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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-16852
KOMAG, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2914864
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
275 SOUTH HILLVIEW DRIVE, MILPITAS, CALIFORNIA 95035
(Address of Principal Executive Offices, including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 946-2300
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
None None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this form 10-K or any amendment of this Form 10-K. [ ]
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The aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 23, 1996 was approximately $1,447,185,000 (based
upon the closing sale price for shares of the Registrant's Common Stock as
reported by the Nasdaq National Market for the last trading date prior to that
date). Shares of Common Stock held by each officer, director and holder of 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On February 23, 1996 approximately 50,832,767 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated:
Komag, Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1996, Part III.
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PART I
ITEM 1. BUSINESS
Komag, Incorporated ("Komag" or the "Company") designs, manufactures
and markets thin-film media ("disks"), the primary storage medium for digital
data in computer hard disk drives. Komag believes it is recognized as the leader
in the thin-film media market. The Company's business strategy relies on the
combination of advanced technology and cost-effective, high-volume manufacturing
to advance its leadership position. The Company believes that the combination of
these two capabilities is a significant competitive advantage and enables the
Company to support its customers' technically advanced, high-volume product
programs. Komag's products address the high-capacity/high-performance segment of
the disk drive market and are used in products such as disk arrays, network file
servers, high-end personal computers and engineering workstations. The Company
manufactures the highest density disks commercially available for primarily
5 1/4-inch and 3 1/2-inch form factor hard disk drives. The Company was
organized in 1983 and is incorporated in the State of Delaware.
The Company's business is subject to risks and uncertainties, a number
of which are discussed under "Risk Factors".
Increasing demand for digital storage and low-cost, high-performance
hard disk drive products has resulted in strong unit demand for these products.
International Data Corporation ("IDC") forecasts that world-wide disk drive unit
shipments in 1996 will grow 30% over 1995 and that the annual rate of unit
growth will remain high, at about 20%, through 1999. Greater processing power,
more sophisticated operating systems and application software, high-resolution
graphics and larger data bases are among the developments that have required
ever higher performance from disk drives. For example, the first 5 1/4-inch hard
disk drive, introduced in 1980, offered a capacity of five megabytes (one
million bytes is a megabyte or "MB") with a storage density of less than ten
megabits (one million bits is a megabit; eight bits is one byte) per square
inch. Current high-performance 3 1/2-inch drives have capacities of four
gigabytes (one billion bytes is a gigabyte or "GB") with densities typically of
400 to 500 megabits per square inch. Advances in component technology have been
critical to improving the performance and storage capacity of disk drives and
lowering cost per bit stored.
The Company has capitalized on its technological strength in thin-film
processes and its manufacturing capabilities to achieve the leading market
position in the thin-film media market. The Company's technological strength
stems from knowledge of materials science and an understanding of the interplay
between disks, heads and other drive components. Komag's manufacturing expertise
in thin-film media is evidenced by its history of delivering reliable products
in high volume. Current manufacturing operations are conducted by the Company in
the United States and Malaysia as well as through a joint venture in Japan.
Asahi Komag Co., Ltd. ("AKCL"), a joint venture with Asahi Glass Co., Ltd.
("Asahi Glass") and Vacuum Metallurgical Company, manufactures thin-film media
in Japan. The Company manufactures disk substrates in the U.S. for internal use
through its subsidiary, Komag Material Technologies, Inc. ("KMT"). A 20%
minority interest in KMT is held by Kobe Steel USA Holdings Inc. (together with
Kobe Steel, Ltd. and other affiliated companies, "Kobe").
The Company has a direct voting interest (less than 20%) in Headway
Technologies, Inc. ("Headway"). Other Headway shareholders include
Hewlett-Packard Company, AKCL, and a U.S. subsidiary of Asahi Glass. Headway is
developing and manufacturing advanced magnetoresistive ("MR") heads for the data
storage industry.
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TECHNOLOGY
Komag manufactures and sells thin-film magnetic media on rigid disk
platters for use in hard disk drives. These drives are used in computer systems
to record, store and retrieve digital information. Inside a disk drive, the
media or disk rotates at speeds of up to 7,200 RPM. The head scans across the
disk as it spins, magnetically recording or reading information. The domains
where each bit of magnetic code is stored are extremely small (now typically 400
to 500 million bits per square inch in high-performance drives) and precisely
placed. The tolerances of the disks and recording heads are extremely demanding
and the interaction between these components is one of the most critical design
aspects in an advanced disk drive.
The primary factors governing the density of storage achievable on a
disk's surface are (1) the minimum distance at which read/write heads can
reliably pass over the surface of the disk to detect a change in magnetic
polarity when reading from the disk, defined as glide height (measured in
microinches or millionths of an inch), and (2) the strength of the magnetic
field required to change the polarity of a bit of data on the magnetic layer of
a disk when writing, defined as coercivity (measured in oersteds -- "Oe"). The
lower the glide height, the more accurately and reliably the bit can be
retrieved. The higher the coercivity of the media, the smaller the width of the
bit that can be stored. The Company's plating, polishing and texturing processes
result in a uniform surface with relatively few defects which permits the
read/write heads to pass over the disk surface at glide heights of 1.5
microinches. The platinum-cobalt based alloy deposited on the surfaces of
Komag's disks allows high coercivities, low noise and other desirable magnetic
characteristics. The combination of these factors results in more data stored in
a given area on the disk surface.
PRODUCTS, CUSTOMERS AND MARKETING
Komag's thin-film disk products generally can be classified by size.
The diameter of the disk corresponds roughly with the width of the disk drive.
The Company sells primarily 95 mm and 130 mm disks for 3 1/2-inch and 5 1/4-inch
drives, respectively. Within each of these sizes, Komag offers a range of
coercivities, glide height capabilities, and other parameters to meet specific
customer requirements.
Komag primarily sells its media products to independent OEM disk drive
manufacturers for incorporation into hard disk drives which are marketed under
the manufacturers' own labels. The Company also currently sells its disks to
computer system manufacturers. The Company works closely with customers as they
design new high-performance disk drives and generally customizes its products
according to customer specifications.
Net sales to major customers in 1995 were as follows: Seagate
Technology, Inc. ("Seagate") -- 42%, Quantum Corporation ("Quantum") -- 23%,
Hewlett-Packard Company ("Hewlett-Packard") -- 15%, and Western Digital
Corporation ("Western Digital") -- 12%. Sales are generally concentrated in a
small number of customers due to the high volume requirements of the dominant
disk drive manufacturers and their tendency to rely on a few suppliers because
of the close interrelationship between media and disk drive performance. Given
the relatively small number of high-performance disk drive manufacturers, the
Company expects that it will continue its dependence on a very limited number of
customers. Further there have been consolidations among the Company's disk drive
customers, including the recent merger of Seagate and Conner. In addition,
Quantum recently announced that it would cease disk drive production in
Milpitas, California and Penang, Malaysia and contract with its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"),
to manufacture its disk drives. AKCL, the Company's Japanese joint venture, has
an established working relationship with MKE and MKE has remained AKCL's largest
customer for the past several years. The Company's Malaysian subsidiary recently
began shipments to MKE's new Singapore manufacturing facility. However, there
can be no
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assurance that MKE will purchase from either Komag or AKCL the unit quantities
of product which the Company previously supplied to Quantum in the U.S. and
Malaysia. See "Risk Factors".
Sales are made directly to disk drive manufacturers worldwide (except
media sales into Japan) from the Company's U.S. and Malaysian operations. Media
sales to Japan are made solely through AKCL. Media sales to the Far East from
the Company's U.S. and Malaysian operations represented 62%, 54% and 45% of
Komag's net sales in 1995, 1994 and 1993, respectively. All foreign sales are
subject to certain risks common to all export activities, such as government
regulation and the risk of imposition of tariffs or other trade barriers.
Foreign sales must also be licensed by the Office of Export Administration of
the U.S. Department of Commerce.
The Company's sales are generally made pursuant to purchase orders
rather than long-term contracts. These purchase orders are generally subject to
change or cancellation without significant penalty. At December 31, 1995 the
Company's backlog of purchase orders scheduled for delivery within 90 days
totaled $156.0 million compared to $69.6 million at January 1, 1995. The Company
believes it is a common practice for disk drive manufacturers to place orders in
excess of actual requirements when there is an industry-wide shortage of media
supply (a condition that persisted throughout much of 1995), and these purchase
orders may be changed or canceled by customers on short notice without
significant penalty. Accordingly, the backlog should not be relied upon as
indicative of sales for any future period.
MANUFACTURING
Komag's manufacturing expertise in thin-film media is evidenced by its
history of delivering reliable products in high volume. Through the utilization
of proprietary processes and techniques, the Company has the capability to
cost-effectively produce advanced disk products that exhibit uniform performance
characteristics. Such uniform performance characteristics enhance the
reliability of the drive products manufactured by the Company's customers. In
addition, these characteristics raise production yields on the customers'
manufacturing lines, which is an important cost consideration in
high-performance disk drives with large component counts. Manufacturing costs
are highly dependent upon the Company's ability to effectively utilize its
installed physical capacity to produce large volumes of products at acceptable
yields. To improve yields and capacity utilization, Komag has adopted formal
continuous improvement programs at all of its worldwide operations. The
Company's media manufacturing facilities throughout the world have obtained ISO
Certification, an internationally recognized quality standard. The process
technologies employed by the Company require substantial capital investment. In
addition, long lead times to install new increments of physical capacity
complicate capacity planning. Historically, the Company has operated at or near
full capacity with favorable manufacturing yields and equipment utilization
rates.
The manufacture of thin-film sputtered disks is a complex, multi-step
process that converts polished aluminum substrates into finished data storage
media ready for use in a hard disk drive. The process requires the deposition of
extremely thin, uniform layers of metallic film onto a disk substrate. To
achieve this end, the Company uses a vacuum deposition, or sputtering method,
similar to that used to coat semiconductor wafers. The basic process consists of
many interrelated steps which can be grouped into four major categories:
1. Nickel Alloy Plating of the Substrate: Through a series of chemical
baths polished aluminum substrates are plated with a uniform nickel phosphorus
layer in order to provide support for the magnetic layer.
2. Polishing, Texturing and Cleaning. During this relatively
labor-intensive process disks are smoothed and cleaned so that the read/write
heads of the disk drives can fly at low and constant levels over the disks.
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3. Sputtering and Lube: By a technically demanding vacuum deposition
process, the magnetic layers are successively deposited on the disk and a hard
protective overcoat is applied. After sputtering, a microscopic layer of
lubrication is applied to the disk's surfaces to improve durability and reduce
surface friction.
4. Glide Test and Certification. In robotically controlled test cells,
disks are first tested for a specified glide height and then certified for
magnetic properties. Based on these test results, disks are graded according to
specific characteristics and sold to customers based upon their specific
performance requirements.
Most of the critical process steps are conducted in Class 100 or better
clean rooms. From the final cleaning operation forward, disks are handled by
custom designed, and in many cases Company-built, automated equipment to reduce
contamination and enhance process precision. Minute impurities in materials
used, particulate contamination, or other production problems can reduce
production yields and, in extreme cases, result in the prolonged suspension of
production. Although no problems have required prolonged suspension of the
Company's production to date, other manufacturers of thin-film media have
experienced such suspensions, and no assurance can be given that the Company
will not experience manufacturing problems from contamination or other causes in
the future.
PRODUCTION CAPACITY
The Company currently has 21 production lines installed at its
manufacturing plants in three countries: ten in the United States, six in
Malaysia, and five at its manufacturing joint venture in Japan. The Company
plans to add one additional line at its Penang, Malaysia facility in the second
quarter of 1996, thus utilizing all available space at that plant. The Company
is currently constructing and equipping a new front end manufacturing facility
in the east Malaysian state of Sarawak. This new facility will manufacture
plated, polished substrates that will be subsequently shipped to the Company's
back end manufacturing facilities in the United States and Penang, Malaysia for
completion. Production at this new facility is expected to begin in the first
half of 1996. In addition, due to strong market demand for the Company's disk
products, the Company has committed to further expand its physical production
capacity in the United States, Malaysia and Japan. The Company began
construction of a new 225,000 square-foot back end disk manufacturing plant in
San Jose, California in October 1995 and recently commenced construction of the
structural foundation for a new 275,000 square foot back end disk manufacturing
plant in Penang, Malaysia. These back end plants will utilize plated, polished
substrates to produce finished sputtered disk products. Production at the new
San Jose and Penang plants is expected to begin during the fourth quarter of
1996 and the first quarter of 1997, respectively. Each of these new facilities
is expected to house the equivalent of at least six current production lines.
AKCL began construction of a 225,000 square-foot facility in Thailand for front
end production of thin-film disks in 1995 and expects to begin production at
this site in late 1996.
Supplementing this new physical capacity, the Company expects that
continued focus on process improvements will result in higher unit output from
both current and planned production lines during 1996, thus leading to increased
effective capacity.
During the fourth quarter of 1994, the Company began a series of
process improvements designed to support production of future advanced disk
products. The Company believes that these improvements should enhance product
performance and should enable increased unit output through reduced process
cycle times. In order to utilize these process improvements on all of the
Company's sputtering lines, certain older machines are in the process of being
upgraded to a new design. Three U.S. machines were upgraded in 1995 and three
additional machines will be upgraded in 1996. Only one sputtering line has been
or will be out of production at any given time. As a result, one U.S. machine
will be out of
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production throughout 1996 as was the case in 1995. Certain older sputtering
lines at the Japanese joint venture have been or will also be upgraded during
1995 and 1996.
The Company does not expect to sell appreciable quantities of
AKCL-produced media in 1996 due to strong demand for AKCL's products within the
Japanese media market. In the event demand within the Japanese media market
decreases, AKCL-produced media may become available for qualification and resale
by the Company to its customers.
RESEARCH, DEVELOPMENT AND ENGINEERING
Since its founding, Komag has focused on the development of advanced
thin-film disk designs, as well as the process technologies necessary to produce
these designs. The Company utilizes a full scale sputtering line for pilot
production. In addition, the Board of Directors has recently approved the
construction of a new 178,000 square foot research and development facility
which the Company expects to occupy in the first half of 1997. The Company's
spending and capital investment for R&D are focused on the investigation,
design, development, and testing of more efficient that can be integrated into
manufacturing in a commercially viable manner.
In 1996 thin-film media development efforts will focus on completing
the development of low-glide, full-surface textured inductive media for contact
recording and full-surface or mechanical zone-textured magnetoresistive ("MR")
media as well as the technical support for the production ramp of these
products. Additional efforts will be placed on the development of laser
zone-textured media for increased recording density in MR applications and on
the development of smooth glass media. Due to the interaction between heads and
disks in these advanced low-glide (less than 1.5 microinches) products, new
mechanical texturing processes are being developed as well as improved cleaning
processes, improved overcoats, and improved corrosion resistant metallic alloys
for the magnetic layers on the disks.
The Company's expenditures (and percentage of sales) on research,
development and engineering, were $23.8 million (4.6%) in fiscal 1995, $21.3
million (5.4%) in fiscal 1994, and $29.6 million (7.7%) in fiscal year 1993.
Research, development and engineering expenses in 1995 and 1994 were lower than
in 1993 due to the cessation of operations at a former thin-film head
manufacturing joint venture, Dastek, Inc. ("Dastek"). Dastek's research,
development and engineering expenditures amounted to approximately $11.8 million
in 1993.
STRATEGIC ALLIANCES
The Company has established joint ventures with Asahi Glass and Kobe.
Komag believes these alliances have enhanced the Company's competitive position
by providing research, development, engineering and manufacturing expertise that
reduce costs and technical risks and shorten product development cycles.
Asahi Komag Co., Ltd. ("AKCL")
In 1987 the Company formed a partnership (Komag Technology Partners)
with the U.S. subsidiaries of two Japanese companies, Asahi Glass and Vacuum
Metallurgical Company. The partners simultaneously formed a wholly-owned
subsidiary, AKCL, to manufacture and distribute thin-film disks in Japan. Under
the joint venture agreement, the Company contributed technology developed prior
to January 1987, and licensed technology developed after January 1987, to the
extent such technology relates to sputtered thin-film hard disk media, for a 50%
interest in the partnership. The Japanese partners contributed equity capital
aggregating 1.5 billion yen (approximately $11 million). AKCL began
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commercial production with its first production line in 1988 and added three
more production lines between 1989 and 1991. A fifth production line was added
at its manufacturing facility in Yonezawa, Japan in September 1995. During the
fourth quarter of 1995 the first sputtering line was removed from production for
upgrading to a new design standard, thus offsetting the incremental unit output
from the newly-installed fifth sputtering line. Following the upgrading of its
second sputtering line, AKCL is expected to commence production on all five
lines late in the first half of 1996.
The terms of the joint venture agreement provide that AKCL may only
sell disks for incorporation into disk drives that are assembled in Japan, with
no limitation on the territory in which AKCL's customers can sell such assembled
disk drive products. The Company has, however, periodically granted AKCL a
limited right to sell its disks outside of Japan. During the term of the joint
venture agreement and for five years thereafter, the Japanese partners and their
affiliates have agreed not to develop, manufacture or sell sputtered media
anywhere in the world other than through the joint venture, and the Company and
its affiliates have agreed not to develop, manufacture or sell such media in
Japan except through the joint venture. Upon the occurrence of certain
terminating events and the subsequent acquisition of AKCL by one or more of the
joint venture partners, the restrictions related to activities of the acquiring
joint venture partner(s) within Japan may lapse.
Disk sales to AKCL represented less than 1% of the Company's net sales
in 1995, 1994 and 1993. The Company purchased 1% of AKCL's unit output during
1995 compared to approximately 8% and 14% in 1994 and 1993, respectively.
Increased demand within the Japanese thin-film disk market continued to absorb
most of AKCL's production. The Company does not expect to sell appreciable
quantities of AKCL-produced products to U.S. customers in 1996 due to expected
strong demand within the Japanese media market. However, disk sales by the
Company to AKCL for distribution may increase in 1996.
Komag Material Technology, Inc. ("KMT")
In 1988 Komag formed a wholly-owned subsidiary, KMT, to secure an
additional stable supply of aluminum substrates of satisfactory quality for the
Company's products. In 1989 Kobe, a leading worldwide supplier of blank aluminum
substrates, purchased a 45% interest in KMT for $1.4 million. In December 1995,
the Company reacquired 25% of the outstanding common stock of KMT by purchasing
shares from Kobe for $6.75 million. The Company's recent purchase raised its
total ownership percentage of KMT to 80%. Under the recent stock purchase and
related agreements, Kobe retained one seat on KMT's Board of Directors.
Under the new agreements, Kobe will continue to supply substrate blanks
to KMT while the Company will continue to purchase KMT's entire output of
finished substrates. Further, the Company has indicated its intention to
purchase a substantial proportion of its future substrate requirements from
Kobe, a continuation of a past procurement practice. In combination, KMT and
Kobe supply in excess of 85% of the Company's substrate requirements.
Dastek, Inc. ("Dastek")
The Company previously supplied thin-film recording heads for hard disk
drives through Dastek, a joint venture with a subsidiary of Asahi Glass. Due to
market changes during 1993 and significant continuing losses, Dastek ceased its
inductive thin-film head operations in mid 1994, sold its equipment at various
public auctions, settled its obligations with its creditors and was legally
dissolved in December 1994.
Equity Positions Held by Asahi Glass and Kobe in Komag
Asahi Glass and Kobe each purchased one million shares of newly issued
Common Stock from the Company for $20 million in January 1989 and March 1990,
respectively. In 1992 Asahi Glass transferred
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ownership of its shares to a U.S. subsidiary of Asahi Glass. Under their
respective stock purchase agreements, Asahi Glass and Kobe each have the right
to purchase additional shares of the Company's Common Stock on the open market
to increase their respective equity interests in the Company to 20%, the right
to maintain their percentage interest in the Company by purchasing their pro
rata shares of any new equity issuance by the Company, and the right to require
the Company to register their shares for resale, either on a demand basis or
concurrent with an offering by the Company. Each stock purchase agreement
further provides that the Company shall use its best efforts to elect a
representative of each investor to the Company's Board of Directors and to
include such representatives on the Nominating Committee of the Board. During
1994 Asahi America and Kobe reduced their ownership positions in the Company by
3,691,568 and 2,573,112 shares, respectively. There were no purchases or sales
of the Company's stock by Asahi Glass or Kobe in 1995 and according to the
Company's stock records at February 23, 1996, Asahi America and Kobe held
2,000,000 and 2,000,002 shares of Common Stock, respectively. Sales of
significant amounts of the security holdings of Asahi Glass and/or Kobe in the
future could adversely affect the market price of the Company's Common Stock.
Any sales by either party, however, would require relinquishment of its
respective seat on the Company's Board of Directors.
