 Notwithstanding the foregoing, if the Quick Ratio measurement requirement is eliminated by virtue of Borrower's achievement of a Quick Ratio of 1.00 to 1.00 as provided in Section 3.13, but subsequently reinstated by virtue of Borrower's generating a fiscal quarter net loss as provided in Section 3.13, the Minimum Quick Ratio shall thereafter be 1.00 to 1.00." "'New Senior Debt': At any date of determination, the aggregate principal amount of any Debt (excluding Revolver Balances) that is not by its terms subordinated to other Debt of the Borrower or its Subsidiaries, which (i) constitutes Debt acquired or assumed on or after March 23, 1998 or (ii) constitutes replacement or refinancing of previously existing Debt." "'Quick Ratio': At any date of determination, the ratio of (a) Consolidated Quick Assets to (b) the sum of (i) Consolidated Current Liabilities plus (ii) Revolver Balances plus (iii) New Senior Debt." "'Quick Ratio Measurement Period': As defined in Section 3.13." "'Revolver Balances': At any date of determination, the aggregate principal amount of outstanding Revolving Loans, plus the aggregate principal amount of all outstanding loans of Borrower or its Consolidated Subsidiaries drawn under any other revolving line of credit." (b) Section 2.1(a) is amended to read as follows from and after the effective date of this Amendment: "(a) The Aggregate Commitment. Each of the Banks severally agrees, on the terms and conditions hereinafter set forth, to make loans ("Revolving Loans") to Borrower from time to time during the period from the date hereof to and including the Maturity Date, pro rata in accordance with its Commitment Percentage, in the aggregate principal amount not to exceed at any one time outstanding its Commitment, as such amount may be reduced pursuant to Section 2.1(d), provided, however, that the Banks shall not be obligated on any date during a Quick Ratio Measurement Period to make a Revolving Loan if Borrower's Quick Ratio at the time of the requested borrowing is less than the applicable Minimum Quick Ratio, and provided, further, that the Banks shall not be obligated on any date during a Quick Ratio Measurement Period to make a Revolving Loan which, after giving effect to the requested borrowing, would cause Borrower to have a Quick Ratio which is less than the applicable Minimum Quick Ratio. Each borrowing under this Section (a "Borrowing") shall be in a minimum amount of $1,000,000 and in an integral multiple of $100,000 above such amount for a Base Rate Loan and in a minimum amount of $1,000,000 and in an integral multiple of $500,000 above such amount for a LIBOR Rate Loan. Subject to the foregoing and within the limits of each Commitment, Borrower may borrow, repay pursuant to Section 2.2(b) and reborrow under this Section, provided that at no time shall the aggregate principal amount of outstanding Revolving Loans exceed the Aggregate Commitment then in effect. Failure to satisfy the Minimum Quick Ratio shall not be an Event of Default." (c) Section 2.3(c) is amended to read as follows from and after the effective date of this Amendment: "(c) LIBOR Rate Loans. Revolving Loans which are LIBOR Rate Loans shall bear interest for each Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the LIBOR Rate determined for such Interest Period plus an amount (the "Applicable Margin") determined in accordance with following schedule: ** If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 162.5 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 175 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 187.5 basis points. Said rates shall be calculated quarterly based on Borrower's performance for the immediately preceding fiscal quarter for which Borrower has provided information to the Agent regarding the calculation of the rate and shall be effective five (5) Business Days following the Agent's receipt of such financial statements and the officer's certificate required to be delivered in connection therewith pursuant to Section 6.1(a); provided that if Borrower shall not have timely delivered its financial statements in accordance with Section 6.1(a) (after giving effect to any grace period set forth in Section 7.1(c)), then commencing on the date upon which such financial statements should have been delivered and continuing until such financial statements are actually delivered, it shall be assumed for purposes of determining said rates that Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0 (said calculations shall apply to existing as well as new LIBOR Rate Loans). Notwithstanding the foregoing, at Borrower's option upon achievement of any of the following, in each case as demonstrated by Borrower's consolidated balance sheet for itself and its Consolidated