COMPETITION
Current thin-film disk competitors fall into three groups: U.S.
non-captive manufacturers, U.S. captive manufacturers, and Japan-based
manufacturers. Historically, each of these groups has supplied approximately
one-third of the worldwide thin-film disk unit output. Based upon research
conducted by an independent market research firm, the Company believes it is the
leading supplier of thin-film disks, with a market share greater than twice the
size of any of the U.S. non-captive manufacturers or Japan-based manufacturers.
The Company's U.S. non-captive thin-film disk competitors include Akashic
Memories Corporation (a subsidiary of Kubota, Inc.), HMT Technology Corporation
and StorMedia, Inc. Japan-based thin-film disk competitors include Fuji Electric
Company, Ltd., Mitsubishi Kasei Corp., Showa Denko K.K. and HOYA Corporation.
The U.S. captive manufacturers include IBM and OEM drive manufacturers, such as
Seagate and Conner (who have recently merged operations), and Western Digital,
which manufacture disks as a part of their vertical integration programs. To
date, IBM and these OEM drive manufacturers have sold nominal quantities of
disks in the open market. See "Risk Factors -- Competition".
ENVIRONMENTAL REGULATION
The Company is subject to a variety of regulations in connection with
its operations, and believes that it has obtained all necessary permits for its
operations. The Company uses various industrial hazardous materials, including
metal plating solutions, in its manufacturing processes. Wastes from the
Company's manufacturing processes are either stored in areas with secondary
containment before removal to a disposal site or processed on site and
discharged to the industrial sewer system. In addition, at one of its
facilities, the Company receives industrial waste water from Headway, which
subleases a portion of a building in Milpitas, California directly from the
Company. Under this arrangement, the Company processes this received waste water
together with its own industrial waste water.
The Company has made investments in upgrading its waste water treatment
facilities to improve the performance and consistency of its waste water
processing. Nonetheless, industrial waste water discharges from the Company and
other businesses located at the southern end of the San Francisco Bay may, in
the future, be subject to more stringent regulations. Failure to comply with
present or future regulations could result in the suspension or cessation of
part or all of the Company's operations. Such regulations could restrict the
Company's ability to expand at its present locations or could require the
Company to acquire costly equipment or incur other significant expenses.
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PATENTS AND PROPRIETARY INFORMATION
Komag holds and has applied for United States and foreign patents
relating to its processes and equipment for manufacturing components and the
resulting components. While possession of patents could present obstacles to the
introduction of new products by competitors and possibly result in
royalty-bearing licenses from third parties, the Company believes that its
success does not depend on the ownership of intellectual property rights, but
rather on its innovative skills, technical competence and marketing abilities.
Accordingly, the patents held and applied for will not constitute any assurance
of the Company's future success.
The Company regards elements of its equipment designs and processes as
proprietary and confidential and relies upon employee and vendor non-disclosure
agreements and a system of internal safeguards for protection. Despite these
steps for protecting proprietary and confidential information, there is a risk
that competitors may obtain and use such information. Furthermore, the laws of
certain foreign countries in which the Company does business may provide a
lesser degree of protection to the Company's proprietary and confidential
information than provided by the laws of the United States. In addition, the
Company from time to time receives proprietary and confidential information from
vendors, customers, and partners, the use and disclosure of which being governed
by non-disclosure agreements. Through internal communication and the monitoring
of use and disclosure of such information, the Company complies with its
obligations regarding use and non-disclosure. However, despite these efforts,
there is a risk that such information may be used or disclosed in violation of
the Company's obligations of non-disclosure.
The Company has occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual rights
alleged to cover certain of the Company's products or manufacturing processes or
equipment. The Company evaluates whether to seek licenses to the rights referred
to in such communications. Although the Company believes that any such licenses
or other rights could be obtained by the Company on terms that would not have a
material adverse effect on the Company, there can be no assurance that this will
be the case.
EMPLOYEES
As of December 31, 1995 the Company and its consolidated subsidiaries
had 2,915 employees (2,748 of which are regular employees and 167 of which were
employed on a temporary basis), including 2,587 in manufacturing, 202 in
research, development and engineering, and 126 in sales, administrative and
management positions. Of the total 1,091 are employed at offshore facilities.
The Company believes that its future success will depend in large part
upon its ability to continue to attract, retain and motivate highly skilled and
dedicated employees. None of the Company's employees is represented by a labor
union and the Company has never experienced a work stoppage.
RISKS FACTORS
The Company's business is subject to a number of risks and
uncertainties. As a result of those risks described below and other risks
presented elsewhere in this report, there can be no assurance that the Company
will continue to be successful or will maintain a leading market position. The
discussion contained in Item 1 -- "Business" and Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain predictions, estimates and other forward-looking statements that involve
a number of risks and uncertainties. While this discussion represents the
Company's current judgment on the risks and 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: product transitions to next-generation
products; effective utilization
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of existing manufacturing facilities; continuation of improved manufacturing
efficiencies; industry supply-demand relationships and related pricing for
high-end disk products; execution of planned capacity additions; and vertical
integration and company consolidation within a limited customer base. 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.
Rapid Technological Change
The thin-film disk industry has been characterized by rapid
technological developments, increasingly shorter product life cycles, and price
erosion. The Company believes that its future success depends, in large measure,
on its ability to continually improve existing process technologies and to
develop and implement new process technologies in a timely manner. Such
technologies must support cost-effective, high-volume production of thin-film
disks that meet the ever-advancing customer requirements for enhanced magnetic
recording performance.
Although the Company has a significant, ongoing research and
development effort to advance its process technologies and the resulting
products, there can be no assurance that the Company will be able to develop and
implement such technologies in a timely manner in order to compete effectively
against competitors' products and/or entirely new data storage technologies. The
Company's results of operations would be materially adversely affected if the
Company's efforts to advance its process technologies were not successful or if
the technologies that the Company had chosen not to develop were proven to be
viable competitive alternatives.
In addition, protection of technology through patents and other forms
of intellectual property rights in technically sophisticated fields is
commonplace. There can be no assurance that others have not or will not perfect
such intellectual property rights and either enforce those rights to prevent the
Company from practicing certain technologies or demand royalty payments from the
Company in return for practicing those technologies, which may have a material
adverse affect on the Company's results of operations. The Company reviews, on a
routine basis, patent issuances in the U.S. and patent applications which are
published in Japan, and became aware of a Japanese patent application which, if
issued in identical form in Japan or, if there exists a corresponding
application in the U.S., if issued in the U.S., could give rise to a claim of
infringement against the Company. While the Company has not investigated this
Japanese patent application in detail, it believes it is unlikely that a valid
patent of sufficient breadth to materially adversely affect the Company's
business will be issued in either Japan or the U.S. However, there can be no
assurance that a broad patent will not issue from this application, which if
asserted against the Company and upheld may apply to a significant portion of
the Company's products and would have a material adverse effect on the Company's
business.
Capacity Expansion and Capital Intensity
Inasmuch as the Company is operating its disk production lines at or
near full capacity, future sales and earnings growth will depend on the
successful expansion of the Company's manufacturing capacity. The Company plans
to expand capacity by increasing the disk output of its existing production
lines through process improvements and through the installation of new
production lines at existing and new manufacturing facilities. To improve disk
output from existing production lines, the Company strives to reduce process
cycle times, improve manufacturing yields, and increase equipment utilization
rates. Additionally, the Company is upgrading certain older existing production
lines to a new design standard that should enhance the production capabilities
of these older machines. Should the Company's efforts in these areas not produce
the desired results, the Company's rate of growth may be constrained or
curtailed. Furthermore, should the Company experience a deterioration in
manufacturing performance or a delay or unforeseen outcome arising from the
machine upgrade program, the Company's results of operations would be materially
adversely affected.
11
<PAGE> 12
The Company currently plans to add another production line at its
existing manufacturing plant in Penang, Malaysia during the second quarter of
1996 and additional lines at new back end manufacturing facilities currently
under construction in San Jose (first line during fourth quarter of 1996) and
Penang (first line during first quarter of 1997). Installations of new
production lines at both facilities are expected to occur in 4 to 6 month
intervals. In addition, a new front end manufacturing plant will begin operation
in the second quarter of 1996 in the east Malaysian state of Sarawak. There can
be no assurance that the Company's additional production lines will be installed
as scheduled or will experience the high levels of manufacturing efficiencies
attained by the Company's existing production lines. The Company must attract,
train, motivate and retain highly-trained and dedicated employees, particularly
at the Company's new operations in Sarawak. Manufacturing and other challenges
in connection with the commencement and subsequent expansion of operations in
any location and in particular Sarawak, a business location with limited
experience in advanced manufacturing, could have a material adverse affect on
the Company's results of operations.
Based upon industry forecasts of continued high growth in demand for
magnetic media, the Company has developed plans to increase its production
capacity under a schedule that is substantially more aggressive than its past
expansion plans. Implementation of this plan entails parallel expansion at
multiple locations rather than serial expansion one location at a time, thus
requiring precise planning. Successful execution of this parallel expansion will
require timely identification and acquisition of appropriate sites, receipt of
requisite approvals, construction and equipping of facilities, recruitment and
retention of a high quality workforce, and achievement of satisfactory
manufacturing results on a scale greater than the Company's prior expansions.
The Company's capital expenditures totaled $166 million in 1995 and
1996 capital expenditures are planned to increase to $350 million. Due to the
capital intensive nature of the Company's business, the construction and
equipping of new manufacturing facilities requires substantial capital
investment. Further, significant amounts of continuing investment in capital
equipment is required to improve, modify and change existing manufacturing
processes to support rapidly changing process technologies. There can be no
assurance that the Company will be able to properly plan and install capable
plant and equipment to support the manufacturing processes required for advanced
future products in a timely and cost-effective manner due to the long lead times
required to design, construct and install plant and equipment. Further, required
changes in manufacturing processes could obsolete or significantly shorten the
useful lives of substantial amounts of equipment.
There can be no assurance that the Company will successfully achieve
planned process improvements or successfully manage its aggressive expansion
plan. In addition, should actual demand for the Company's products not meet the
Company's forecast, and not absorb existing or planned additional capacity, the
fixed costs and operating expenses related to unused capacity would have a
material adverse affect on the Company's results of operations.
Dependence on a Limited Number of Customers; Dependence on the Hard Disk Drive
Industry
The Company's sales are concentrated in a small number of customers due
to the high-volume requirements of the dominant disk drive manufacturers and
their tendency to rely on a few suppliers because of the close interrelationship
between media performance and disk drive performance. Net sales to major
customers in 1995 were as follows: Seagate -- 42%, Quantum -- 23%,
Hewlett-Packard -- 15%, and Western Digital -- 12%. Given the relatively small
number of high-performance disk drive manufacturers, the Company expects that it
will continue its dependence on a very limited number of customers. Further
there have been consolidations among the Company's disk drive customers,
including the recent merger of Seagate and Conner. In addition, Quantum recently
announced that it would cease disk drive production in Milpitas, California and
Penang, Malaysia and contract with its Japanese manufacturing partner,
Matsushita-Kotobuki Electronics, Industries, Ltd. ("MKE") to manufacture its
disk drives. AKCL, the Company's Japanese joint venture, has an established
working relationship with MKE and MKE has remained AKCL's largest customer for
the past several years. The Company's
12
<PAGE> 13
Malaysian subsidiary recently began shipments to MKE's new Singapore
manufacturing facility. However, there can be no assurance that MKE will
purchase from either Komag or AKCL the unit quantities of product which the
Company previously supplied to Quantum in the U.S. and Malaysia.
Seagate produces a portion of its disk requirements internally and
Conner produces the majority of its own disk requirements. Prior to their
merger, both Seagate and Conner announced expansions of their disk production
facilities and Seagate has recently announced a long-term purchase commitment
with one of the Company's competitors. Other customers and potential customers
have, or could adopt, similar strategies. Depending on the overall growth in
market demand for disk products, such actions could result in the reduction or
cessation of purchases from the Company, thus materially adversely affecting the
Company's results of operations. Additionally, if one or more of the Company's
customers were to begin selling disks on the open market in direct competition
with the Company, the Company's results of operations could be further adversely
affected.
The demand for the Company's high-performance thin-film disks depends
upon the demand for hard disk drives and the Company's ability to provide
technically superior products at competitive prices. The high-performance
segment of the hard disk drive market is characterized by short product life
cycles and rapid technological change. Failure by the Company to qualify new
products and/or successfully achieve volume manufacturing of new customer
products could adversely affect the Company's results of operations.
Furthermore, the Company's sales are generally made pursuant to purchase orders
which are subject to cancellation, modification or rescheduling without
significant penalties. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods, or that the
Company will be able to obtain orders from new customers.
Capital Needs
The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
significant additional financial resources over the next several years for
capital expenditures, working capital and research and development. During 1996,
the Company expects to spend approximately $350 million on capital expenditures.
The Company believes that it will be able to fund these expenditures from a
combination of cash flow from operations, funds available from existing and
possibly new bank lines of credit, and existing cash balances. Property, plant
and equipment expenditures in 1997 are expected to be approximately $400 million
and will require significant new capital, thus necessitating additional debt,
equity or other financing. There can be no assurance that such additional funds
will be available to the Company or, if available, will be available on
favorable terms. In addition, the Company may require additional capital for
other purposes. If the Company is unable to obtain sufficient capital, it could
be required to reduce its capital equipment and research and development
expenditures, which could have a material adverse affect on the Company's
results of operations.
Fluctuations in Operating Results
The Company believes that its future operating results will continue to
be subject to quarterly variations based upon a wide variety of factors,
including the cyclical nature of the hard disk drive industry, the ability to
develop and implement new manufacturing process technologies, the ability to
introduce new products and to achieve cost-effective, high-volume production in
a timely manner, changes in product mix and average selling prices, the
availability and the extent of utilization of the Company's production capacity,
manufacturing yields, prolonged disruptions of operations at any of the
Company's facilities for any reason, changes in the cost of or limitations on
availability of labor, and increases in production and engineering costs
associated with initial production of new product programs.
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 average selling prices, reductions in manufacturing
efficiency would cause declines in gross margins. Additionally, decreasing
13
<PAGE> 14
demand for the Company's products generally results in reduced average selling
prices and/or low capacity utilization that, in turn, adversely affects gross
margins and operating results. The Company's ability to maintain average selling
prices and gross margins is dependent on its ability to produce, in volume,
products that are differentiated on the basis of technological superiority. In
the second, third and fourth quarters of 1995, the Company achieved high gross
margins as a result of increased manufacturing efficiencies, coupled with strong
market demand for and an industry shortage of 1800 Oe disks. The Company does
not believe that future gross margins are sustainable at the fourth quarter's
record level. The Company expects that the overall average selling price will
likely trend downward from the average selling price in the fourth quarter of
1995 due to a continuing high proportion of 1800 Oe product sales during the
first half of 1996. The transition to higher-priced 2000 Oe products is expected
to commence in the second quarter of 1996 and such products could account for
more than 50% of the Company's sales during the fourth quarter of 1996. In the
event that market supply meets or exceeds demand or the Company is unable to
introduce and ramp to volume production next-generation products in a timely
manner, the Company's operating results would likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Fluctuations in the financial results of AKCL, the Company's
unconsolidated Japanese disk manufacturing joint venture, could also impact the
Company's financial performance. Equity in net income of AKCL contributed 7% of
the Company's 1995 consolidated net income. AKCL is subject to many of the same
types of risks facing the Company. In addition, the equity income derived from
AKCL fluctuates over time due to its dependence on a more limited customer base
(MKE and Fujitsu Ltd. accounted for 72% and 26%, respectively, of AKCL's 1995
net sales), yen/dollar exchange rate fluctuations, and possible further
write-downs by AKCL of its investment in Headway Technologies, Inc.
Risk of Foreign Operations
In 1995, sales to customers in the Far East, including foreign
subsidiaries of domestic companies, accounted for 62% of the Company's net sales
from its U.S. and Malaysian facilities, and the Company anticipates that
international sales will continue to represent the majority of its net sales.
All of the Company's sales are currently priced in U.S. dollars worldwide.
Certain costs at the Company's foreign manufacturing and marketing operations
are incurred in the local currency. The Company also purchases certain operating
supplies and production equipment from Japanese suppliers in yen denominated
transactions. Accordingly, the Company's operating results are subject to the
risks inherent with international operations, including but not limited to,
compliance with or changes in the law and regulatory requirements of foreign
jurisdictions, fluctuations in exchange rates, tariffs or other barriers,
difficulties in staffing and managing foreign operations, exposure to taxes in
multiple jurisdictions, and transportation delays and interruptions.
The Company's existing Malaysian manufacturing facility accounted for
33% and 52% of the Company's 1995 consolidated net sales and operating income,
respectively. Prolonged disruption of operations at this facility for any reason
would cause delays in shipments of the Company's products, thus materially
adversely affect the Company's results of operations.
Competition
The Company's thin-film disk products are used primarily in the
high-capacity segment of the 3 1/2-inch and 5 1/4-inch hard disk drive market,
where product performance, consistent quality and availability, taken together,
are of great competitive importance. To succeed in an industry characterized by
rapid incremental technological developments, the Company must continuously
advance its thin-film technology at a pace consistent with or faster than its
competitors. In addition, the Company must capture a market share position that
will insure a competitive cost structure. The Company believes that its
thin-film manufacturing facility in Penang, Malaysia provides a significant
competitive cost advantage relative to most other thin-film disk manufacturers
that currently operate exclusively in the U.S. and Japan. However, if the
technology involved in the manufacture of thin-film disks does not continue to
advance
14
<PAGE> 15
rapidly, or if the Company is not able to keep pace with such advances, the
Company may face increased price competition from other manufacturers. Such
competition could materially adversely affect its results of operations.
Worldwide disk drive shipments grew 30% in 1995 over 1994 and are
projected to grow approximately 30% in 1996 over 1995 according to International
Data Corporation ("IDC"). IDC forecasts that the annual rate of unit growth will
remain high, at about 20%, through 1999. In response to the continuing rapid
growth of the disk drive market and resulting strong demand for thin-film disk
products, a majority of the Company's competitors (both independent disk
manufacturers and vertically-integrated disk drive customers) have announced
substantial plans to increase disk manufacturing capacity. These significant
investments in new disk production capacity, coupled with slower market growth
for data storage, could reduce the number of potential customers and increase
competition for the remaining market. Such conditions could have a material
adverse affect on the Company's results of operations.
Volatility of Stock Price
The Company's Common Stock has experienced and can be expected to
experience substantial price volatility in response to actual or anticipated
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments
related to patents or other intellectual property rights, developments in the
Company's relationships with its customers or suppliers, announcements of
alliances, mergers or other relationships by or between the Company's
competitors and/or customers, and other events or factors. In addition, any
shortfall or changes in revenue, gross margins, earnings, or other financial
results from analysts' expectations could cause the price of the Company's
Common Stock to fluctuate significantly. In recent years the stock market in
general has experienced extreme price and volume fluctuations which have
particularly affected the market price of many technology companies and which
have often been unrelated to the operating performance of those companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Price Range of Common Stock".
Other Risk Factors
The Company relies on a limited number of suppliers, in some cases a
sole supplier, for certain materials used in its manufacturing processes. These
materials include aluminum substrates, nickel plating solutions, sputtering
target materials, and certain polishing and texturing supplies. These suppliers
work closely with the Company to optimize the Company's production processes.
Although this reliance on a limited number of suppliers, or sole supplier,
entails some risk that the Company's production capacity would be limited if one
or more of such materials were to become unavailable or available in reduced
quantities, the Company believes that the advantages of working closely with
these suppliers outweigh such risks. If such materials should be unavailable for
a significant period of time, the Company's results of operations would be
adversely affected.
The Company's California manufacturing facilities, its Japanese joint
venture (AKCL), its Japanese supplier of aluminum blanks for substrate
production, other Japanese suppliers of key manufacturing supplies, and its
Japanese supplier of sputtering machines are each located in areas with seismic
activity. The Company has incurred no significant disruptions to its business
due to seismic activity. However, there can be no assurance that seismic
activity or other natural disasters will not result in a prolonged disruption of
production in the future. Such disruptions could have a material adverse affect
on the Company's results of operations.
15
<PAGE> 16
ITEM 2. PROPERTIES.
Worldwide (excluding AKCL), the Company currently occupies facilities
totaling approximately 813,000 square feet and has 775,000 square feet of
manufacturing facilities currently under construction. The Company owns a
340,000 square foot thin-film disk manufacturing facility in Penang, Malaysia on
a 13-acre site and the Company's headquarters, research and development,
manufacturing, and sales facilities are located in leased buildings in the
cities of Milpitas, San Jose, and Santa Rosa, California. These facilities are
leased for the following terms:
<TABLE>
<CAPTION>
FACILITY SIZE CURRENT LEASE
(SQUARE FEET) TERM EXPIRES EXTENSION OPTIONS
<S> <C> <C> <C>
103,000 July 1999 10 years
97,000 February 2001 10 years
96,000 February 2001 10 years
44,000 April 1999 10 years
39,000 March 1997 --
51,000 March 1997 --
</TABLE>
In addition to the facilities listed above, the Company leases other
smaller facilities in California and Singapore. The Company owns approximately 6
acres of undeveloped land adjacent to its Milpitas manufacturing complex.
The Company is currently constructing and equipping a 275,000 square
foot front end manufacturing plant on a 77-acre site in Kuching, the capital
city of the east Malaysian state of Sarawak. Production from this facility is
scheduled to commence in the first half of 1996. The Company is also
constructing a new 225,000 square foot back end disk manufacturing plant in San
Jose, California under a build-to-suit lease arrangement on a 14-acre parcel and
recently commenced construction of a new 275,000 square foot back end disk
manufacturing plant in Penang, Malaysia on a 18-acre site. The new back end
plants in San Jose and Penang should begin operations in the fourth quarter of
1996 and first quarter of 1997, respectively.
In January 1996, the Board of Directors approved the construction
(under build-to-suit lease arrangements) of a new 178,000 square foot research
and development building and a new 90,000 square foot administrative building in
San Jose, California. These new buildings will be located on an 18-acre parcel
adjacent to the new San Jose manufacturing plant and will be ready for occupancy
in the first half of 1997.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company or its
subsidiaries is a party or to which any of its property is subject.
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
A Special Annual Meeting of Stockholder's was held on December 20, 1995
for the following purpose:
To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized shares of Common Stock from 35,000,000
shares to 85,000,000 shares.
Shares of Common Stock voted (on a post-split basis) were as follows:
For -- 43,549,324
Against -- 747,814
Abstain -- 291,768
Broker non-votes -- 5,837,866
EXECUTIVE OFFICERS OF THE REGISTRANT
As of January 31, 1996 the executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Tu Chen................................... 60 Chairman of the Board of Directors
Stephen C. Johnson........................ 53 President, Chief Executive Officer and Director
Willard Kauffman.......................... 60 Senior Vice President-Chief Operating Officer
Venche Kao................................ 59 Vice President Manufacturing-Milpitas Operations
Kathryn A. McGann......................... 50 Vice President-Human Resources
Steven J. Miura........................... 43 Vice President-Quality and Product Integration
T. Hunt Payne............................. 53 Senior Vice President-Marketing and Sales
William L. Potts, Jr...................... 49 Senior Vice President, Chief Financial Officer and
Secretary
Thian Hoo Tan............................. 47 Vice President Manufacturing-Malaysian Operations
Sonny Wey................................. 54 Vice President-Engineering and R&D
William V. Whitmer........................ 53 Vice President Manufacturing-U.S. Operations
Tsutomu T. Yamashita...................... 41 Vice President-Research
</TABLE>
Dr. Chen is a founder of the Company and has served as Chairman of the
Board from its inception in June 1983. From 1971 to June 1983 he was a Member,
Research Staff and principal scientist at Xerox Corporation's Palo Alto Research
Center. From 1968 to 1971 Dr. Chen was employed as a research scientist for
Northrop Corp. Dr. Chen received his Ph.D. and M.S. in Metallurgical Engineering
from the University of Minnesota and holds a B.S. degree in Metallurgical
Engineering from Cheng Kung University in Taiwan.
Mr. Johnson has served as President and Chief Executive Officer of the
Company since September 1983. From 1977 to 1983 Mr. Johnson was an officer of
Boschert Incorporated, a manufacturer of switching power supplies, initially as
Vice President, Marketing and subsequently as President and Chief Executive
Officer. Mr. Johnson holds a B.S. degree in Engineering from Princeton
University, a M.S. degree in Electrical Engineering from the University of New
Mexico and a M.B.A. degree from the Harvard Graduate School of Business. Mr.
Johnson is a director of 3COM Corporation and Uniphase Corporation.
17
<PAGE> 18
Mr. Kauffman was appointed Senior Vice President-Chief Operating
Officer in February 1990. For three years prior to joining the Company, Mr.
Kauffman was Executive Vice President and Chief Operating Officer of Vitelic
Corporation. Prior to that he was employed at Intel Corporation for 16 years in
a variety of positions, including Vice President of Component Production and
Vice President of Component Quality. Mr. Kauffman holds B.S. and M.S. degrees in
Engineering Physics from Lehigh University.
Dr. Kao was promoted to Vice President for Milpitas Manufacturing in
October 1993. Dr. Kao joined Komag in November 1983 as a manager of Operations
and was promoted to Director of Manufacturing in April 1988. Previously, Dr. Kao
was a Plant Manager at Tau Laboratory, Inc. in New York. Dr. Kao holds a Ph.D.
degree from Iowa State University where he majored in Electrical Engineering and
minored in Physics.
Ms. McGann joined the Company as Vice President-Human Resources in
September 1988. From 1978 to 1981 and from 1985 to 1988 she was employed by
Transamerica Corporation in various human resource management positions. From
1981 to 1985, Ms. McGann was an area personnel manager and later a personnel
programs manager at Digital Equipment Corporation. Ms. McGann holds a B.A.
degree in Anthropology from the University of California at Berkeley and a
Masters degree in Public Administration from the University of Southern
California.
Mr. Miura joined the Company in 1984 and was Director of Test
Engineering prior to his promotion to Vice President-Quality and Product
Integration in November 1991. Before joining Komag, Mr. Miura held various
engineering positions at IBM. Mr. Miura holds both B.S. and M.S. degrees in
electrical engineering from the University of California, Davis.
Mr. Payne joined the Company in June 1985 and was Vice
President-Marketing and Sales prior to his promotion to Senior Vice
President-Marketing and Sales in January 1992. From November 1983 to June 1985
he was a founder and Vice President of Marketing for Domain Technology,
Incorporated. From 1981 to 1983 he served as Vice President of Sales for
ITT/Qume Corporation and prior to that served in several sales management
positions for Control Data Corporation.
Mr. Potts joined the Company in 1987 and served as Vice President --
Chief Financial Officer from January 1991 until his promotion to Senior Vice
President -- Chief Financial Officer in January 1996. In addition Mr. Potts
serves as Secretary. Prior to joining Komag, Mr. Potts held financial management
positions at several high technology manufacturing concerns. He has also served
on the consulting staff of Arthur Andersen & Co. Mr. Potts holds a B.S. degree
in Industrial Engineering from Lehigh University and a M.B.A. degree from the
Stanford Graduate School of Business.
Mr. Tan was appointed Vice President Manufacturing of Komag,
Incorporated in September 1993 and has served as the Managing Director of Komag
USA (Malaysia) Sdn., since February 1992. Previously, Mr. Tan was in charge of
operations at Komag's San Jose, California manufacturing facility. Before
joining Komag in 1989, Mr. Tan was Vice President of Operations at HMT
Technology. Mr. Tan holds a M.S. degree in Physics from University of Malaya at
Kuala Lumpur.
Dr. Wey has served as Vice President-Engineering since April 1988 and
assumed his current responsibilities in January 1996. Dr. Wey joined the
Company in November 1983 and has held director positions in both engineering
and manufacturing. For 10 years prior to joining the Company, Dr. Wey worked in
various engineering and engineering management positions at IBM. Dr. Wey
received his Ph.D. in Physical Chemistry from the Illinois Institute of
Technology and holds a B.S. degree in Chemical Engineering from National
Chen-Kung University in Taiwan.
18
<PAGE> 19
Mr. Whitmer joined the Company as Vice President-Manufacturing in
December 1987. From 1972 to 1987, he held various positions with Raychem
Corporation including the General Manager of the Materials Division. Mr. Whitmer
holds a B.S. degree in Chemical Engineering from Ohio State University.
Mr. Yamashita joined the Company in 1984 and was Senior Director of
Research prior to his promotion to Vice President-Research in January 1995.
Prior to joining the Company, Mr. Yamashita was a graduate research assistant in
the Department of Material Science and Engineering at Stanford University. Mr.
Yamashita holds a B.S. in Chemistry and M.S. in Materials Science from Stanford
University.
PART II
ITEMS 5, 6, 7 AND 8.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol KMAG. The following table sets forth the range of high and low
closing sales prices, as reported on the Nasdaq National Market. At February 23,
1996 the Company had approximately 449 holders of record of its Common Stock and
50,832,767 shares outstanding. The share prices have been adjusted to reflect
the Company's two-for-one stock split effective December 21, 1995.
PRICE RANGE OF
COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
First Quarter 13 13/16 7 7/8
Second Quarter 12 5/8 8 7/8
Third Quarter 13 1/4 9 5/8
Fourth Quarter 14 5/16 12 1/16
1995
First Quarter 16 23/32 11 9/16
Second Quarter 26 1/8 15 7/8
Third Quarter 37 1/16 25 5/8
Fourth Quarter 34 3/8 21 15/16
1996
First Quarter (through February 23, 31 7/8 23
1996)
</TABLE>
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. Certain of Komag's debt agreements limit the
amount of dividend payments without the lenders' consent.
19
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of Komag, Incorporated. The financial data and
operating information is derived from the consolidated financial statements of
Komag, Incorporated and should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------
1995 1994 1993 (1) 1992 1991
-------- -------- -------- -------- --------
(in thousands, except per share amounts and number of employees)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net Sales $512,248 $392,391 $385,375 $326,801 $279,194
Gross Profit 197,486 125,386 91,439 67,765 68,185
Restructuring Charge -- -- 38,956 -- --
Income (Loss) Before
Minority Interests and Equity
in Joint Venture Income 101,410 54,156 (33,738) 4,263 14,314
Minority Interests in Net Income
(Loss) of Consolidated
Subsidiaries 1,957 1,091 (18,977) (9,458) 1,025
Equity in Net Income of
Unconsolidated Joint Venture 7,362 5,457 4,860 3,172 2,070
Net Income (Loss) $106,815 $58,522 $(9,901) $16,893 $15,359
Net Income (Loss) Per Share (2) $2.14 $1.27 $(0.23) $0.40 $0.38
CONSOLIDATED BALANCE SHEET DATA:
Working Capital $252,218 $118,230 $97,265 $97,894 $97,808
Net Property, Plant & Equipment 329,174 228,883 187,267 192,051 120,904
Long-term Debt & Capital
Lease Obligations (less current portion) -- 16,250 29,482 27,613 16,516
Stockholders' Equity 574,564 331,215 255,331 248,738 202,077
Total Assets $686,315 $424,095 $382,297 $355,849 $276,979
Number of Employees at Year-end 2,915 2,635 3,497 3,090 2,637
</TABLE>
(1) The results of operations for 1993 included a $39.0 million
restructuring charge for the winding down of Dastek's inductive
thin-film head operation. The net effect of the restructuring charge,
after related minority interest and tax adjustments, was $35.4 million
($0.83 loss per share) for 1993.
(2) The earnings per share amounts have been restated to reflect the
two-for-one stock split effective December 21, 1995.
(3) The Company paid no cash dividends during the five-year period.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's business is both capital intensive and volume sensitive,
making capacity planning and efficient capacity use imperative. Physical
capacity, utilization of this physical capacity, yields and average unit sales
price constitute the key determinants of the Company's profitability. Of these
key determinants, price and utilization are the most sensitive to changes in
product demand. If capacity and product price are fixed at a given level and
demand is sufficient to support a higher level of output, then increased output
attained through improved utilization rates and higher manufacturing yields will
translate directly into increased sales and improved gross margins.
Alternatively, if demand for the Company's products decreases, falling average
selling prices and lower capacity utilization could adversely affect the results
of the Company's operations.
The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion 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: product
transitions to next-generation products; effective utilization of existing
manufacturing facilities; continuation of improved manufacturing efficiencies;
industry supply-demand relationships and related pricing for high-end disk
products; execution of planned capacity additions; and vertical integration and
consolidations within a limited customer base. See "Business - Risk Factors" for
more detailed discussions of the Company's risk factors. 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.
1995 VS. 1994
Net Sales
Net sales for 1995 rose to $512.2 million, a 31% increase over the
$392.4 million reported in 1994. The combination of unit sales volume growth and
an increase in the overall average selling price resulted in the substantially
higher net sales. Nearly three-quarters of the improvement in net sales was
attributable to higher unit sales volume in 1995 relative to 1994. The overall
average selling price typically strengthens only as the result of product mix
shifts to higher-priced, more technologically advanced product offerings. Price
reductions for individual product offerings are characteristic of the thin-film
media industry. The Company began a rapid transition to its leading-edge 1800 Oe
product offering in the fourth quarter of 1994. Unit sales of this product
increased to 91% of unit sales volume in the fourth quarter of 1995 from 14% of
unit sales in the fourth quarter of 1994. The higher sales mix of 1800 Oe
product and a favorable pricing environment arising from an industry shortage of
this product allowed the overall average selling price to increase 7% in 1995
relative to 1994. The overall average selling price will likely trend downward
from the average selling price in the fourth quarter of 1995 due to a continuing
high proportion of 1800 Oe product sales during the first half of 1996. The
transition to higher-priced 2000 Oe products is expected to commence in the
second quarter of 1996 and such products could account for more than 50% of the
Company's sales during the fourth quarter of 1996. Any delay in the introduction
of these products could adversely affect the Company's results of operations.
21
<PAGE> 22
In addition to sales of its internally produced disk products, the
Company resells products manufactured by Asahi Komag Co., Ltd. ("AKCL"), its
Japanese joint venture with Asahi Glass Company, Ltd. Distribution sales of
product manufactured by AKCL decreased to $0.9 million in 1995 from $9.4 million
in 1994. The Company purchased smaller quantities of product from AKCL in 1995
as demand within the Japanese thin-film media market absorbed the majority of
AKCL's capacity. The Company anticipates that distribution sales of
AKCL-produced product to U.S. customers in 1996 will be minimal.
Increased production volume may occur due to increased physical
capacity (additional production lines) and/or improvements in manufacturing
efficiencies (improved unit output from higher yields, better equipment
utilization or shorter process cycle times). The increase in unit production
volume required to support the increase in unit sales volume for 1995 relative
to 1994 was primarily achieved through the addition of production lines and
improvement in cycle times. Production yields and equipment utilization rates
were relatively unchanged between the years. Shortened process cycle times
accounted for nearly one-half of the increase in unit output in 1995 relative
to 1994. Net physical capacity additions provided the remaining increase in
unit production volume. The Company added one new sputtering machine in each of
January 1994, August 1994, March 1995 and September 1995. As of the end of the
year, the Company had a total of fifteen production lines, ten in the U.S. and
five in Malaysia. In late 1994, the Company began a program to upgrade its
sputtering machines to enhance product capabilities and shorten process cycle
times. The Company expects one U.S. machine will be out of production on a
rotating basis through 1996. The addition of two production lines in the first
and second quarters of 1996 and full use of the two production lines installed
during 1995 throughout 1996, coupled with expected efficiency improvements,
should allow unit output between 1995 and 1996 to grow approximately 35%.
Gross Margin
The gross margin percentage for 1995 rose to 38.6%, up markedly from
the 32.0% gross margin achieved for 1994. The combination of the rapid
transition to 1800 Oe product in 1995, strong industry demand for this product,
and solid manufacturing performance produced this historically high gross margin
for the Company. The 7% increase in the overall average selling price accounted
for over two-thirds of the gross margin percentage improvement. Additionally,
process cycle time improvements allowed the Company to lower its overall average
unit cost of production despite the inherently higher costs of producing more
technologically advanced 1800 Oe products. The gross margin percentage increased
sequentially in each quarter of 1995 from 31.2% in the first quarter to 42.6% in
the fourth quarter of 1995 as the sales mix of 1800 Oe product increased and
market conditions for advanced thin-film media remained strong. The gross margin
achieved in the fourth quarter of 1995 was well above the Company's targeted
range and the Company anticipates that its quarterly gross margin percentage
will decline toward its targeted range of 33%-38% as the 1996 fiscal year
progresses. Continued focus on process improvement programs designed to increase
production throughput and reduce the overall average unit production cost should
reduce, but not eliminate, the impact of a decreasing overall average selling
price on the Company's gross margin in 1996. In spite of expected sequential
increases in quarterly unit output, reductions in the gross margin percentage
from the level achieved in the fourth quarter of 1995 will likely restrict
sequential earnings growth during 1996. However, the Company believes that its
1996 annual financial performance will compare favorably to that achieved for
fiscal year 1995.
Operating Expenses
Research and development expenses increased 12% ($2.5 million) in 1995
relative to 1994. The increase was primarily due to development of improved
sputtering processes and next-generation thin-film media products. Selling,
general and administrative ("SG&A") expenses increased $17.5 million in 1995
compared to 1994. The increase was primarily due to a $13.5 million increase in
the provisions for the Company's bonus and profit sharing programs resulting
from the substantially higher operating performance in 1995. Provisions for bad
debt increased $1.5 million between the years. Excluding provisions for bad debt
and the Company's bonus and profit sharing programs, SG&A expenses
22
<PAGE> 23
increased approximately $2.5 million between the years. Increases in
administrative costs required to support the growth in the business accounted
for the majority of the increase.
Interest Income/Expense and Other Income
Interest income increased $2.5 million (76%) in 1995 relative to 1994.
The increase was due to the combination of higher interest rates and higher
average investment balances in 1995. The Company exited 1995 with $213.7 million
in cash and short-term investments compared to $93.9 million at the end of 1994.
Proceeds from the Company's third public offering in September 1995 and
significant cash flow provided by operations in 1995 allowed the Company to
maintain its higher average investment balances for 1995. Interest expense
decreased $1.1 million (37%) in 1995 compared to 1994 due to a lower average
outstanding debt balance for 1995. The Company repaid all of its existing
outstanding debt in September 1995 and exited the year with no bank debt. Other
income increased $2.1 million in 1995 relative to 1994 primarily due to receipt
of an insurance recovery related to an electrical power disruption at the
Company's Malaysian manufacturing facility.
Income Taxes
The effective income tax rate for 1995 of 25% was lower than the 1995
combined federal and state statutory rate of 41% and the effective income tax
rate of 30% in 1994 primarily as a result of a tax holiday granted to the
Company's wholly-owned thin-film media operation in Malaysia. Komag USA
(Malaysia) Sdn. ("KMS") has been granted a five-year tax holiday by the
Malaysian government. Assuming the Company fulfills certain commitments under
its license to operate within Malaysia, this tax holiday may be extended for an
additional five-year period by the Malaysian government. The impact of the tax
holiday was to increase net income by approximately $11.5 million ($0.23 per
share) and $6.4 million ($0.14 per share) in 1995 and 1994, respectively. Losses
incurred prior to the commencement of the tax holiday, approximately $6.2
million, are available for carryforward to years following the expiration of the
tax holiday. The Company anticipates that the effective income tax rate for 1996
will decrease as KMS installs one additional sputtering machine in each of the
first and second quarters of 1996 and generates a larger percentage of the
Company's consolidated profit than in 1995.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture
The minority interest in the net income of consolidated subsidiary
during 1995 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") 45% share of
Komag Material Technology, Inc.'s ("KMT") net income. KMT recorded net income of
$4.3 million and $2.4 million in 1995 and 1994, respectively. On December 28,
1995 the Company increased its ownership interest in KMT from 55% to 80% through
the purchase of KMT shares directly from Kobe USA for $6.75 million. Kobe USA
retained a 20% minority interest investment in KMT.
The Company records 50% of AKCL's net income as equity in net income of
unconsolidated joint venture. AKCL reported net income of $14.7 million for
1995, up from $11.0 million for 1994. Equity in net income of AKCL contributed
7% of the Company's 1995 consolidated net income. The Company anticipates that
AKCL's equity income will account for a similar percentage of 1996 consolidated
net income. The Company translates AKCL's yen-based income statements to U.S.
dollars at the average exchange rate in effect during the year. The Japanese yen
strengthened approximately 6% in 1995 relative to 1994. AKCL's net income would
have been approximately $13.5 million in 1995 had the yen-based income statement
been translated at the average rate in effect for 1994.
AKCL's net income in 1996 will be affected by the start-up costs
associated with a new manufacturing facility and the financial performance of
Headway Technologies, Inc. ("Headway"). AKCL began construction of a 225,000
square foot facility in Thailand for front end production of thin-film disks in
1995 and expects to begin production at this site in late 1996. AKCL invested in
Headway in 1994 and has been recording partial writedowns of its investment
based upon net losses incurred at
23
<PAGE> 24
Headway. AKCL's net income reflected writedowns, net of tax, of $2.2 million and
$0.5 million in 1995 and 1994, respectively. To the extent that such losses
continue, AKCL will record a portion of those losses. Alternatively, AKCL will
record a portion of Headway's net income, if any, to the extent of previously
recognized losses.
Other
The Company operates facilities in the U.S. and Malaysia and ships
products to both domestic and international locations. In order to minimize the
risks associated with foreign currency fluctuations, the Company denominates its
sales in U.S. dollars and periodically enters into foreign exchange contracts to
hedge firm purchase commitments. The Company had approximately $17.1 million of
foreign exchange contracts outstanding at December 31, 1995. No such foreign
exchange contracts were open as of January 1, 1995. Gains and losses created by
the remeasurement of the financial statements of the Company's Malaysian
operations into U.S. dollars from Malaysian ringgits have not had a significant
effect on the consolidated results of operations.