Subsidiaries as at the end of the applicable period, and the related consolidated statements of income, stockholders' equity and statement of cash flows for such period, which statements are certified by a duly authorized officer of Borrower as being fairly stated in all material respects subject to year end adjustments, the Applicable Margin shall be adjusted as follows: (i) Upon Borrower's achievement of a cumulative average Net Profit Margin for any fiscal three (3) month period from and after March 1, 1998 of at least five percent (5%) but less than ten percent (10%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 112.5 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 125 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 137.5 basis points. (ii) Upon Borrower's achievement of the cumulative average Net Profit Margin test as specified in clause (i) above, and Borrower's achievement of a cumulative average Net Profit Margin for any subsequent fiscal three (3) month period of at least five percent (5%) but less than ten percent (10%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 62.5 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 75 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 87.5 basis points. (iii) Upon Borrower's achievement of the cumulative average Net Profit Margin tests as specified in clauses (i) and (ii) above, and Borrower's achievement of a cumulative average Net Profit Margin for any subsequent fiscal three (3) month period of at least five percent (5%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 35 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 42.5 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 50 basis points. (iv) Upon Borrower's achievement of the cumulative average Net Profit Margin test as specified in clause (i) above, and Borrower's achievement of a cumulative average Net Profit Margin for any subsequent fiscal three (3) month period of at least ten percent (10%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 35 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 42.5 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 50 basis points. (v) Upon Borrower's achievement of a cumulative average Net Profit Margin for any fiscal three (3) month period from and after March 1, 1998 of at least ten percent (10%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 75 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 87.5 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 100 basis points. (vi) Upon Borrower's achievement of the cumulative average Net Profit Margin test as specified in clause (v) above, and Borrower's achievement of a cumulative average Net Profit Margin for any subsequent fiscal three (3) month period of at least five percent (5%), the Applicable Margin shall be as follows: If Borrower's Consolidated Funded Debt to Consolidated Capital is less than .15 to 1.0: the Applicable Margin shall be 35 basis points; If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .15 to 1.0 but less than .25 to 1.0: the Applicable Margin shall be 42.5 basis points; and If Borrower's Consolidated Funded Debt to Consolidated Capital is equal to or greater than .25 to 1.0: the Applicable Margin shall be 50 basis points. For purposes of this Section 2.3(c), Borrower shall be required to furnish its fiscal three (3) month period financial statements only for those periods as are necessary to demonstrate achievement of the Net Profit Margin tests specified in this Section." (d) A new Section 3.13 is added to Article III, at the end thereof, which shall read as follows: "SECTION 3.13 QUICK RATIO MEASUREMENT PERIOD. Any fiscal month in which the Quick Ratio is required to be measured pursuant to the provisions of this Section 3.13 shall be deemed to be a "Quick Ratio Measurement Period." The Quick Ratio shall be required to be measured monthly as of the last day of each fiscal month of Borrower from and after March 23, 1998, except that (a) the Quick Ratio shall not be required to be measured from and after the first date after March 23, 1998 on which Borrower demonstrates achievement of a Quick Ratio equal to or greater than 1.00 to 1.00, provided that if Borrower has a net loss for any fiscal quarter period after such achievement, the Quick Ratio shall again be required to be measured monthly as of the last day of each fiscal month thereafter, and (b) notwithstanding the foregoing, the Quick Ratio shall not be required to be measured from and after Borrower's achievement of a cumulative average Net Profit Margin for any three (3) fiscal quarter periods from and after the quarter ended March 31, 1998 of at least five percent (5%). So long as the Quick Ratio is required to be measured under this Section 3.13, at the request