In 1995, the Company adopted Statement of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed" ("FAS 121"). The adoption of FAS 121 did not have a
material impact on the Company's financial position or results of operations.
Beginning January 1, 1996, the Company will be required to adopt Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). The Company plans to adopt only the disclosure requirements of the
Statement and, as such, the adoption of FAS 123 will have no impact on the
Company's financial position or results of operations.
1994 VS. 1993
The Company's consolidated results of operations for 1994 represent the
Company's thin-film media operations exclusively. In contrast, results of
operations for 1993 consolidate the operating results of the Company's thin-film
media operations and Dastek, Inc. ("Dastek"), the Company's thin-film head joint
venture with Asahi Glass America, Inc. ("Asahi America"). In the fourth quarter
of 1993, the Company recorded a $39.0 million restructuring charge related to
the cessation of Dastek's inductive thin-film head operations, which was
effected during 1994. Approximately one-half of the restructuring charge
provided for estimates of losses to be incurred during the 1994 wind down of
Dastek's operations. The remaining charge primarily represented reductions of
assets and liabilities to their estimated net realizable value. Actual operating
losses incurred in 1994 were approximately one-third higher than estimated in
the 1993 restructuring charge. However, net losses from the sale of Dastek's
assets and the settlement of its liabilities were lower by a comparable amount.
24
<PAGE> 25
Excluding Dastek's results of operations and the related restructuring
charge, income statements for the Company were as follows for 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands) Fiscal Year Ended
------------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales $392,391 $334,542
Cost of sales 267,005 225,086
-------- --------
Gross profit 125,386 109,456
Research, development and engineering 21,340 17,867
Selling, general and administrative 27,101 24,488
-------- --------
Operating income 76,945 67,101
Interest income 3,306 2,674
Interest expense (2,933) (4,038)
Other income, net 48 606
Income before taxes, minority
interest and equity in joint -------- --------
venture income 77,366 66,343
Provision for income taxes 23,210 24,825
Minority interest in net income
of consolidated subsidiary 1,091 499
Equity in income of
unconsolidated joint venture 5,457 4,860
-------- --------
Net income $ 58,522 $ 45,879
======== ========
</TABLE>
The following discussion compares the results of operations for 1994
vs. 1993, excluding the results of Dastek, as presented above.
Net Sales
Unit sales of thin-film media increased nearly 40% in 1994 relative to
1993. The effect on thin-film media revenue from this substantial increase in
unit sales volume was reduced by a 16% decrease in the overall average unit
selling price between the years. In 1994, the Company began a transition to more
advanced 1800 Oe product offerings. The transition to this new disk product was
more challenging and required more time than previous product transitions. As a
result of the more lengthy product transition time, the effects of traditionally
declining prices for individual product offerings reduced the overall average
selling price between the years. Distribution sales of product manufactured by
AKCL decreased to $9.4 million in 1994 from $17.1 million in 1993. The Company
purchased smaller quantities of product from AKCL in 1994 as demand within the
Japanese thin-film media market absorbed more of AKCL's capacity.
The increase in unit production volume required to support the increase
in unit sales volume for 1994 relative to 1993 was primarily achieved through a
combination of higher manufacturing throughput, increased physical capacity, and
improved production yields and utilization rates. Improvements in manufacturing
throughput, primarily due to shortened sputter cycle times, and physical
capacity additions each accounted for approximately 40% of the increased unit
production volume. Improvements in yields and utilization rates accounted for
the remaining increase in unit production volume.
25
<PAGE> 26
Gross Margin
The thin-film media gross margin percentage decreased to 32.0% for 1994
from 32.7% for 1993. Excluding distribution sales of product manufactured by
AKCL for resale to the Company's customers, the gross margin percentage
decreased to 32.7% from 34.1% between the years. The substantial decrease in the
overall average selling price outpaced solid improvements in the average unit
production cost and resulted in the lower gross margin percentage for 1994.
Manufacturing efficiencies, such as reduced cycle times and yield and
utilization improvements, were the primary drivers in reducing the average unit
production cost.
Operating Expenses
Research, development and engineering expenses increased $3.5 million
in 1994 compared to 1993. The increase between the years was mainly due to
development costs for advanced thin-film media, including costs associated with
the Company's thin-film media pilot production line. Selling, general and
administrative expenses increased $2.6 million in 1994 relative to 1993,
primarily due to higher provisions for the Company's bonus and profit sharing
programs resulting from the higher operating profitability for the Company's
thin-film media operations.
Interest Income/Expense and Other Income
Interest income increased $0.6 million in 1994 relative to 1993. The
increase was due to the combination of higher interest rates and higher average
investment balances in 1994. Interest expense decreased $1.1 million. In 1993,
the Company reversed previously capitalized interest related to the construction
of its thin-film media manufacturing facility in Malaysia, thus increasing 1993
interest expense. Excluding this reversal, interest expense decreased $0.2
million primarily due to a lower average outstanding debt balance for 1994.
Other income, net decreased $0.6 million in 1994 mainly due to higher losses on
disposal of equipment in 1994 relative to 1993.
Income Taxes
The effective income tax rate for 1994 of 30% was lower than the
effective income tax rate of 37% in 1993 primarily as a result of a tax holiday
granted to the Company's wholly-owned thin-film media operation in Malaysia.
Komag USA (Malaysia) Sdn. has been granted a five-year tax holiday by the
Malaysian government. The impact of the tax holiday was to increase net income
by approximately $6.4 million ($0.14 per share) in 1994.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture
The minority interest in the net income of consolidated subsidiary
represented Kobe USA's 45% share of KMT's net income. KMT recorded net income of
$2.4 million and $1.1 million in 1994 and 1993, respectively.
The equity in net income of unconsolidated joint venture reflected the
Company's 50% interest in AKCL's net income. AKCL reported net sales and net
income of $131.3 million and $11.0 million for 1994, up from $119.4 million and
$9.8 million for 1993. AKCL's functional currency is the Japanese yen. The
Company translates AKCL's yen-based income statements to U.S. dollars at the
average exchange rate in effect for each quarterly period. The Japanese yen
strengthened approximately 8% in 1994 relative to 1993. AKCL's net income would
have been approximately $10.0 million in 1994 had the yen-based income statement
been translated at the average rate in effect for 1993.
26
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash and short-term investments of $213.7 million at the
end of 1995 increased substantially from $93.9 million at the end of 1994.
Consolidated operating activities generated $188.8 million in cash during 1995
and more than funded the Company's $166.5 million of capital spending during the
year. Sales of Common Stock under the Company's stock option and stock purchase
programs during 1995 generated $10.8 million, while scheduled repayments of
long-term obligations used $9.7 million. In September 1995, the Company raised
$122.1 million (net of underwriting commissions and expenses) through a public
offering of 3.5 million shares of the Company's Common Stock. The Company used
$19.8 million of the proceeds from the stock offering to repay all of its
long-term debt.
Total capital expenditures for 1996 are currently planned at
approximately $350 million. Construction and fit up of three new manufacturing
facilities are the major components of the capital plan. The Company is nearing
completion of a 275,000 square foot facility for the front end stages of its
manufacturing process in Sarawak, Malaysia and expects to begin production at
this site in the second quarter of 1996. Two back end factories are currently
under construction in San Jose, California and Penang, Malaysia. The San Jose
factory is approximately 225,000 square feet and the Penang factory is
approximately 275,000 square feet. The Company plans to begin production at the
new San Jose and Penang facilities in late 1996 and early 1997, respectively.
Additionally, the Company expects to begin construction of a 178,000 research
and development facility and a 90,000 square foot administration building in
1996 for occupancy in the first half of 1997. Current noncancellable commitments
total approximately $165.0 million.
The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
additional financing over the next several years for capital expenditures,
working capital, and research and development. During the two-year period of
1996 and 1997, the Company expects to spend approximately $750 million to
construct new facilities and add production equipment at its new and existing
facilities. Assuming a continued strong operating performance, the Company
expects to fund its 1996 capital expenditures through a combination of cash
flow from operations, its cash balances, and funds available from its
unutilized $140 million credit facilities. However, new debt or equity
financing will likely be required to fund a portion of capital expenditures in
1997. If the Company is unable to obtain sufficient capital it could be
required to reduce its capital equipment and research and development
expenditures which could have a material adverse effect on the Company's
results of operations.
27
<PAGE> 28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
KOMAG, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 29
Consolidated Statements of Operations
1995, 1994 and 1993 30
Consolidated Balance Sheets, 1995 and 1994 31-32
Consolidated Statements of Cash Flows
1995, 1994 and 1993 33-34
Consolidated Statements of Stockholders' Equity,
1995, 1994 and 1993 35
Notes to Consolidated Financial Statements 36-47
</TABLE>
28
<PAGE> 29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Komag, Incorporated
We have audited the accompanying consolidated balance sheets of Komag,
Incorporated as of December 31, 1995 and January 1, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Asahi Komag Co., Ltd. (a corporation in which the Company has a
50% interest) as of December 31, 1995 and January 1, 1995, and for each of the
three years in the period ended December 31, 1995. Those financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for Asahi Komag Co., Ltd. as of
December 31, 1995 and January 1, 1995, and for each of the three years in the
period ended December 31, 1995, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Komag, Incorporated at December
31, 1995 and January 1, 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 17, 1996
29
<PAGE> 30
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales (see Note 13) $512,248 $392,391 $385,375
Cost of sales (see Notes 12 and 13) 314,762 267,005 293,936
-------- -------- --------
Gross profit 197,486 125,386 91,439
Operating expenses:
Research, development and engineering 23,804 21,340 29,641
Selling, general and administrative 44,598 27,101 28,165
Restructuring charge -- -- 38,956
-------- -------- --------
68,402 48,441 96,762
-------- -------- --------
Operating income (loss) 129,084 76,945 (5,323)
Other income (expense):
Interest income 5,802 3,306 2,915
Interest expense (1,856) (2,933) (5,510)
Other, net 2,189 48 605
-------- -------- --------
6,135 421 (1,990)
-------- -------- --------
Income (loss) before income taxes, minority
interests and equity in joint venture income 135,219 77,366 (7,313)
Provision for income taxes 33,809 23,210 26,425
-------- -------- --------
Income (loss) before minority interests and equity
in joint venture income 101,410 54,156 (33,738)
Minority interests in net income (loss) of
consolidated subsidiaries 1,957 1,091 (18,977)
Equity in net income of unconsolidated joint venture 7,362 5,457 4,860
-------- -------- --------
Net income (loss) $106,815 $58,522 $(9,901)
======== ======== ========
Net income (loss) per share $2.14 $1.27 $(0.23)
======== ======== ========
Number of shares used in per share computation 49,905 45,994 42,744
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year End
-------------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $14,879 $22,664
Short-term investments 198,799 71,284
Accounts receivable, less allowances of $4,279 in 1995
and $2,223 in 1994 61,660 44,564
Accounts receivable from related parties 5,034 214
Inventories:
Raw materials 20,213 15,030
Work-in-process 7,431 5,652
Finished goods 1,377 3,419
-------- --------
Total inventories 29,021 24,101
Prepaid expenses and deposits 5,196 1,611
Deferred income taxes 8,569 7,069
-------- --------
Total current assets 323,158 171,507
Investment in Unconsolidated Joint Venture 30,143 22,653
Property, Plant and Equipment
Land 5,268 4,360
Building 38,357 33,322
Leasehold improvements 51,088 45,633
Furniture 6,118 4,711
Equipment 443,011 294,626
-------- --------
543,842 382,652
Less allowances for depreciation and amortization (214,668) (153,769)
-------- --------
Net property, plant and equipment 329,174 228,883
Deposits and Other Assets 3,840 1,052
-------- --------
$686,315 $424,095
======== ========
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
Fiscal Year End
----------------------
1995 1994
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $28,717 $17,842
Accounts payable to related parties 7,761 2,354
Accrued compensation and benefits 31,966 17,913
Other liabilities 2,096 1,665
Income taxes payable 400 271
Current portion of long-term debt -- 13,232
-------- --------
Total current liabilities 70,940 53,277
Long-term Debt, Less Current Portion -- 16,250
Deferred Income Taxes 37,643 18,725
Other Long-term Liabilities 474 548
Minority Interest in Consolidated Subsidiary 2,694 4,080
Commitments
Stockholders' Equity
Preferred Stock, $0.01 par value per share:
Authorized--1,000 shares in 1995
and 1994
No shares issued and outstanding -- --
Common Stock, $0.01 par value per share:
Authorized--85,000 shares in 1995
and 35,000 in 1994
Issued and outstanding--50,714 shares
in 1995 and 45,803 shares in 1994 507 458
Additional paid-in capital 374,399 238,033
Retained earnings 193,605 86,790
Accumulated translation adjustment 6,053 5,934
-------- --------
Total stockholders' equity 574,564 331,215
-------- --------
$686,315 $424,095
======== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 33
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities--
see detail on following page $188,792 $97,517 $40,752
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (166,450) (102,435) (86,249)
Purchase of subsidiary shares from minority interest holder (6,750) -- --
Purchases of short-term investments (177,993) (86,402) (80,900)
Proceeds from short-term investments 50,478 90,518 86,200
Proceeds from disposal of equipment 916 12,072 416
Deposits and other assets 113 983 (72)
-------- -------- -------
Net cash used in investing activities (299,686) (85,264) (80,605)
FINANCING ACTIVITIES
Increase in notes payable -- 1,500 19,000
Payments of notes payable -- (4,500) --
Increase in long-term obligations -- -- 20,000
Payments of long-term obligations (29,482) (14,505) (9,488)
Sale of Common Stock, net of issuance costs 132,871 12,037 6,826
Minority interest investment in consolidated subsidiary -- -- 11,031
Distribution to minority interest holder (280) (280) --
-------- -------- -------
Net cash provided by (used in) financing activities 103,109 (5,748) 47,369
-------- -------- -------
Increase (decrease) in cash and cash equivalents (7,785) 6,505 7,516
Cash and cash equivalents at beginning of year 22,664 16,159 8,643
-------- -------- -------
Cash and cash equivalents at end of year $14,879 $22,664 $16,159
-------- -------- -------
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) $106,815 $58,522 $(9,901)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 65,483 47,591 49,025
Provision for losses on accounts receivable 1,519 (195) (191)
Undistributed earnings of unconsolidated
joint venture (7,362) (5,457) (4,860)
Loss on disposal of equipment 508 1,156 757
Restructuring charge -- -- 38,956
Deferred income taxes 17,418 8,709 2,030
Deferred rent (74) (7) (43)
Minority interests in net income (loss) of
consolidated subsidiaries 1,957 1,091 (18,977)
Changes in operating assets and liabilities:
Accounts receivable (18,615) (1,649) (7,284)
Accounts receivable from related parties (4,820) 73 (175)
Inventories (4,920) 6,981 (10,885)
Prepaid expenses and deposits (2,811) 1,419 (4)
Trade accounts payable 10,875 (4,923) 2,404
Accounts payable to related parties 5,407 (1,072) (3,828)
Accrued compensation and benefits 14,053 1,344 1,959
Other liabilities 431 (809) 1,817
Income taxes payable 2,928 630 (48)
Restructuring liability -- (15,887) --
--------- ------- -------
Net cash provided by operating activities $188,792 $97,517 $40,752
======== ======== =======
Supplemental disclosure of cash flow information
Cash paid for interest $2,204 $2,892 $3,865
Cash paid for income taxes 13,463 12,937 24,310
Income tax benefit from stock
options exercised 3,582 2,851 1,703
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
--------------- Paid-in Note Retained Translation
Shares Amount Capital Receivable Earnings Adjustment
------ ------ ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 3, 1993 42,162 $422 $219,175 $(11,031) $38,169 $2,003
Collection of note receivable (4,412) 11,031
Common Stock issued under stock
option and purchase plans, including
related tax benefits 1,370 14 8,404
Net loss (9,901)
Accumulated translation adjustment 1,457
------ ---- -------- -------- -------- ------
BALANCE AT JANUARY 2, 1994 43,532 436 223,167 -- 28,268 3,460
Common Stock issued under stock
option and purchase plans, including
related tax benefits 2,268 22 14,865
Common Stock issued upon exercise
of stock warrants 3 1
Net income 58,522
Accumulated translation adjustment 2,474
------ ---- -------- -------- -------- ------
BALANCE AT JANUARY 1, 1995 45,803 458 238,033 -- 86,790 5,934
Common Stock issued under stock
option and purchase plans, including
related tax benefits 1,411 14 14,298
Sale of Common Stock, net of
issuance costs 3,500 35 122,068
Net income 106,815
Accumulated translation adjustment 119
------ ---- -------- -------- -------- ------
BALANCE AT DECEMBER 31, 1995 50,714 $507 $374,399 $ -- $193,605 $6,053
====== ==== ======== ======== ======== ======
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company, its wholly-owned and majority-owned subsidiaries (see
Notes 11 and 12) and equity in its unconsolidated joint venture (see Note 13).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation: The functional currency of the Company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements are included as a separate
component of stockholders' equity and not included in net income. The functional
currency for the Company's Malaysian operation is the U.S. dollar. Remeasurement
gains and losses, resulting from the process of remeasuring these foreign
currency financial statements into U.S. dollars, are included in operations.
Foreign Exchange Gains and Losses: The Company enters into foreign currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process. Gains and
losses related to these contracts are included in the cost of the assets
acquired. The Company had approximately $17,125,000 in foreign exchange
contracts outstanding at December 31, 1995. The fair market value of these
foreign exchange contracts was not materially different from the contract value
at December 31, 1995. There were no foreign exchange contracts outstanding at
January 1, 1995. The Company had approximately $358,000 and $9,000,000 of
unhedged Japanese yen based firm purchase commitments at December 31, 1995 and
January 1, 1995, respectively.
Cash Equivalents: The Company considers as a cash equivalent any highly liquid
investment that matures within three months of its purchase date.
Short-Term Investments: The Company invests its excess cash in high-quality,
short-term debt instruments. Short-term investments consist primarily of
AAA-rated, municipal auction rate preferred stock. None of the Company's debt
security investments have maturities greater than one year. At December 31, 1995
all short-term investments are designated as available for sale. Interest and
dividends on the investments are included in interest income.
The following is a summary of the Company's investments by major security type
at amortized cost, which approximates fair value:
<TABLE>
<CAPTION>
DEC 31 Jan 1
(in thousands) 1995 1995
-------- --------
<S> <C> <C>
Municipal auction rate preferred stock $198,636 $ 70,765
Corporate debt securities 3,062 2,417
Mortgage-backed securities 19,462 10,677
-------- --------
$221,160 $ 83,859
======== ========
Amounts included in cash and cash equivalents $ 22,361 $ 12,575
Amounts included in short term investments 198,799 71,284
-------- --------
$221,160 $ 83,859
======== ========
</TABLE>
36
<PAGE> 37
There were no realized gains or losses on the Company's investments during 1995
as all investments were held to maturity during the year. The Company utilizes
zero-balance accounts and other cash management tools to invest all available
funds including bank balances in excess of book balances.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment: Property, plant and equipment, except
construction-in-process, are stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. The estimated useful life of the Company's
buildings is 30 years. Furniture and equipment are generally depreciated over 3
to 5 years and leasehold improvements are amortized over the shorter of the
lease term or the useful life.
Revenue Recognition: The Company records sales upon shipment and provides an
allowance for estimated returns of defective products.
Research and Development: Research and development costs are expensed as
incurred.
Income Taxes: The provision for income taxes is based on pretax financial
accounting income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax and book
basis of assets and liabilities.
Income (Loss) Per Share: Income per share has been computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon the assumed exercise of options reflected under the treasury stock method.
Loss per share has been computed using the weighted average number of shares of
Common Stock outstanding during the period.
Reclassifications: Certain reclassifications have been made to the 1994
Consolidated Balance Sheet, the 1994 and 1993 Statements of Cash Flows, and the
related notes to conform to the current year's presentation.
Fiscal Year: The Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The years ended December 31, 1995, January 1, 1995 and
January 2, 1994 were each comprised of 52 weeks.
Stock Split: The Company effected a two-for-one stock split of its outstanding
Common Stock effective December 21, 1995. Earnings per share and share amounts
for all periods in the consolidated financial statements have been restated to
reflect the split.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment which is the development,
production and marketing of high-performance thin-film media for use in hard
disk drives. The Company sells to original equipment manufacturers in the rigid
disk drive market and computer system manufacturers that produce their own disk
drives.
37
<PAGE> 38
Summary information for the Company's operations by geographic location is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Net sales
To customers from U.S. operations $ 344,218 $ 315,540 $ 369,683
To customers from Far East operations 168,030 76,851 15,692
Intercompany from Far East operations 25,123 16,881 25,806
Intercompany from U.S. operations 6,683 -- --
--------- --------- ---------
544,054 409,272 411,181
Eliminations (31,806) (16,881) (25,806)
--------- --------- ---------
Total net sales $ 512,248 $ 392,391 $ 385,375
========= ========= =========
Operating income (loss)
U.S. operations $ 55,696 $ 48,265 $ 7,460
Far East operations 67,559 25,080 (13,458)
--------- --------- ---------
123,255 73,345 (5,998)
Eliminations 5,829 3,600 675
--------- --------- ---------
Total operating income (loss) $ 129,084 $ 76,945 $ (5,323)
========= ========= =========
Identifiable assets
U.S. operations $ 573,006 $ 387,907 $ 342,192
Far East operations 201,915 124,048 89,354
--------- --------- ---------
774,921 511,955 431,546
Eliminations (88,606) (87,860) (49,249)
--------- --------- ---------
Total identifiable assets $ 686,315 $ 424,095 $ 382,297
========= ========= =========
</TABLE>
Export sales by domestic operations included the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Far East (see Note 13) $ 151,000 $ 133,574 $ 180,844
Europe -- 1,258 20,950
</TABLE>
38
<PAGE> 39
NOTE 3. CONCENTRATION OF CUSTOMER AND SUPPLIER RISK
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral. Significant customers accounted
for the following percentages of net sales in 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Seagate Technology, Inc. 42% 40% 24%
Quantum Corporation 23% 23% 15%
Hewlett-Packard Company 15% 21% 21%
Western Digital Corporation 12% 12% less than 10%
Conner Peripherals, Inc. less than 10% less than 10% 11%
</TABLE>
In February 1996, Seagate and Conner merged. Net sales to Seagate and Conner on
a combined basis were 44%, 40% and 35% in 1995, 1994 and 1993, respectively. In
addition, Quantum recently announced that it would cease disk drive production
in Milpitas, California and Penang, Malaysia and contract with its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE")
to manufacture its drives. Asahi Komag Co. Ltd. ("AKCL"), the Company's Japanese
joint venture, has an established working relationship with MKE and MKE has
remained AKCL's largest customer for the past several years. The Company's
Malaysian subsidiary recently began shipments to MKE's new Singapore
manufacturing facility. However, there can be no assurance that MKE will
purchase from either the Company or AKCL the unit quantities of product which
the Company previously supplied to Quantum in the U.S. and Malaysia.
Kobe Steel, Ltd. ("Kobe") supplies aluminum substrate blanks to Komag Material
Technology, Inc. ("KMT"), and the Company in turn purchases KMT's entire output
of finished substrates. The Company also purchases substantial quantities of
finished substrates from Kobe in addition to the substrates purchased from KMT.
In combination, KMT and Kobe supply in excess of 85% of the Company's substrate
requirements. The Company also relies on a limited number of other suppliers, in
some cases a sole supplier, for certain other materials used in its
manufacturing processes. These materials include nickel plating solutions,
sputtering target materials and certain polishing and texturing supplies. These
suppliers work closely with the Company to optimize the Company's production
processes. Although this reliance on a limited number of suppliers, or sole
supplier, entails some risk that the Company's production capacity would be
limited if one or more of such materials were to become unavailable or available
in reduced quantities, the Company believes that the advantages of working
closely with these suppliers outweigh such risks. If such materials should be
unavailable for a significant period of time, the Company's results of
operations would be adversely affected.
NOTE 4. STOCKHOLDERS' EQUITY
In 1995, the Company raised $122,100,000 from the sale of 3,500,000 shares of
Common Stock in a follow-on public stock offering. In December 1995, the
stockholders approved an increase in the number of shares of Common Stock
authorized for issuance to 85,000,000.
39
<PAGE> 40
NOTE 5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
Under the Company's stock option plans ("Plans"), options to purchase up to
12,760,000 shares of Common Stock may be granted to key employees and directors.
The Plans provide for issuing both incentive stock options, which must be
granted at fair market value at the date of grant, and non-qualified stock
options, which may be granted at not less than 85% of fair market value at the
date of grant. Outstanding options generally vest over four years and expire no
later than ten years from the date of grant. Options may be exercised in
exchange for cash or outstanding shares of the Company's Common Stock.
Approximately 17,000 and 11,000 shares of the Company's Common Stock were
received in exchange for option exercises in 1995 and 1994, respectively. No
such exchange occurred in 1993. At December 31, 1995 approximately 543,000
options were available for grant and 5,571,000 shares of Common Stock were
reserved for future issuance under these Plans. At December 31, 1995 and January
1, 1995 approximately 1,487,000 and 1,283,000, respectively, of the outstanding
options were exercisable.
Under an option plan for employees of Dastek, Inc. ("Dastek"), a former joint
venture of the Company (see Note 11), options to purchase 2,000,000 shares of
the Company's Common Stock were authorized and reserved for issuance. At
December 31, 1995, 560,000 options had been exercised and no options were
exercisable or outstanding under the Dastek plan. No additional options will be
granted under the Dastek plan due to the cessation of Dastek's operations.
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
Shares Exercise Price Total
------ --------------- --------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Outstanding at January 3, 1993 5,671 $ 0.49 - $10.88 $ 35,770
Granted 1,883 7.75 - 12.00 18,701
Exercised (842) 0.49 - 9.25 (3,787)
Cancelled (330) 0.49 - 10.88 (2,490)
------ --------------- --------
Outstanding at January 2, 1994 6,382 0.49 - 12.00 48,194
Granted 1,382 7.88 - 13.38 12,551
Exercised (1,811) 0.49 - 12.00 (9,850)
Cancelled (1,254) 2.17 - 12.00 (10,728)
------ --------------- --------
Outstanding at January 1, 1995 4,699 2.90 - 13.38 40,167
Granted 1,479 11.63 - 35.94 24,528
Exercised (997) 2.90 - 12.94 (7,174)
Cancelled (153) 2.90 - 25.63 (1,567)
------ --------------- --------
Outstanding at December 31, 1995 5,028 $3.13 - $ 35.94 $ 55,954
====== =============== ========
</TABLE>
In January 1996 the Company's Board of Directors approved an increase of
3,000,000 in the total number of shares of Common Stock that may be issued under
the Komag Stock Option Plan. The increase is subject to stockholder approval.
Under the terms of the Employee Stock Purchase Plan, employees may elect to
contribute up to 10% of their compensation toward the purchase of shares of the
Company's Common Stock. The purchase price
40
<PAGE> 41
per share will be the lesser of 85% of the fair market value of the stock on the
first day of enrollment in a twenty-four month offering period or the last day
of each semi-annual period within the twenty-four month offering period. The
total number of shares of stock that may be issued under the Plan cannot exceed
2,800,000 shares. Shares issued under this plan approximated 431,000, 469,000
and 528,000 in 1995, 1994 and 1993, respectively. At December 31, 1995
approximately 398,000 shares of Common Stock were reserved for future issuance
under this Plan.
Beginning January 1, 1996, the Company will be required to adopt Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). The Company plans to adopt only the disclosure requirements of the
Statement and, as such, the adoption of FAS 123 will have no impact on the
Company's financial position or results of operations.
NOTE 6. BONUS AND PROFIT SHARING PLANS
The Company and its subsidiaries maintain various cash profit sharing plans.
Under the terms of the cash profit sharing plans, a percentage of semi-annual
operating profit, as defined in the plans, is allocated among all employees who
meet certain criteria. Under the terms of the Company's bonus plans, various
percentages of an operating unit's annual operating profit, as defined in the
respective bonus plans, is paid to eligible employees. The Company expensed
$19,990,000, $9,083,000 and $8,084,000 under these bonus and cash profit sharing
plans in 1995, 1994 and 1993, respectively.
The Company and its subsidiaries maintain savings and deferred profit sharing
plans. Employees who meet certain criteria are eligible to participate. In
addition to voluntary employee contributions to these plans, the Company
contributes four percent of semi-annual consolidated operating profit, as
defined in the plans. These contributions are allocated to all eligible
employees. Furthermore, the Company matches a portion of the employee's
contributions to the plans up to a maximum amount. The Company contributed
$6,653,000, $4,081,000 and $2,207,000 to the plans in 1995, 1994 and 1993,
respectively.
Expenses for the Company's bonus and profit sharing plans are included in
selling, general and administrative expenses.
41
<PAGE> 42
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ 16,496 $ 13,482 $ 22,863
Deferred 14,830 4,437 (4,515)
-------- -------- --------
31,326 17,919 18,348
State:
Current (1,284) 264 1,339
Deferred 2,588 4,272 6,580
-------- -------- --------
1,304 4,536 7,919
Foreign:
Current 1,179 755 158
-------- -------- --------
$ 33,809 $ 23,210 $ 26,425
======== ======== ========
</TABLE>
The foreign provision above consists of withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries.
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year End
------------------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Depreciation $ (7,284) $ (8,384)
State income taxes (7,295) (5,016)
Deferred income (13,588) (1,323)
Other (9,476) (4,002)
-------- --------
Gross deferred tax liabilities (37,643) (18,725)
-------- --------
Inventory valuation adjustments 1,578 1,675
Accrued compensation and benefits 2,270 2,466
State income taxes 901 1,636
Other 3,820 1,292
Tax benefit of net operating losses 34,789 33,600
-------- --------
Gross deferred tax assets 43,358 40,669
-------- --------
Deferred tax asset valuation allowance (34,789) (33,600)
-------- --------
$(29,074) $(11,656)
======== ========
</TABLE>
As of December 31, 1995 a 60%-owned subsidiary of the Company, Dastek Holding
Company, has a federal tax net operating loss carryforward of approximately
$99,000,000. The Company has fully reserved for the potential future federal tax
benefit of this net operating loss in the deferred tax asset
42
<PAGE> 43
valuation allowance due to the fact that its utilization is limited to the
subsidiary's separately computed future taxable income and that the subsidiary
has no history of operating profits. The deferred tax asset valuation allowance
increased $1,189,000, $7,308,000 and $11,719,000 in fiscal years 1995, 1994 and
1993, respectively. The $99,000,000 net loss expires at various dates through
2010.
A reconciliation of the income tax provision at the 35% federal statutory rate
to the income tax provision at the effective tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Income taxes computed at federal statutory rate $ 47,327 $ 27,078 $ (2,560)
State and foreign income taxes, net of federal tax
benefit 868 2,961 5,290
Tax-exempt interest income (1,434) (827) (723)
Permanently reinvested foreign earnings (12,634) (6,473) --
Domestic losses unavailable for offset in
consolidated return or carryback -- -- 21,141
Certain foreign losses not currently utilized -- -- 5,429
Write-off of investments in subsidiaries -- -- (2,295)
Other (318) 471 143
-------- -------- --------
$ 33,809 $ 23,210 $ 26,425
======== ======== ========
</TABLE>
Foreign pretax income (loss) was $65,903,000, $23,882,000 and ($15,511,000) in
1995, 1994 and 1993, respectively.
Komag USA (Malaysia) Sdn., the Company's wholly-owned thin-film media operation
in Malaysia, has been granted a tax holiday for a period of five years
commencing in July 1993. Assuming the Company fulfills certain commitments under
its license to operate within Malaysia, this tax holiday may be extended for an
additional five-year period by the Malaysian government. The impact of this tax
holiday was to increase net income by approximately $11,500,000 ($0.23 per
share) and $6,400,000 ($0.14 per share) in 1995 and 1994, respectively. Losses
incurred prior to the commencement of the tax holiday, approximately $6,237,000,
are available for carryforward to years following the expiration of the tax
holiday.
The Company has generated $76,800,000 of earnings for which no U.S. tax has been
provided. These earnings are considered to be permanently invested outside the
United States.
NOTE 8. TERM DEBT AND LINE OF CREDIT
The Company had no long-term debt outstanding at December 31, 1995. Notes
payable, primarily to banks, totaled approximately $29,482,000 at January 1,
1995. The notes bore interest at various LIBOR and Eurodollar rates plus 1.375%.
The Company used $19,800,000 of the proceeds from its September 1995 public
offering to repay its remaining notes payable.
The Company's credit facilities total $140,000,000 and are comprised of three
four-year term line of credit agreements. These agreements each expire in
December 1999 but may be extended, subject to bank approvals, annually for an
additional year, thus perpetuating their four-year terms. The entire
$140,000,000 under these unsecured credit facilities remains available.
43
<PAGE> 44
The Company's credit facilities require maintenance of certain financial ratios
and compliance with covenants that limit the amount of dividend payments without
the lenders' consents.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and short-term investments, accounts receivable and
certain other liabilities on the Consolidated Balance Sheets approximate fair
value at December 31, 1995 and January 1, 1995 due to the relatively short
period to maturity of the instruments.
NOTE 10. LEASES AND COMMITMENTS
The Company leases most of its production facilities under operating leases that
expire at various dates between 1996 and 2006. Certain of these leases include
renewal options varying from five to ten years.
At December 31, 1995 the future minimum commitments for all non-cancellable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 4,809
1997 5,495
1998 5,378
1999 4,564
2000 3,692
Thereafter 12,241
-------
Total minimum lease payments $36,179
=======
</TABLE>
Rental expense for all operating leases amounted to $4,212,000, $4,319,000 and
$5,471,000 in 1995, 1994 and 1993, respectively.
The Company has current non-cancellable capital commitments of approximately
$165,037,000.
NOTE 11. DASTEK HOLDING COMPANY
In December 1991 the Company completed a merger with Dastek, Inc. ("Dastek"), a
manufacturer of thin-film magnetic recording heads for use in hard disk drives.
In February 1992 the Company formed a joint venture to produce and market
thin-film magnetic recording heads with Asahi Glass America, Inc. ("Asahi
America"), a U.S. subsidiary of Asahi Glass Co., Ltd. of Japan. Under the joint
venture agreement, the Company contributed to the joint venture both the stock
of Dastek and the assets of its existing thin-film head development program.
Asahi America in turn contributed to the joint venture nearly $60,000,000 in
cash and notes. The notes were paid to the joint venture in 1992 and 1993. Based
on these contributions, the Company and Asahi America obtained interests in the
joint venture of 60% and 40%, respectively. During 1993 the Company and a
subsidiary of Asahi America loaned the Dastek joint venture an additional
$24,000,000 and $16,000,000, respectively.
These loans were revalued to their estimated settlement amounts in late 1993 as
a result of the restructuring of the thin-film head operations. In December 1993
the Company recorded a one-time charge of $38,956,000 as a result of Dastek's
decision to exit the inductive thin-film head business. The net impact of the
restructuring charge, after related minority interest and income tax
adjustments, was $35,389,000
44
<PAGE> 45
($0.83 loss per share for the year ended January 2, 1994). Approximately
one-half of the restructuring charge related to the reduction of assets and
liabilities to net realizable value. The remaining portion provided for
estimated operating losses to be incurred during the completion of existing
customer orders and the wind down of Dastek's operations. Dastek ceased its
inductive thin-film head operations, sold its equipment at various public
auctions, settled with its creditors and was legally dissolved prior to the end
of 1994. Based upon the results of these actual shutdown activities, no
significant adjustment was required to the aggregate restructuring charge
recorded in 1993. Actual operating losses incurred in 1994 were approximately
one-third higher than estimated in the 1993 restructuring charge. However, net
losses from the sale of Dastek's assets and the settlement of its liabilities
were lower by a comparable amount.
NOTE 12. KOMAG MATERIAL TECHNOLOGY, INC.
The Company's financial statements include the consolidation of the financial
results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells
aluminum disk substrate products for high-performance magnetic storage media.
KMT was owned 55% by the Company and 45% by Kobe Steel USA Holdings Inc. ("Kobe
USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe") from November 1988 to
December 1995. On December 28, 1995 the Company increased its ownership of KMT
to 80% through the purchase of KMT Common Stock directly from Kobe USA for
$6,750,000. Kobe USA retained a 20% minority interest investment in KMT.
Other transactions between Kobe or its distributors and the Company were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Accounts payable to Kobe or its distributors:
Balance at beginning of year $ 2,234 $ 2,728 $ 2,636
Purchases 34,478 34,657 33,098
Payments (33,410) (35,151) (33,006)
-------- -------- --------
Balance at end of year $ 3,302 $ 2,234 $ 2,728
======== ======== ========
</TABLE>
NOTE 13. UNCONSOLIDATED JOINT VENTURE
In 1987 the Company formed a partnership, Komag Technology Partners
("Partnership"), with the U.S. subsidiaries of two Japanese companies and
simultaneously formed a subsidiary, Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed technology in exchange for a 50% interest in the Partnership, and
the subsidiaries of the Japanese companies contributed approximately 1.5 billion
yen (approximately $11 million) in exchange for a 50% interest in the
Partnership. The Partnership then contributed all the cash and licensed the
technology to AKCL in exchange for all of its stock and a limited royalty of 5%
of product produced and sold by AKCL. The Partnership and its subsidiary (joint
venture) established a facility in Japan to manufacture and sell the Company's
thin-film media products in Japan. AKCL also sells its products to the Company
for resale outside of Japan.
The Company's share of the joint venture's net income was $7,362,000, $5,457,000
and $4,860,000 in 1995, 1994 and 1993, respectively. Royalty income ceased in
1992 upon reaching its contractual limit.
45
<PAGE> 46
Other transactions between the joint venture and the Company were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Accounts receivable from joint venture:
Balance at beginning of year $ 96 $ 227 $ 92
Sales 21,224 1,375 990
Cash receipts (16,414) (1,506) (855)
-------- -------- --------
Balance at end of year $ 4,906 $ 96 $ 227
-------- -------- --------
Accounts payable to joint venture:
Balance at beginning of year $ 46 $ 592 $ 4,572
Purchases 5,460 9,752 16,259
Payments (5,151) (10,298) (20,239)
-------- -------- --------
Balance at end of year $ 355 $ 46 $ 592
======== ======== ========
</TABLE>
Equipment purchases by the Company from its joint venture partners were
$18,195,000, $11,571,000 and $4,998,000 in 1995, 1994 and 1993, respectively.
Summary combined financial information for the Partnership and AKCL for the
years ended December 31, 1995, 1994 and 1993, and as of December 31, 1995 and
1994 is as follows. The subsidiary's total assets, liabilities, revenues, costs
and expenses approximate 100% of the combined totals.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Summarized Income Statements:
Net sales $173,177 $131,335 $119,447
Costs and expenses 143,766 109,674 99,596
Provision for income taxes 14,687 10,626 10,094
-------- -------- --------
Net Income $ 14,724 $ 11,035 $ 9,757
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year End
----------------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Summarized Balance Sheets:
Current assets $ 52,302 $ 32,328
Noncurrent assets 99,765 76,124
-------- --------
Total Assets $152,067 $108,452
======== ========
Current liabilities $ 71,811 $ 39,677
Long-term obligations 10,412 14,079
Partners' capital 69,844 54,696
-------- --------
Total Liabilities and Partners' Capital $152,067 $108,452
======== ========
</TABLE>
46
<PAGE> 47
NOTE 14. PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.
The Company has a voting interest in Headway Technologies, Inc. ("Headway").
Headway was formed in 1994 to research, develop and manufacture advanced
magnetoresistive ("MR") heads for the data storage industry. Hewlett-Packard
Company ("HP") and AKCL (see Note 13) provided the initial cash funding to
Headway in exchange for equity interests. The Company and Asahi America licensed
to Headway MR technology developed by Dastek and contributed certain research
and production equipment in exchange for equity. As a result of these
transactions the Company holds a direct voting interest in Headway of less than
20%. The Company has no cost basis in its investment in Headway. Consequently,
operating results at Headway do not directly affect the Company's earnings. The
Company has not guaranteed any obligation of Headway and is not otherwise
committed to provide financial support to Headway.
AKCL invested in Headway in 1994 and has been recording partial writedowns of
its investment based upon net losses incurred at Headway. AKCL's net income
reflected writedowns, net of tax, of $2,200,000 and $500,000 in 1995 and 1994,
respectively. To the extent that such losses continue, AKCL will record a
portion of those losses. Alternatively, AKCL will record a portion of Headway's
net income, if any, to the extent of previously recognized losses.
NOTE 15. QUARTERLY SUMMARIES
(in thousands except per share amounts, unaudited)
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $105,063 $120,807 $132,835 $153,543
Gross profit 32,767 46,020 53,322 65,377
Net income 14,880 23,361 30,399 38,175
Net income per share $ 0.31 $ 0.48 $ 0.61 $ 0.72
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $97,701 $97,774 $98,172 $98,744
Gross profit 32,888 29,897 31,570 31,031
Net income 15,444 13,954 15,015 14,109
Net income per share $ 0.34 $ 0.31 $ 0.33 $ 0.30
</TABLE>
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEMS 10, 11, 12 AND 13.