of the Agent, prior to, and as a condition of, each borrowing hereunder, and in any event within twenty-one (21) days after the last day of each fiscal month, Borrower shall deliver to Agent a certificate signed by the chief executive officer or chief financial officer of Borrower, setting forth in such detail as Agent may request the calculation of the Quick Ratio as of the last day of the preceding fiscal month." (e) Section 6.2(a) is amended to read as follows: "(a) Profitability. Permit, on a consolidated after-tax basis, (i) a net loss for the fiscal quarter ending March 29, 1998 of more than Sixty Million Dollars ($60,000,000); or (ii) a net loss for the fiscal quarter ending June 28, 1998 of more than Fifty Million Dollars ($50,000,000); or (iii) a net loss for the fiscal quarter ending September 27, 1998 of more than Ten Million Dollars ($10,000,000); or (iv) commencing with the fiscal quarter ending January 3, 1999, a net loss for any two consecutive fiscal quarter periods; or (v) commencing with the fiscal quarter ending January 3, 1999, a net loss for any fiscal quarter in excess of an amount equal to ten percent (10%) of Borrower's Consolidated Tangible Net Worth as of the last day of such fiscal quarter." (f) Section 6.2(b) is amended to read as follows: "Leverage Ratio. Permit Borrower's ratio of Consolidated Funded Debt to Consolidated Capital, on a quarterly consolidated basis, to exceed 0.4 to 1.0." (g) Section 6.2(c) is amended to read as follows: "Consolidated Tangible Net Worth. Permit Borrower's Consolidated Tangible Net Worth, on a quarterly consolidated basis, to be less than $560,000,000, plus (i) seventy-five percent (75%) of Borrower's future fiscal year end consolidated net income (without deduction for any losses), adjusted on an annual basis beginning after the end of Borrower's 1997 fiscal year and including such fiscal year plus (ii) one hundred percent (100%) of the net proceeds of equity investments and issues received by Borrower or its Consolidated Subsidiaries adjusted on a consolidated quarterly basis in accordance with GAAP, without duplication. For purposes hereof, the minimum Consolidated Tangible Net Worth requirement shall not be increased by equity issued through the exercise of employee stock options and/or employee stock purchase plans." (h) Section 6.2(i) is amended by adding the following sentence at the end thereof: "Notwithstanding the foregoing, Borrower shall have no obligation to comply with this Section 6.2(i) for the fiscal quarter ending June 28, 1998." (i) A new subsection (k) is added to Section 6.2, by inserting the following at the end thereof: "(k) Until Borrower's achievement of a cumulative average Net Profit Margin for any three (3) fiscal quarters from and after March 1, 1998 of at least five percent (5%), Borrower shall not make any payment in respect of any Debt (excluding Debt owing to Standard Chartered Bank under the $10,000,000 offshore Labuan revolving facility) other than the Revolving Loans, unless Borrower on the same day makes a payment on account of the Revolving Loans, such payment on account of the Revolving Loans to be at least pro rata in accordance with the aggregate principal amount of the outstanding Revolving Loans and the aggregate outstanding amount of such other Debt to be repaid." (j) A new subsection (l) is added to Section 6.2, by inserting the following at the end thereof: "(l) Replace or refinance any Debt that is not by its terms subordinated to other Debt of the Borrower or its Subsidiaries without the prior written consent of the Majority Banks, which consent shall not be unreasonably withheld, provided such replacement financing is to replace Debt of like-kind, and provided that the material terms (including maturity, financial covenants, and pricing) of such replacement financing are not more burdensome to Borrower as those under this Agreement." (k) The second sentence of Section 7.1(c) is amended to read as follows: "Notwithstanding the foregoing, any failure of Borrower to perform or observe Sections 6.1(c) and (f) and/or 6.2(a), (b), (c), (d), (e), (f), (h), (i), (j), (k) or (l) shall constitute an Event of Default without regard to any lapse of time or cure period; or" 3. Conditions to Effectiveness. This Amendment shall become effective as of March 23, 1998 (the "Closing Date"), only upon: (i) receipt by the Agent from the Borrower of an amendment fee equal to Two Hundred Sixty-Two Thousand Five Hundred Dollars ($262,500), to be distributed to the Banks on a pro rata basis in accordance with the respective Commitment Percentage of each Bank; (ii) receipt by the Agent from the Borrower of a one-time Agent's fee as set forth in a side letter between the Borrower and the Agent dated on or about the Closing Date; (iii) receipt by the Agent of the following (each of which shall be in form and substance satisfactory to the Agent and its counsel, with sufficient copies for each of the Banks): (a) counterparts of this Amendment duly executed on behalf of the Borrower, the Agent, and the Majority Banks; (b) copies of resolutions of the Board of Directors or other authorizing documents of the Borrower, authorizing the execution and delivery of this Amendment; and (iv) completion of such other matters and delivery of such other agreements, documents and certificates as any Bank through the Agent may reasonably request. 