Items 10 through 13 of Part III will be contained in the Komag,
Incorporated Proxy Statement For the Annual Meeting of Stockholders to be held
May 14, 1996 (the "1996 Proxy Statement") which will be filed with the
Securities and Exchange Commission no later than April 29, 1996. The cross
reference table below sets forth the captions under which the responses to these
items are found:
<TABLE>
<CAPTION>
10-K Item Description Caption in 1996 Proxy Statement
- --------- ----------- -------------------------------
<S> <C> <C>
10 Directors and Executive Officers "Item No. 1--Election of Directors:
Nominees; Business
Experience of Directors and
Nominees" and "Additional
Information: Certain
Relationships and Related
Transactions; Other Matters"
11 Executive Compensation "Additional Information: Executive
Compensation and Related
Information"
12 Security Ownership of Certain Beneficial "Additional Information: Principal
Owners and Management Stockholders"
13 Certain Relationships and Related "Additional Information: Certain
Transactions Relationships and Related
Transactions"
</TABLE>
The information set forth under the captions listed above, contained in
the 1996 Proxy Statement, are hereby incorporated herein by reference in
response to Items 10 through 13 of this Report on Form 10-K.
48
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS.
The following consolidated financial statements of Komag, Incorporated
are filed in Part II, Item 8 of this Report on Form 10-K:
Consolidated Statements of Operations--Fiscal Years 1995, 1994 and 1993
Consolidated Balance Sheets--December 31, 1995 and January 1, 1995
Consolidated Statements of Cash Flows--Fiscal Years 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity--Fiscal Years 1995, 1994 and
1993
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Komag, Incorporated is
filed in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
Report of Other Auditor
--Report of Chuo Audit Corporation on Asahi Komag Co., Ltd.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
49
<PAGE> 50
3. EXHIBITS.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws (incorporated by reference from Exhibit 3.3 filed with
the Company's Report on Form 10-K for the year ended December
30, 1990).
4.2 Specimen Stock Certificate (incorporated by reference from a
similarly numbered exhibit filed with Amendment No. 1 to the
Registration Statement).
10.1.1 Lease Agreement dated May 24, 1991 between Milpitas-Hillview
and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.2 filed with the Company's report on Form 10-K
for the year ended December 29, 1991).
10.1.2 Lease Agreement dated May 24, 1991, between Milpitas-Hillview
II and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.3 filed with the Company's report on Form 10-K
for the year ended December 29, 1991).
10.1.3 Lease Agreement dated July 29, 1988 by and between Brokaw
Interests and Komag Corporation (incorporated by reference
from Exhibit 10.1.6 filed with the Company's Report on Form
10-K for the year ended January 1, 1989).
10.1.4 Lease Agreement dated May 2, 1989 by and between Stony Point
Associates I and Komag Material Technology, Inc. (incorporated
by reference from Exhibit 10.1.6 filed with the Company's
Report on Form 10-K for the year ended December 31, 1989).
10.1.5 Amendment to Lease Agreement dated December 28, 1990 by and
between Milpitas-Hillview II and Komag, Incorporated
(incorporated by reference from Exhibit 10.1.11 filed with the
Company's Report on Form 10-K for the year ended December 30,
1990).
10.1.6 Second Amendment to Lease dated December 28, 1990 by and
between Milpitas-Hillview and Komag, Incorporated
(incorporated by reference from Exhibit 10.1.12 filed with the
Company's Report on Form 10-K for the year ended December 30,
1990).
10.1.7 First Amendment to Lease dated November 1, 1993 by and between
Wells Fargo Bank et al and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.1.14 filed with the
Company's Report on Form 10-K for the year ended January 2,
1994).
10.1.8 Lease Agreement dated May 27, 1994 by and between Hillview I
Partners and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.16 filed with the Company's Report on Form
10-Q for the quarter ended July 3, 1994).
10.1.9 Lease Agreement dated August 4, 1995 by and between Great Oaks
Interests and Komag, Incorporated (incorporated by reference
from Exhibit 10.11.12 filed with Form 10-Q for the Quarter
ended October 1, 1995).
10.2 Form of Directors' Indemnification Agreement (incorporated by
reference from Exhibit 10.9 filed with the Company's Report on
Form 10-K for the year ended December 30, 1990).
10.3.1 Joint Venture Agreement by and among Komag, Inc., Asahi Glass
Co., Ltd., and Vacuum Metallurgical Company dated November 9,
1986, as amended January 7, 1987 and January 27, 1987
(incorporated by reference from Exhibit 10.10.1 filed with the
50
<PAGE> 51
Registration Statement on Form S-1--File No. 33-13663)
(confidential treatment obtained as to certain portions).
10.3.2 General Partnership Agreement for Komag Technology Partners
dated January 7, 1987 (incorporated by reference from Exhibit
10.10.2 filed with the Registration Statement on Form
S-1--File No. 33-13663).
10.3.3 Technology Contribution Agreement dated January 7, 1987 by and
between Komag, Incorporated and Komag Technology Partners
(incorporated by reference from Exhibit 10.10.3 filed with the
Registration Statement on Form S-1--File No. 33-13663)
(confidential treatment obtained as to certain portions).
10.3.4 Technical Cooperation Agreement dated January 7, 1986 by and
between Asahi Glass Company, Ltd. and Komag, Incorporated
(incorporated by reference from Exhibit 10.10.4 filed with the
Registration Statement on Form S-1--File No. 33-13663).
10.3.5 Third Amendment to Joint Venture Agreement by and among Komag,
Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et
al dated March 21, 1990 (incorporated by reference from
Exhibit 10.10.5 filed with the Company's Report on Form 10-K
for the year ended December 31, 1989).
10.3.6 Fourth Amendment to Joint Venture Agreement by and among
Komag, Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical
Company, et al dated May 24, 1990 (incorporated by reference
from Exhibit 10.10.11 filed with the Company's Report on Form
10-K for the year ended January 1, 1995).
10.3.7 Fifth Amendment to Joint Venture Agreement by and among Komag,
Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et
al dated November 4, 1994 (incorporated by reference from
Exhibit 10.10.12 filed with the Company's Report on Form 10-K
for the year ended January 1, 1995).
10.3.8 Joint Venture Agreement dated March 6, 1989 by and between
Komag, Incorporated, Komag Material Technology, Inc. and Kobe
Steel USA Holdings Inc. (incorporated by reference from
Exhibit 10.10.6 filed with the Company's Report on Form 10-K
for the year ended December 31, 1989) (confidential treatment
obtained as to certain portions).
10.3.9 Joint Development and Cross-License Agreement dated March 10,
1989 by and between Komag, Incorporated, Kobe Steel, Ltd., and
Komag Material Technology, Inc. (incorporated by reference
from Exhibit 10.10.7 filed with the Company's Report on Form
10-K for the year ended December 31, 1989).
10.3.10 Blank Sales Agreement dated March 10, 1989 by and between
Komag, Incorporated, Kobe Steel, Ltd., and Komag Material
Technology, Inc. (incorporated by reference from a similarly
numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1989).
10.3.11 Finished Substrate Agreement dated March 10, 1989 by and
between Komag, Incorporated, Kobe Steel, Ltd., and Komag
Material Technology, Inc. (incorporated by reference from
Exhibit 10.10.9 filed with the Company's Report on Form 10-K
for the year ended December 31, 1989) (confidential treatment
obtained as to certain portions).
10.3.12 Stock Purchase Agreement between Komag, Incorporated and Kobe
Steel USA Holdings Inc. dated November 17, 1995.
51
<PAGE> 52
10.3.13 Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
Incorporated dated November 17, 1995 (filed on March 4, 1996
requesting confidential treatment as to certain portions;
incorporated herein by reference).
10.3.14 License Amendment Agreement among Komag, Incorporated, Komag
Material Technology, Inc. and Kobe Steel, Ltd. dated November
17, 1995.
10.3.15 Substrate Sales Amendment Agreement among Komag, Incorporated,
Komag Material Technology, Inc. and Kobe Steel, Ltd. dated
November 17, 1995.
10.3.16 Joint Venture Amendment Agreement among Komag, Incorporated,
Komag Material Technology, Inc. and Kobe Steel USA Holdings
Inc. dated November 17, 1995 (filed on March 4, 1996
requesting confidential treatment as to certain portions;
incorporated herein by reference).
10.4.1 Restated 1987 Stock Option Plan, effective January 23, 1992
and forms of agreement thereunder (incorporated by reference
from a similarly numbered exhibit filed with the Company's
report on Form 10-K for the year ended December 29, 1991).
10.4.2 Komag, Incorporated 1995 Management Bonus Plan (incorporated
by reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
10.4.3 1988 Employee Stock Purchase Plan Joinder Agreement dated July
1, 1993 between Komag, Incorporated and Komag USA (Malaysia)
Sdn. (incorporated by reference from Exhibit 10.11.11 filed
with the Company's Report on Form 10-K for the year ended
January 2, 1994).
10.5.1 Komag, Incorporated Deferred Compensation Plan (incorporated
by reference from a similarly numbered exhibit filed with the
Company's Report on Form 10-K for the year ended January 1,
1995).
10.5.2 Komag Material Technology, Inc. 1995 Stock Option Plan
(incorporated by reference from Exhibit 10.11.12 filed with
Form 10-Q for the Quarter ended October 1, 1995).
10.6 Common Stock Purchase Agreement dated December 9, 1988 by and
between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 1 filed with the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on December 20, 1988).
10.7 Common Stock Purchase Agreement dated February 6, 1990 by and
between Komag, Incorporated and Kobe Steel USA Holdings Inc.
(incorporated by reference from Exhibit 10.17 filed with the
Company's Report on Form 10-K for the year ended December 31,
1989).
10.8 Registration Rights Agreement dated March 21, 1990 by and
between Komag, Incorporated and Kobe Steel USA Holdings Inc.
(incorporated by reference from Exhibit 10.18 filed with the
Company's Report on Form 10-K for the year ended December 31,
1989).
10.9 Amendment No. 1 to Common Stock Purchase Agreement dated March
21, 1990 by and between Komag, Incorporated and Asahi Glass
Co., Ltd. (incorporated by reference from Exhibit 10.19 filed
with Amendment No. 1 to the Registration Statement filed with
the Securities and Exchange Commission on May 26, 1987).
52
<PAGE> 53
10.10 Amended and Restated Registration Rights Agreement dated March
21, 1990 by and between Komag, Incorporated and Asahi Glass
Co., Ltd. (incorporated by reference from Exhibit 10.20 filed
with Amendment No. 1 to the Registration Statement filed with
the Securities and Exchange Commission on May 26, 1987).
10.11 Letter dated February 10, 1992 from the Malaysian Industrial
Development Authority addressed to Komag, Incorporated
approving the "Pioneer Status" of the Company's thin- film
media venture in Malaysia (incorporated by reference from
Exhibit 10.28 filed with the Company's report on Form 10-K for
the year ended January 3, 1993).
10.12 Credit Agreement between Komag, Incorporated and First
Interstate Bank of California-- Three Year Facility--dated
December 15, 1994 (incorporated by reference from Exhibit
10.24 filed with the Company's report on Form 10-K for the
year ended January 1, 1995).
10.13 Credit Agreement between Komag, Incorporated and First
Interstate Bank of California-- One Year Facility--dated
December 15, 1994 (incorporated by reference from Exhibit
10.25 filed with the Company's report on Form 10-K for the
year ended January 1, 1995).
10.14 First Amendment to Credit Agreement--Three Year Facility--by
and between Komag, Incorporated and First Interstate Bank of
California dated March 29, 1995.
10.15 Second Amendment to Credit Agreement--Three Year Facility--by
and between Komag, Incorporated and First Interstate Bank of
California dated December 15, 1995.
10.16 Credit Agreement between Komag, Incorporated and The
Industrial Bank of Japan, Limited, San Francisco Agency dated
December 15, 1995.
11.1 Computation of Income (Loss) per Share.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Chuo Audit Corporation.
24 Power of Attorney. Reference is made to the signature pages of
this Report.
27 Financial Data Schedule.
- -----------------
The Company agrees to furnish to the Commission upon request a copy of any
instrument with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Company.
(B) REPORTS ON FORM 8-K.
Not Applicable
UNDERTAKING
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:
53
<PAGE> 54
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8 identified
below, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987), 33-19851 (filed January 28, 1988), 33-25230 (filed October 28, 1988),
33-41945 (filed July 29, 1991), 33-45469 (filed February 3, 1992), 33-53432
(filed October 16, 1992), 33-80594 (filed June 22, 1994), and 33-62543 (filed
September 12, 1995).
54
<PAGE> 55
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MILPITAS, CALIFORNIA ON
THIS 6TH DAY OF MARCH, 1996.
Komag, Incorporated
By Stephen C. Johnson
-------------------------
Stephen C. Johnson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Stephen C. Johnson and William L. Potts,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
55
<PAGE> 56
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
TU CHEN Chairman of the Board March 6, 1996
- ---------------------------- and Director
(Tu Chen)
STEPHEN C. JOHNSON President, Chief Executive Officer March 6, 1996
- ----------------------------
(Stephen C. Johnson)
WILLIAM L. POTTS, JR. Senior Vice President-Chief March 6, 1996
- ---------------------------- Financial Officer and Secretary
(William L. Potts, Jr.) (Principal Financial and
Accounting Officer)
CRAIG R. BARRETT Director February 23, 1996
- ----------------------------
(Craig R. Barrett)
CHRIS A. EYRE Director March 6, 1996
- ----------------------------
(Chris A. Eyre)
IRWIN FEDERMAN Director March 6, 1996
- ----------------------------
(Irwin Federman)
GEORGE A. NEIL Director February 26, 1996
- ----------------------------
(George A. Neil)
MAX PALEVSKY Director March 6, 1996
- ----------------------------
(Max Palevsky)
ANTHONY SUN Director March 6, 1996
- ----------------------------
(Anthony Sun)
MASAYOSHI TAKEBAYASHI Director February 24, 1996
- ---------------------------
(Masayoshi Takebayashi)
*By WILLIAM L. POTTS, JR.
------------------------
(William L. Potts, Jr.,
Attorney-in-Fact)
</TABLE>
56
<PAGE> 57
ITEM 14(D) FINANCIAL STATEMENT SCHEDULES
KOMAG, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended January 2, 1994
Allowance for doubtful accounts $ 1,917 $ (191) $ 44 $ 1,682
Allowance for sales returns 1,344 3,163 (1) 2,632 (2) 1,875
------- ------- -------- -------
Sub total 3,261 2,972 2,676 3,557
Restructuring liability (3) -- 38,956 23,069 (4) 15,887
------- ------- -------- -------
$ 3,261 $41,928 $ 25,745 $19,444
======= ======= ======== =======
Year ended January 1, 1995
Allowance for doubtful accounts $ 1,682 $ (195) $ -- $ 1,487
Allowance for sales returns 1,875 2,146 (1) 3,285 (2) 736
------- ------- -------- -------
Sub total 3,557 1,951 3,285 2,223
Restructuring liability (3) 15,887 -- 15,887 (5) --
------- ------- -------- -------
$19,444 $ 1,951 $ 19,172 $ 2,223
======= ======= ======== =======
Year ended December 31, 1995
Allowance for doubtful accounts $ 1,487 $ 1,519 $ -- $ 3,006
Allowance for sales returns 736 2,351 (1) 1,814 (2) 1,273
------- ------- -------- -------
$ 2,223 $ 3,870 $ 1,814 $ 4,279
======= ======= ======== =======
</TABLE>
(1) Additions to the allowance for sales returns are netted against sales.
(2) Actual sales returns of subsequently scrapped product were charged
against the allowance for sales returns. Actual sales returns of
product that was subsequently tested and shipped to another customer
were netted directly against sales.
(3) Relates to the restructuring of Dastek, Inc., the Company's thin-film
head joint venture. See Note 10 to the Consolidated Financial
Statements.
(4) Primarily represents reductions of assets and liabilities to their
estimated net realizable values.
(5) Primarily represents operating losses incurred during the shutdown of
Dastek, Inc.
57
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Asahi Komag Co., Ltd.
We have audited the accompanying consolidated balance sheet of Asahi Komag
Co., Ltd. and subsidiary as of December 31, 1995, and the related consolidated
statements of income, cash flows, and stockholder's equity for the year then
ended. We have also audited the accompanying balance sheet of Asahi Komag Co.,
Ltd. as of December 31, 1994, and the related statements of income, cash flows,
and stockholder's equity for each of the years in the two year period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Headway Technologies, Inc., a company investment accounted for
using the equity method, which represents six percent of the Company's total
assets as of December 31, 1995. Those statements were audited by other auditors
whose report has been provided to us and our opinion, insofar as it relates to
the amounts included for Headway Technologies, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects
the consolidated financial position of Asahi Komag Co., Ltd. and subsidiary as
of December 31, 1995, and the consolidated results of its operations and its
cash flows for the year ended December 31, 1995, and the financial position of
Asahi Komag Co., Ltd. as of December 31, 1994 and the results of its operations
and its cash flows for each of the years in the two year period ended December
31, 1994 in conformity with generally accepted accounting principles applicable
in the United States of America.
As discussed in Note 2b of the notes to the financial statements, the
Company reporting entity changed in 1995 as a result of the establishment of a
wholly owned subsidiary.
The consolidated financial statements as of and for the year ended December
31, 1995 have been translated into United States Dollars solely for the
convenience of the reader. Our audit included the translation, and in our
opinion such translation has been made in accordance with the basis stated in
note 2g to the financial statements.
CHUO AUDIT CORPORATION
Tokyo, Japan
January 27, 1996
58
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF KOMAG, INCORPORATED,
a Delaware Corporation
The undersigned, Stephen C. Johnson and William L. Potts, Jr.,
hereby certify that:
FIRST: They are the duly elected and acting President and
Secretary, respectively, of said corporation.
SECOND: The Certificate of Incorporation of said corporation
was originally filed with the Secretary of State of Delaware on October 29,
1986.
THIRD: The Certificate of Incorporation of said corporation
shall be amended and restated to read in full as follows:
I
The name of the corporation (herein called the "Corporation") is KOMAG,
INCORPORATED.
II
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle, zip code 19801. The name of the
registered agent of the Corporation at such address is The Corporation Trust
Company.
III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
IV
The Corporation shall be authorized to issue Eighty-Six
Million (86,000,000) shares of capital stock having an aggregate par value of
Eight Hundred Sixty Thousand Dollars ($860,000). This Capital Stock shall be
divided into two classes, Common Stock and Preferred Stock, both classes having
a par value. The authorized Common Stock shall be Eighty-Five Million shares
(85,000,000) shares having a par value of one cent ($.01) per share for an
aggregate class par value of Eight Hundred Fifty Thousand Dollars ($850,000).
The authorized Preferred Stock shall be One Million (1,000,000) shares having a
par value of one cent ($.01) per share for an aggregate class par value of Ten
Thousand Dollars ($10,000). The Board of Directors of the Corporation is
hereby empowered (i) to determine the preferences, privileges, or restrictions
of such Preferred Stock, including (but not limited to) the dividend rights and
rate, conversion and voting rights, redemption rights and the terms and prices
thereof (including any provision for a sinking fund), or liquidation
preferences thereof, if any, (ii) to divide the Preferred Stock into different
series consisting of any number of shares, each series having different rights,
provisions, or conditions from any other series and (iii) to increase or
decrease the number of shares of any series so designated, but not below the
number of shares of any such series then outstanding. The Corporation is also
authorized to issue debentures (convertible into the Common Stock or Preferred
Stock or non- convertible, either with or without voting rights) and/or
warrants or options to purchase Common Stock or Preferred Stock.
V
<PAGE> 2
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter,
amend or repeal the By-Laws of the Corporation.
VI
The number of directors of the Corporation shall be fixed from
time to time by a by-law or amendment thereof duly adopted by the Board of
Directors or by the Stockholders.
VII
All rights to vote and all voting power shall be vested in the
Common Stock, and any Preferred Stock with voting rights pursuant to the terms
thereof, and any such holders thereof shall be entitled at all elections of
directors to as many votes as shall equal the number of votes which (except for
this provision as to cumulative voting) he would be entitled to cast for the
election of directors with respect to his shares of stock multipled by the
number of directors to be elected, and such holder may cast all of such votes
for a single director or may distribute them among the number to be voted for,
or for any two or more of them as he may see fit, and to vote for each share
upon all other matters.
VIII
Elections of directors need not be by written ballot unless
the By-laws of the Corporation shall be provided.
IX
Meetings of stockholders may be held within or without the
State of Delaware, as the By-laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the By-laws of the Corporation.
X
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit.
XI
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
XII
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
2.
<PAGE> 3
XIII
The Corporation shall have perpetual existence.
3.
<PAGE> 4
FOURTH: The foregoing Amended and Restated Certificate of
Incorporation has been duly adopted by the Corporation's Board of Directors and
stockholders in accordance with the applicable provisions of Section 228, 242
and 245 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this
certificate on December ____, 1995.
KOMAG, INCORPORATED
By:
------------------------------------
Stephen C. Johnson, President
Attest:
----------------------------------------
William L. Potts, Jr., Secretary
4.
<PAGE> 1
EXHIBIT 10.3.12
STOCK PURCHASE AGREEMENT
Dated As Of November 17, 1995
Between
KOMAG, INCORPORATED
And
KOBE STEEL USA HOLDINGS INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . . 1
2. Representations and Warranties of the Seller . . . . . . . . . . . 1
2.1 Organization . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Offering . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Non-Contravention . . . . . . . . . . . . . . . . . . . . 2
2.7 Title to Stock . . . . . . . . . . . . . . . . . . . . . . 2
3. Representations and Warranties of the Buyer . . . . . . . . . . . 2
3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Authorization . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 3
3.5 Non-Contravention . . . . . . . . . . . . . . . . . . . . 3
3.6 Purchase for Own Account . . . . . . . . . . . . . . . . . 3
3.7 Accredited Investor . . . . . . . . . . . . . . . . . . . 4
4. Conditions of Buyer's Obligations at Closing . . . . . . . . . . . 4
4.1 Representations and Warranties . . . . . . . . . . . . . . 4
4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Qualifications . . . . . . . . . . . . . . . . . . . . . . 4
4.4 Corporate Proceedings and Documents . . . . . . . . . . . 4
4.5 No Adverse Proceeding . . . . . . . . . . . . . . . . . . 4
4.6 Absence of Governmental or Other Objection . . . . . . . . 4
4.7 Board of Directors . . . . . . . . . . . . . . . . . . . . 5
4.8 Stock Certificates . . . . . . . . . . . . . . . . . . . . 5
4.9 Seller Purchase Documents . . . . . . . . . . . . . . . . 5
4.10 Secretary's Certificate . . . . . . . . . . . . . . . . . 5
4.11 Other Matters . . . . . . . . . . . . . . . . . . . . . . 6
5. Conditions of the Seller's Obligations at Closing . . . . . . . . 6
5.1 Representations and Warranties . . . . . . . . . . . . . . 6
5.2 Performance . . . . . . . . . . . . . . . . . . . . . . . 6
5.3 Corporate Proceedings and Documents . . . . . . . . . . . 6
5.4 No Adverse Proceeding . . . . . . . . . . . . . . . . . . 6
5.5 Payment of Purchase Price . . . . . . . . . . . . . . . . 6
5.6 Stock Certificates . . . . . . . . . . . . . . . . . . . . 6
5.7 Buyer Purchase Documents . . . . . . . . . . . . . . . . . 6
5.8 Secretary's Certificate . . . . . . . . . . . . . . . . . 7
5.9 Other Matters . . . . . . . . . . . . . . . . . . . . . . 7
6. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1 Survival of Representations, Warranties and Agreements . . 7
6.2 Indemnification . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
i.
<PAGE> 3
<TABLE>
<S> <C> <C>
6.3 Defense of Claims. . . . . . . . . . . . . . . . . . . 8
6.4 Successors and Assigns . . . . . . . . . . . . . . . . . 9
6.5 Governing Law . . . . . . . . . . . . . . . . . . . . . 9
6.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . 9
6.7 Titles and Subtitles . . . . . . . . . . . . . . . . . . 9
6.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . 9
6.9 Finder's Fee . . . . . . . . . . . . . . . . . . . . . . 9
6.10 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 10
6.11 Amendments and Waivers . . . . . . . . . . . . . . . . . 10
6.12 Severability . . . . . . . . . . . . . . . . . . . . . . 10
6.13 Entire Agreement . . . . . . . . . . . . . . . . . . . . 10
6.14 Arbitration . . . . . . . . . . . . . . . . . . . . . . 10
6.15 Non-Exercise of Joint-Venture Option . . . . . . . . . . 10
</TABLE>
EXHIBIT A - Joint Venture Amendment Agreement
EXHIBIT B - License Amendment Agreement
EXHIBIT C - Substrate Sales Amendment Agreement
EXHIBIT D - KMT Consent
EXHIBIT E - Substrate Agreement
ii.
<PAGE> 4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 17th day of
November, 1995, between Komag, Incorporated, a Delaware corporation (the
"Buyer"), and Kobe Steel USA Holdings Inc., a Delaware corporation (the
"Seller").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, the Buyer agrees to purchase for $6,750,000 at
the Closing, and the Seller agrees to sell to the Buyer at the Closing, 389
shares of the Common Stock (such Common Stock as is being sold by the Seller is
referred to herein as the "Stock") of Komag Material Technology, Inc., a
Delaware corporation ("KMT"), owned by the Seller. The purchase and sale of
the Stock shall take place at the offices of Brobeck, Phleger & Harrison, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California, at 10:30 A.M. on
December 28, 1995, or at such other time and place as the Seller and the Buyer
mutually agree upon in writing (which time and place are designated as the
"Closing"). At the Closing the Seller shall deliver to the Buyer a certificate
or certificates representing the Stock (which certificate or certificates shall
be appropriately endorsed to the Buyer) that the Buyer is purchasing against
payment by the Buyer by wire transfer representing immediately available funds
in the amount of $6,750,000 to an account to be designated by the Seller to the
Buyer.
2. Representations and Warranties of the Seller. The
Seller hereby represents and warrants to the Buyer that:
2.1 Organization. The Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
2.2 Authorization. All corporate action on the part of
the Seller, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, each of the other
documents required to be executed and delivered by the Seller or persons
affiliated with the Seller in connection with this Agreement that are described
in Section 4.9 (together with this Agreement, referred to collectively as the
"Seller Purchase Documents") and performance of all obligations of the Seller
hereunder and thereunder has been taken or will be taken prior to the Closing,
and this Agreement and the other Seller Purchase Documents constitute valid and
legally binding obligations of the Seller, enforceable against the Seller in
accordance with their respective terms.
2.3 Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority or any other
person on the part of the Seller is required in connection with the
consummation of the transactions contemplated by this Agreement or the other
Seller Purchase Documents.
2.4 Offering. Subject to the truth and accuracy of each
of the Buyer's representations set forth in Section 3 of this Agreement, the
offer and sale of the Stock as contemplated by this Agreement are exempt from
the registration requirements of the Securities Act of 1933, as amended, and
neither the Seller nor any agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
1.
<PAGE> 5
2.5 Litigation. There is no action, suit, proceeding or
investigation pending or, to the best of the Seller's knowledge, currently
threatened against the Seller that questions the validity of this Agreement or
the other Seller Purchase Documents or the right of the Seller to enter into
this Agreement or the other Seller Purchase Documents, or to consummate the
transactions contemplated hereby or thereby. The Seller is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality that would in any way
adversely affect the Seller's ability to perform its obligations under this
Agreement or the other Seller Purchase Documents or the transactions
contemplated hereby or thereby. There is no action, suit, proceeding or
investigation by the Seller currently pending or that the Seller intends to
initiate that would in any way adversely affect the Seller's ability to perform
its obligations under this Agreement or the other Seller Purchase Documents or
the transactions contemplated hereby or thereby.
2.6 Non-Contravention. The execution, delivery and
performance by the Seller of this Agreement and the other Seller Purchase
Documents do not and will not, (a) contravene or conflict with the certificate
of incorporation or by-laws of the Seller, (b) contravene or conflict with any
law, regulation, judgment, injunction, writ, order or decree binding upon or
currently applicable to the Seller, (c) result in the creation or imposition of
any lien upon the Stock, or (d) constitute a default under any agreement,
contract or other instrument binding upon the Seller or by or to which or any
of its assets or properties is bound.
2.7 Title to Stock. The Seller owns the Stock free and
clear of all mortgages, liens, loans and encumbrances and no other person has
any rights or claims of any kind to the Stock except for any rights and
privileges provided to the Buyer in Section 10 of the Joint Venture Agreement
(the "JV Agreement") dated as of March 6, 1989 among the Buyer, KMT and the
Seller.
3. Representations and Warranties of the Buyer. The
Buyer hereby represents and warrants that:
3.1 Organization. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.2 Authorization. All corporate action on the part of
the Buyer, its officers, directors, and stockholders necessary for the
authorization, execution and delivery of this Agreement and each of the other
documents required to be executed and delivered by the Buyer or persons
affiliated with the Buyer in connection with this Agreement that are described
in Section 5.7 (together with this Agreement, referred to collectively as the
"Buyer Purchase Documents" and the Buyer Purchase Documents, together with the
Seller Purchase Documents, are referred to collectively as the "Purchase
Documents") and the performance of, all obligations of the Buyer hereunder and
thereunder has been taken or will be taken prior to the Closing, and this
Agreement and the other Buyer Purchase Documents constitute valid and legally
binding obligations of the Buyer, enforceable against the Buyer in accordance
with their respective terms.
3.3 Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority or any other
person on the part of the Buyer is required in connection with the consummation
of the transactions contemplated by this Agreement or the other Buyer Purchase
Documents.
3.4 Litigation. There is no action, suit, proceeding or
investigation pending or,
2.
<PAGE> 6
to the best of the Buyer's knowledge, currently threatened against the Buyer
that questions the validity of this Agreement or the other Buyer Purchase
Documents or the right of the Buyer to enter into this Agreement or the other
Buyer Purchase Documents, or to consummate the transactions contemplated hereby
or thereby. The Buyer is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency
or instrumentality that would in any way adversely affect the Seller's ability
to perform its obligations under this Agreement or the other Buyer Purchase
Documents or the transactions contemplated hereby or thereby. There is no
action, suit, proceeding or investigation by the Buyer currently pending or
that the Buyer intends to initiate that would in any way adversely affect the
Seller's ability to perform its obligations under this Agreement or the other
Buyer Purchase Documents or the transactions contemplated hereby or thereby.
3.5 Non-Contravention. The execution, delivery and
performance by the Buyer of this Agreement and the other Buyer Purchase
Documents do not and will not, (a) contravene or conflict with the certificate
of incorporation or by-laws of the Buyer, (b) contravene or conflict with any
law, regulation, judgment, injunction, writ, order or decree binding upon or
currently applicable to the Buyer, or (c) constitute a default under any
agreement, contract or other instrument binding upon the Buyer or by or to
which or any of its assets or properties is bound.
3.6 Purchase for Own Account. The Stock to be received
by the Buyer will be acquired for investment for the Buyer's own account, not
as a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Buyer has no present intention of selling, granting
any participation in, or otherwise distributing the same.
3.14 Accredited Investor. The Buyer is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect and acknowledges that it can bear
the economic risk of its investment and can capably evaluate the risks of the
purchase of the Stock.
4. Conditions of Buyer's Obligations at Closing. The
obligations of the Buyer under Section 1 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions:
4.1 Representations and Warranties. The representations
and warranties of the Seller contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the date of such Closing.
4.2 Performance. The Seller shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement and the other Seller Purchase Documents that are required to be
performed or complied with by it on or before the Closing.
4.3 Qualifications. All authorizations, approvals,
consents or permits, if any, of any governmental authority or regulatory body
of the United States or of any state or any other person that are required in
connection with the lawful sale of the Stock pursuant to this Agreement shall
be duly obtained and effective as of the Closing.
4.4 Corporate Proceedings and Documents. All corporate
and other proceedings in connection with the transactions contemplated to occur
at the Closing by this Agreement and the other Seller Purchase Documents and
all documents incident hereto and thereto shall be reasonably satisfactory in
form and substance to the Buyer, and the Buyer shall have received all such
counterpart originals and certified or other copies of such documents as it may
3.
<PAGE> 7
reasonably request.
4.5 No Adverse Proceeding. There shall have been no
pending or threatened claim, action, litigation or proceeding, judicial or
administrative, or any government investigation against the Seller, KMT or the
Buyer for the purpose, or having the effect of, enjoining or preventing the
consummation of this Agreement or the other Purchase Documents, or otherwise
claiming that this Agreement or the other Purchase Documents or the
consummation of this Agreement or the other Purchase Documents is illegal.
4.6 Absence of Governmental or Other Objection. There
shall be no pending or threatened lawsuit challenging the sale of the Stock
contemplated by the SEC, the California Department of Corporations, or any
commissioner of corporations or similar offices of any other state, the Federal
Trade Commission, the U.S. Department of Justice, any other body or agency of
the federal government, or any similar state body or agency and the
consummation of the transaction(s) contemplated hereby shall not have been
enjoined by a court of competent jurisdiction as of the Closing. At the time
of the Closing, the sale and issuance of the Stock shall be legally permitted
by all laws and regulations to which the Seller and KMT are subject.
4.7 Board of Directors. The Board of Directors of KMT
shall be reconstituted so that one director nominated by the Seller shall
resign his position on the Board of Directors and one new director nominated by
the Buyer shall be elected to the Board of Directors.
4.8 Stock Certificates. The Seller shall have delivered
to the Buyer the certificate or certificates representing the Stock, which
certificate or certificates shall be appropriately endorsed in favor of the
Buyer.
4.9 Seller Purchase Documents. The Seller shall have
executed and delivered, or, where execution or delivery is required by an
affiliate of Seller other than KMT, caused to be executed and delivered, to the
Buyer each of the Seller Purchase Documents which shall be in the forms
attached hereto. Such Seller Purchase Documents shall consist of (a) this
Agreement, (b) the Joint Venture Amendment Agreement dated as of the date
hereof among the Buyer, the Seller and KMT in substantially the form attached
as Exhibit A hereto (the "JV Amendment"), (c) the License Amendment Agreement
dated as of the date hereof among the Buyer, Kobe Steel, Ltd. and KMT in
substantially the form attached as Exhibit B hereto (the "License Amendment"),
(d) the Substrate Sales Amendment Agreement dated as of the date hereof among
the Buyer, Kobe Steel, Ltd. and KMT in substantially the form attached as
Exhibit C hereto (the "Substrate Sales Amendment"), (e) the Consent of KMT
dated as of the date hereof by KMT in substantially the form attached as
Exhibit D hereto (the "KMT Consent"), (f) the Substrate Agreement dated as of
the date hereof between Kobe Steel, Ltd. and the Buyer in substantially the
form attached as Exhibit E hereto (the "Substrate Agreement"), and (g) the
documents and certificates required pursuant to Sections 4.8 and 4.10.
4.10 Secretary's Certificate. The Secretary or Assistant
Secretary of the Seller shall have executed and delivered certified copies of
the resolutions of the Board of Directors of the Seller authorizing the
execution, delivery and performance by the Seller of the Seller Purchase
Documents which are to be executed, delivered or performed by the Seller.
4.11 Other Matters. All actions required to be taken by
the Seller in connection with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Buyer.
4.
<PAGE> 8
5. Conditions of the Seller's Obligations at Closing.
The obligations of the Seller to the Buyer under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
the Buyer:
5.1 Representations and Warranties. The representations
and warranties of the Buyer contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 Performance. The Buyer shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement and the other Buyer Purchase Documents that are required to be
performed or complied with by it on or before the Closing.
5.3 Corporate Proceedings and Documents. All corporate
and other proceedings in connection with the transactions contemplated to occur
at the Closing by this Agreement and the other Buyer Purchase Documents and all
documents incident hereto and thereto shall be reasonably satisfactory in form
and substance to the Seller, and the Seller shall have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request.
5.4 No Adverse Proceeding. There shall have been no
pending or threatened claim, action, litigation or proceeding, judicial or
administrative, or any government investigation against the Seller, KMT or the
Buyer for the purpose, or having the effect of, enjoining or preventing the
consummation of this Agreement or the other Purchase Documents, or otherwise
claiming that this Agreement or the other Purchase Documents or the
consummation of this Agreement or the other Purchase Documents is illegal.
5.5 Payment of Purchase Price. The Buyer shall have
delivered to the Seller the purchase price as specified in Section 1.
5.6 Stock Certificates. The Buyer shall have caused KMT
to deliver to the Seller the new or replacement certificate or certificates
representing the Seller's remaining 311 shares of the Common Stock of KMT.
5.7 Buyer Purchase Documents. The Buyer shall have
executed and delivered, or caused KMT to execute or deliver, to the Seller each
of the Buyer Purchase Documents which shall be in the forms attached hereto to
the Seller. Such Buyer Purchase Documents shall consist of (a) this Agreement,
(b) the JV Amendment, (c) the License Amendment, (d) the Substrate Sales
Amendment, (e) the KMT Consent, (f) the Substrate Agreement, and (g) the
documents and certificates required pursuant to Sections 5.6 and 5.8.
5.8 Secretary's Certificate. The Secretary or Assistant
Secretary of the Buyer shall have executed and delivered certified copies of
the resolutions of the Board of Directors of the Buyer authorizing the
execution, delivery and performance by the Buyer of the Buyer Purchase
Documents which are to be executed, delivered or performed by the Buyer.
5.9 Other Matters. All actions required to be taken by
the Buyer in connection with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Seller.
5.
<PAGE> 9
6. Miscellaneous.
6.1 Survival of Representations, Warranties and
Agreements.
(a) Survival of Representation and Warranties.
Subject to the limitations set forth in Section 6.2 of this Agreement and
notwithstanding any investigation conducted at any time with regard thereto by
or on behalf of either party, all representations and warranties of each party
set forth in this Agreement shall survive the execution, delivery and
performance of this Agreement for a period of one (1) year from the Closing and
shall thereafter terminate and be of no further force and effect. All
representations, and warranties of each party set forth in this Agreement shall
be deemed to have been made again by such party at and as of the Closing.
(b) Survival of Covenants and Agreements. Unless
provided otherwise, the covenants, indemnities and agreements of each of the
parties in this Agreement shall survive the execution, delivery and performance
of this Agreement.
6.2 Indemnification.
(a) Indemnification by the Seller. The Seller
hereby agrees to indemnify and hold harmless the Buyer, KMT and any of their
officers, directors, affiliates, employees and/or agents (collectively, the
"Buyer Indemnified Parties") from and against any and all losses, liabilities,
damages, demands, claims, suits, actions, judgments or causes of action,
assessments, costs and expenses, including, without limitation, interest,
penalties, attorneys' fees, any and all expenses incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, "the Buyer Indemnified Parties Damages"), asserted
against, resulting to, imposed upon, or incurred or suffered by any of the
Buyer Indemnified Parties directly or indirectly, as a result of or arising
from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants or agreements made by the Seller in this
Agreement and from any taxes that are the Seller's responsibility to pay but
which are imposed by any governmental entity or otherwise on the Buyer in
connection with the sale of the Stock (the "Buyer Indemnified Parties Claims").
(b) Indemnification by the Buyer. The Buyer
hereby agrees to indemnify and hold harmless the Seller and any of its
officers, directors, affiliates, employees and/or agents (collectively, the
"Seller Indemnified Parties") from and against any and all losses, liabilities,
damages, demands, claims, suits, actions, judgments or causes of action,
assessments, costs and expenses, including, without limitation, interest,
penalties, attorneys' fees, any and all expenses incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, the "Seller Indemnified Parties Damages"), asserted
against, resulting to, imposed upon, or incurred or suffered by the Seller
Indemnified Parties directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants or agreements made by the Buyer Indemnified Parties in
this Agreement and from any taxes that are the Buyer's responsibility to pay
but which are imposed by any governmental entity or otherwise on the Seller in
connection with the purchase of the Stock (the "Seller Indemnified Parties
Claims" and, together with the Buyer Indemnified Parties Claims, referred to
collectively as the "Claims").
6.3 Defense of Claims. The parties hereto shall promptly
give written notice to
6.
<PAGE> 10
each other after either of them obtains knowledge of any Claim, obligation,
liability or action for which indemnification may be sought hereunder or prompt
written notice of the commencement of any legal proceedings for which
indemnification may be sought hereunder, whichever occurs first; provided, that
the failure to give such notice (other than notice of the commencement of a
legal proceeding) shall not adversely affect any right of indemnification under
this Agreement. The indemnifying party shall be entitled to control the
defense of any such legal proceeding, through legal counsel reasonably
satisfactory to the indemnified party, at the sole expense of the indemnifying
party, and the indemnified party shall cooperate with the indemnifying party in
the defense of such Claim and shall have the right, but not the obligation, to
participate in the defense at its own expense. If the indemnifying party
elects not to direct such defense by written notice within fifteen (15) days
after receipt of the original notice, the indemnified party will have the
right, at its own discretion, to direct such defense at the indemnifying
party's sole expense. The indemnifying party shall have the right to
compromise or settle, with the indemnified party's prior written approval, any
claim or litigation regarding which it is required to indemnify. If the
indemnified party refuses to approve any compromise or settlement recommended
by the indemnifying party which would have concluded such Claim or litigation
but for the indemnified party's failure to give approval, the indemnifying
party's liability to the indemnified party hereunder with respect to any such
claim or litigation shall not exceed the amount which the indemnifying party
would have paid pursuant to such proposed compromise or settlement.
6.4 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including transferees of the Stock). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.5 Governing Law. This Agreement shall be governed by
and construed under the laws of the State of California as applied to
agreements among California residents entered into and to be performed entirely
within California.
6.6 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.7 Titles and Subtitles. The titles and subtitles used
in this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.8 Notices. Unless otherwise provided, any notice
required or permitted under this Agreement shall be given in writing and shall
be deemed effectively given upon personal delivery to the party to be notified
or upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
6.9 Finder's Fee. Each party represents that it neither
is nor will be obligated for any finders' fee or commission in connection with
this transaction. The Seller agrees to indemnify and to hold harmless the
Buyer from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Seller or any of its officers, partners,
employees, or representatives is responsible. The Buyer agrees to indemnify
and hold harmless the Seller from any liability for
7.