4. Representations and Warranties. In order to induce the Banks to enter into this Amendment, the Borrower represents and warrants to the Agent and each Bank that the following statements are true, correct and complete as of the effective date of this Amendment: (a) Corporate Power and Authority. The Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "Amended Agreement"). The Certificate of Incorporation and Bylaws of the Borrower have not been amended since the copies previously delivered to the Agent or Banks. (b) Authorization of Agreements. The execution and delivery of this Amendment and the performance by the Borrower of the Amended Agreement have been duly authorized by all necessary corporate action on the part of the Borrower. (c) No Conflict. The execution and delivery by the Borrower of this Amendment do not and will not contravene (i) any law or any governmental rule or regulation applicable to the Borrower, (ii) the Certificate of Incorporation or Bylaws of the Borrower, (iii) any order, judgment or decree of any court or other agency of government binding on the Borrower, or (iv) any material agreement or instrument binding on the Borrower. (d) Governmental Consents. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. (e) Binding Obligation. This Amendment and the Amended Agreement have been duly executed and delivered by the Borrower and are the binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except in each case as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws and equitable principles relating to or affecting creditors' rights. (f) Incorporation of Representations and Warranties From Credit Agreement. The representations and warranties contained in Section 5.1 of the Credit Agreement are correct on and as of the effective date of this Amendment as though made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date). (g) Absence of Default. After giving effect to this Amendment, no event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default. 5. Miscellaneous. (a) Reference to and Effect on the Credit Agreement and the Other Loan Documents. (i) On and after the Closing Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement," "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Agent or any Bank under the Credit Agreement or any of the other Loan Documents. (b) Fees and Expenses. All reasonable and documented costs and expenses of the Agent, including, but not limited to, reasonable and documented attorneys' fees, incurred by the Agent in the preparation and implementation of this Amendment constitute costs and expenses in connection with the amendment and restructuring of the Loan Documents, and as such are payable by the Borrower in accordance with Section 9.5 of the Credit Agreement. (c) Headings. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. (e) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [REMAINDER INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. KOMAG, INCORPORATED By: /s/ William L. Potts, Jr. Title: SVP, CFO BANKBOSTON, N.A., as the Agent and as a Bank By: /s/ Anthony Kwee Title: Vice President COMERICA BANK - CALIFORNIA, as a Bank By: Title: STANDARD CHARTERED BANK, as a Bank By: /s/ ??????? Title: AVP By: /s/ ??????? Title: Vice President BANQUE NATIONALE DE PARIS, as a Bank By: /s/ Rafael C. Lumanlan Title: Vice President By: /s/ Jeffrey S. Kajisa Title: Assistant Vice President FLEET NATIONAL BANK, as a Bank By: Title: BANK OF MONTREAL, as a Bank By: /s/ ???????? Title: Portfolio Manager THE BANK OF NOVA SCOTIA, as a Bank By: /s/ ?????????? Title: RM UNION BANK OF CALIFORNIA, N.A., as a Bank By: /s/ Patrick Clemens Title: Assistant Vice President EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTE FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED I ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-03-1999 DEC-29-1997 MAR-29-1998 96,951 76,700 51,727 3,835 60,562 320,045 1,113,423 430,286 1,025,919 61,079 260,000 0 0 529 626,406 1,025,919 76,057 76,057 107,652 107,652 19,555 (838) 4,554 (48,829) 0 (58,158) 0 0 0 (58,158) ($1.10) ($1.10)
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