<PAGE> 11
any commission or compensation in the nature of a finders' fee (and the costs
and expenses of defending against such liability or asserted liability) for
which the Buyer or any of its officers, employees or representatives is
responsible.
6.10 Expenses. Irrespective of whether the Closing is
effected, each party shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement except as set forth in the immediately following sentence. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to
which such party may be entitled.
6.11 Amendments and Waivers. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Seller and the Buyer.
6.12 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.13 Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
6.14 Arbitration. All disputes, controversies or
differences arising out of or in relation to or in connection with this
Agreement, which cannot be settled by discussion and mutual accord, shall be
finally settled by binding arbitration, to be conducted in Palo Alto,
California in accordance with the rules of the American Arbitration
Association. Demand for arbitration shall be made in writing and shall be
served upon the party or parties to whom the demand is addressed in the manner
provided for the tender of notices in Section 6.8 hereof. There shall be three
(3) arbitrators and the proceedings shall be conducted in the English language.
Judgment upon the award rendered may be entered in any court having proper
jurisdiction or application made to such court for a judicial acceptance of the
award and an order of enforcement, as the case may be. The arbitrators shall
be instructed, in connection with the issuance of their award, to prepare a
written finding of facts and law concerning the award.
6.15 Non-Exercise of Joint-Venture Option.
Notwithstanding anything to the contrary in the JV Agreement, the execution,
delivery and performance of this Agreement and the other Purchase Documents
shall not be deemed to be an exercise, or to involve or require the exercise,
of any of the Buyer's or the Seller's rights under Section 10.2 of the JV
Agreement and all other rights and obligations of the parties to the JV
Agreement are hereby ratified and confirmed.
8.
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
KOMAG, INCORPORATED
By:
Title:
Address: 275 South Hillview Drive
Milpitas, CA 95035
KOBE STEEL USA HOLDINGS INC.
By:
Title:
Address: 535 Madison Avenue
New York, NY 10010
9.
<PAGE> 1
EXHIBIT 10.3.14
LICENSE AMENDMENT AGREEMENT
THIS LICENSE AMENDMENT AGREEMENT (this "Amendment"), dated as of
November 17, 1995, is made among Komag, Incorporated, a Delaware corporation
("Komag"), Komag Material Technology, Inc., a Delaware corporation ("KMT"), and
Kobe Steel, Ltd., a Japanese company ("Kobe").
WHEREAS, Komag, KMT and Kobe are parties to a Joint Development and
Cross-License Agreement dated as of March 10, 1989 (the "License Agreement");
WHEREAS, the term of such License Agreement has expired and the
parties hereto wish to reinstate (on the terms and conditions set forth therein
as originally executed except as modified hereby) and extend the term of such
License Agreement; and
WHEREAS, Komag and Kobe Steel USA Holdings, Inc. are parties to a
Stock Purchase Agreement dated as of the date hereof (the "Stock Purchase
Agreement") and it is a condition precedent to the effectiveness of such Stock
Purchase Agreement that the parties hereto execute and deliver this Amendment.
NOW, THEREFORE, subject to the terms and conditions hereof, the
parties hereto agree as follows:
1 Definitions; Reinstatement of License Agreement. Terms
Defined in License Agreement. All capitalized terms used in this Amendment and
not otherwise defined herein shall have the meanings assigned to them in the
License Agreement.
2 Amendments to the License Agreement.
(a) Amendments. The License Agreement shall be restated and
amended as follows, effective as of the date of the occurrence of the Closing,
as defined in the Stock Purchase Agreement.
(i) Article I of the License Agreement is hereby
amended by adding in the following new Sections:
"Section 1.4 A "Inventing Party" shall mean a party to this
Agreement which employs one or more inventors as that term is used
before the U.S. Patent and Trademark Office, which inventor or
inventors contribute or contributes to the invention of a certain
Joint Invention."
"Section 1.4 B "Joint Inventions" shall mean all
discoveries, improvements and inventions, conceived or first
reduced to practice pursuant hereto, as those terms are used before
the U.S. Patent and Trademark Office which are jointly made by one
or more Inventing Parties."
(ii) Sections 2.1, 2.2 and 2.3 of the License Agreement
are hereby amended by deleting the phrase "or other products incorporating Disk
Substrates" appearing therein.
1.
<PAGE> 2
(iii) Section 4.5 of the License Agreement is
hereby amended by deleting such Section 4.5 in its entirety and by inserting in
lieu thereof the following new Section 4.5:
"4.5 Joint Property. Joint Inventions shall be jointly owned
by the Inventing Parties, each Inventing Party having an equal and
undivided interest therein, subject to the limitations on
sublicensing set forth in Section 2.4 above as if such Joint
Inventions were held subject to licenses hereunder. In such event,
the Inventing Parties shall all determine whether a patent
application or applications shall be filed on such Joint
Inventions, the Inventing Party which will prepare and file such
application or applications, and the country or countries in which
the same are to be filed. The patent expenses incurred shall be
divided equally among the Inventing Parties. If the Inventing
Parties are not able to all agree to file an application or
applications on a Joint Invention, any one of the Inventing Parties
may elect to assume such expenses (the "Electing Party"). The
Electing Party shall control the preparation and prosecution of any
such applications and all rights in any patents granted thereon
shall belong exclusively to the Electing Party. Any Inventing
Party declining to bear its share of the expenses of prosecuting or
maintaining patents covering a Joint Invention (the "Declining
Party") agrees to execute any and all forms, assignments or other
documents to effect the foregoing; provided, however, that the
Declining Party shall automatically have a worldwide,
non-exclusive, royalty-free perpetual license under any patent or
patents which may be granted with respect to any such Joint
Invention; provided further, however, that such Declining Party
shall not have the right to assign, sublicense or otherwise
transfer the patent or patents, except to an Affiliate. The
administration of any licensing of Joint Inventions shall be
determined when the circumstances arise. Neither Kobe nor KOMAG
may, without the prior written consent of the other (which consent
may be withheld for any reason in its sole and absolute
discretion), assign or otherwise transfer its interest in any Joint
Invention except pursuant to Section 8.14 below."
(iv) Section 5.1 of the License Agreement is hereby
amended by deleting such Section 5.1 in its entirety and by inserting in lieu
thereof the following new Section 5.1:
"5.1 Term. This Agreement shall become effective on December
28, 1995 and shall remain in full force and effect for two (2)
years unless earlier terminated pursuant to Sections 5.2 or 5.3;
provided, that such term shall be automatically renewed for
subsequent two (2) year periods (subject to the effect of Sections
5.2 and 5.3) unless a written objection of any party hereto is
received by the other parties hereto prior to the end of the then
current term, in which case this Agreement will expire at the end
of such then current term."
(v) Section 7.2 of the License Agreement is hereby
amended by adding the following new clause (c):
"(c) Notwithstanding anything to the contrary in Section
7.2, any Proprietary Information shall no longer be deemed to be
"confidential" or "proprietary" for purposes of this Agreement five
(5) years after the date such Proprietary Information is disclosed
by any party to any other party hereto."
(vi) Section 7.3(a) of the License Agreement is hereby
amended by adding ", California" after the occurrence of "Palo Alto" therein.
2.
<PAGE> 3
(vii) Section 8.1 of the License Agreement is hereby
amended by (a) deleting "Richard C. Spalding" and by inserting in lieu thereof
"Andrew B. Koslow" and (b) deleting all text relating to Graham & James and by
inserting in lieu thereof the following new text:
"Graham & James
One Maritime Plaza
Suite 300
San Francisco, CA 94111
Attention: Michael R. Moyle, Esq.
Facsimile: (415) 391-2493"
(viii) Section 8.14(a) of the License Agreement is hereby
amended by adding the phrase "and except as to those rights specified in
Sections 4.2, 4.3 and 4.4" after the word "below" in the second line thereof.
(b) Amendment to Table of Contents. The Table of Contents of the
License Agreement shall be amended to the extent necessary to reflect the
amendments to the License Agreement made in subsection (a).
(c) References Within License Agreement. Each reference in the
License Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
License Agreement as amended by this Amendment.
3 Miscellaneous.
(a) License Agreement Otherwise Not Affected. Except as
expressly reinstated and amended pursuant hereto, the License Agreement shall
remain unchanged and in full force and effect. Without limitation, the
provisions of Sections 8.4, 8.5, 8.6, 8.10 and 8.14 of the License Agreement
shall be deemed to be applicable to this Amendment.
(b) Complete Agreement; Amendments. This Amendment, together
with the License Agreement, contains the entire and exclusive agreement of the
parties hereto and thereto with reference to the matters discussed herein and
therein. This Amendment supersedes all prior commitments, drafts,
communications, discussions and understandings, oral or written, with respect
thereto. This Amendment may not be modified, amended or otherwise altered
except in accordance with the terms of the License Agreement.
(c) Severability. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of this
Amendment shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only
to the extent of such prohibition or invalidity without affecting the remaining
provisions of this Amendment, or the validity or effectiveness of such
provision in any other jurisdiction.
(d) 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 shall be deemed to be an original and all of which
taken together shall constitute but one and the same agreement.
(e) Interpretation. This Amendment is the result of negotiations
among the parties hereto, and is the product of all parties hereto.
Accordingly, this Amendment shall not be construed against a particular party
merely because of such party's involvement in the preparation thereof.
3.
<PAGE> 4
4.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.
KOMAG, INCORPORATED
By
-------------------------------------
Title:
KOMAG MATERIAL TECHNOLOGY, INC.
By
-------------------------------------
Title:
KOBE STEEL, LTD.
By
-------------------------------------
Title:
5.
<PAGE> 1
EXHIBIT 10.3.15
SUBSTRATE SALES AMENDMENT AGREEMENT
THIS SUBSTRATE SALES AMENDMENT AGREEMENT (this "Amendment"),
dated as of November 17, 1995, is made among Komag, Incorporated, a Delaware
corporation ("Komag"), Komag Material Technology, Inc., a Delaware corporation
("KMT"), and Kobe Steel, Ltd., a Japanese company ("Kobe").
WHEREAS, Komag, KMT and Kobe are parties to a Finished Sales
Substrate Agreement dated as of March 10, 1989 (the "Substrate Agreement"); and
WHEREAS, Komag and Kobe Steel USA Holdings, Inc. are parties
to a Stock Purchase Agreement dated as of the date hereof (the "Stock Purchase
Agreement") and it is a condition precedent to the effectiveness of such Stock
Purchase Agreement that the parties hereto execute and deliver this Amendment.
NOW, THEREFORE, subject to the terms and conditions hereof,
the parties hereto agree as follows:
1 Definitions. All capitalized terms used in this
Amendment and not otherwise defined herein shall have the meanings assigned to
them in the Substrate Agreement.
2 Amendments to the Substrate Agreement.
(a) Amendments. The Substrate Agreement shall be amended as
follows, effective as of the date of satisfaction of the occurrence of the
Closing, as defined in the Stock Purchase Agreement:
(i) Section 1.2 of the Substrate Agreement is hereby
amended by deleting such Section 1.2 in its entirety and by inserting in lieu
thereof the following new Section 1.2:
"1.2 "Cost" will be determined quarterly and shall be
KMT's cost from the prior fiscal quarter (including operating
expenses and other expenses) before tax in accordance with
generally accepted accounting principles consistently applied
with the exception that all costs relating to stock options
shall be excluded.
(ii) Section 3.2 of the Substrate Agreement is hereby
amended by deleting such Section 3.2 in its entirety and by inserting in lieu
thereof the phrase "Intentionally Omitted."
(iii) Section 8.1 of the Substrate Agreement is hereby
amended by (a) deleting "Richard C. Spalding" and by inserting in lieu thereof
"Andrew B. Koslow" and (b) deleting all text relating to Graham & James and by
inserting in lieu thereof the following new text:
"Graham & James
One Maritime Plaza
Suite 300
1.
<PAGE> 2
San Francisco, CA 94111
Attention: Michael R. Moyle, Esq.
Facsimile: (415) 391-2493"
(iv) Section 8.11 of the Substrate Agreement is hereby
amended by adding ", California" after the occurrence of "Palo Alto" appearing
therein.
(b) Amendment to Table of Contents. The Table of ontents of
the Substrate Agreement shall be amended to the extent necessary to reflect the
amendments to the Substrate Agreement made in subsection (a).
(c) References Within Substrate Agreement. Each eference in
the Substrate Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
Substrate Agreement as amended by this Amendment.
3 Miscellaneous.
(a) Substrate Agreement Otherwise Not Affected. Except as
expressly amended pursuant hereto, the Substrate Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects. Without limitation, the provisions of Sections 8.4, 8.5, 8.6,
8.10 and 8.15 of the Substrate Agreement shall be deemed to be applicable to
this Amendment.
(b) Complete Agreement; Amendments. This Amendment, together
with the Substrate Amendment, contains the entire and exclusive agreement of the
parties hereto and thereto with reference to the matters discussed herein and
therein. This Amendment supersedes all prior commitments, drafts,
communications, discussions and understandings, oral or written, with respect
thereto. This Amendment may not be modified, amended or otherwise altered
except in accordance with the terms of the Substrate Agreement.
(c) Severability. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Amendment shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Amendment, or the validity or effectiveness of such provision
in any other jurisdiction.
(d) 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 shall be deemed to be an original and all of
which taken together shall constitute but one and the same agreement.
(e) Interpretation. This Amendment is the result of
negotiations among the parties hereto and is the product of all parties hereto.
Accordingly, this Amendment shall not be construed against a particular party
merely because of such party's involvement in the preparation thereof.
2.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.
KOMAG, INCORPORATED
By
-------------------------------------
Title:
KOMAG MATERIAL TECHNOLOGY, INC.
By
-------------------------------------
Title:
KOBE STEEL, LTD.
By
-------------------------------------
Title:
3.
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDMENT TO CREDIT AGREEMENT - THREE YEAR FACILITY
This First Amendment To Credit Agreement - Three Year Facility is
entered into this 29th day of March, 1995, by and among (a) KOMAG, INCORPORATED,
a Delaware corporation ("Borrower"); (b) the banks from time to time party
hereto, together with their respective successors and assigns (each a "Bank" and
collectively the "Banks"); and FIRST INTERSTATE BANK OF CALIFORNIA, a California
banking corporation ("FICAL"), as agent for the Banks (in such capacity, the
"Agent").
This First Amendment amends that certain Credit Agreement - Three Year
Facility dated as of December 15, 1994 and executed by and among Borrower, Banks
and Agent and Bank as follows:
1. Section 6.02, NEGATIVE COVENANTS (j) (vi), page 29: delete
the "and" at the end of the sub-section;
2. Section 6.02, NEGATIVE COVENANTS (j) (vii), page 30:
delete the "." at the end of the sub-section and replace with ";
and";
3 Section 6.02, NEGATIVE COVENANTS (j), page 30, insert a
new "(viii)" as follows:
"(viii) make investments which in the aggregate do not exceed
$5,000,000 during the term of this Agreement pursuant to
Borrower's Non Qualified Deferred Compensation Plan which will
become effective March 31, 1995."
- - - - - - - - - - -
Except as specifically amended in this First Amendment or to the extent
necessary to be consistent with the provisions of this First Amendment, the
Credit Agreement - Three Year Facility shall continue in full force and effect
and be binding upon Borrower, Banks and Agent notwithstanding the execution and
delivery of this First Amendment.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment as of the day and year first hereinabove written.
FIRST INTERSTATE BANK OF KOMAG, INCORPORATED
CALIFORNIA, as the Agent and as a Bank
By: By:
----------------------------------- ---------------------------------
Title: Title:
-------------------------------- ------------------------------
Address:
South Bay Regional Corporate Center By:
177 Park Center Plaza ---------------------------------
San Jose, California 95113 Title:
Attention: Teresa J. Heller ------------------------------
Senior Vice President Address:
275 South Hillview Drive
Milpitas, California 95035
Attention: David H. Allen
Treasurer
COMERICA BANK - CALIFORNIA ABN AMRO BANK, N.V.
By: By:
----------------------------------- ---------------------------------
Title: Title:
-------------------------------- ------------------------------
Address
333 West Santa Clara Street By:
San Jose, California 95113 ---------------------------------
Attention: Lori S. Edwards Title:
First Vice President ------------------------------
Address:
101 California Street
San Francisco, California 94111-5812
Attention: Robin S. Yim
Vice President
<PAGE> 1
EXHIBIT 10.15
SECOND AMENDMENT TO CREDIT AGREEMENT - THREE YEAR FACILITY
This Second Amendment to Credit Agreement - Three Year Facility is
entered into as of this fifteenth day of December, 1995, by and among (a)
KOMAG, INCORPORATED, a Delaware corporation ("Borrower"); (b) the banks from
time to time party hereto, together with their respective successors and
assigns (each a "Bank" and collectively "Banks"); and FIRST INTERSTATE BANK OF
CALIFORNIA, a California banking corporation ("FICAL"), as agent for the Banks
(in such capacity, the "Agent").
This Second Amendment amends that certain Credit Agreement - Three Year
Facility dated as of December 15, 1994 and that certain First Amendment thereto
dated March 29, 1995 (jointly, the "Agreement"), each of which were executed by
and among Borrower, Banks and the Agent as follows:
1. SECTION 1.01., DEFINED TERMS., "Maturity Date", page 5:
delete this definition and replace with
"December 15, 1999, unless an extension shall occur under Section
2.01, in which case "Maturity Date" shall mean the amended
Maturity Date resulting from such extension.";
2. SECTION 2.01., THE REVOLVING LOANS., (c) Commitment Fee.,
page 9: delete this section and replace with
"Borrower agrees to pay to the Agent, for the pro rata benefit of
the Banks in accordance with their respective Commitment
Percentages, a commitment fee equal to ten (10) basis points of
the Aggregate Commitment, calculated on the basis of a 360-day
year for the actual days elapsed, payable on December 15, 1995 and
on each anniversary date thereafter.";
3. SECTION 2.01., THE REVOLVING LOANS., (f) Non-Utilization
Fee., page 10: delete this section and replace with
"Borrower agrees to pay to the Agent, for the pro rata benefit of
the Banks in accordance with their respective Commitment
Percentages, a non-utilization fee equal to fifteen (15) basis
points of average daily unused portion of the Aggregate Commitment
from December 15, 1995 until the Maturity Date, and any extensions
thereof, payable on the last day of each December, March, June and
September (for the preceding quarter) commencing on the first such
date occurring after December 15,1995 and on the Maturity Date.",
<PAGE> 2
4. SECTION 2.01., THE REVOLVING LOANS., (g) Extension of
Maturity Date., pages 10 and 11, inclusive: delete "the then current Maturity
Date" and replace with "each anniversary date" on lines 5, lines 7 and 8 and
lines 9 and 10;
5. SECTION 2.03., INTEREST RATE AND PAYMENT DATES., (c)
Eurodollar Rate Loans., page 13: delete the schedule and replace with
"If Borrower's Consolidated Debt to Consolidated Capital is less
than .25 to 1.0: 75 basis points; and
If Borrower's Consolidated Debt to Consolidated Capital is equal
to or greater than .25 to 1.0: 90 basis points.";
6. SECTION 2.03., INTEREST RATE AND PAYMENT DATES., (c)
Eurodollar Rate Loans., page 13: add a new introductory sentence to the last
paragraph as follows
"Notwithstanding anything to the contrary contained in the
Agreement, for purposes of calculating the rates referred to in
this subsection, Borrower's convertible subordinated debt shall
not be included as part of its Consolidated Debt.";
7. SECTION 6.01., AFFIRMATIVE COVENANTS., (b) Notices and
Information.,(i), (c), page 24: delete "$1,000,000" wherever it appears and
replace with "$10,000,000";
8. SECTION 6.02., NEGATIVE COVENANTS., (d) Consolidated
Tangible Net Worth., line 7, page 27: insert the following between
"Subsidiaries" and "adjusted"
"(other than equity investments by the Borrower in its
Consolidated Subsidiaries or equity investments by the
Borrower's Consolidated Subsidiaries in the Borrower)";
9. SECTION 6.02., NEGATIVE COVENANTS., (e) Domestic
Unrestricted Cash Balances., page 27: delete this section and its header in
their entirety;
10. SECTION 6.02., NEGATIVE COVENANTS., (f) Liens, Etc., (g)
Debt., (h) Dividends, Etc., (i) Consolidation, Merger or Acquisition., A) Loans,
Investments, Secondary Liabilities., and (k) Asset Sales., pages 27 through 30,
inclusive: reletter as
(e) Liens, Etc., (f) Debt., (g) Dividends, Etc., (h)
Consolidation, Merger or Acquisition., (i) Loans,
Investments, Secondary Liabilities. , and A) Asset Sales.
Page 2 of 6
<PAGE> 3
11. SECTION 6.02., NEGATIVE COVENANTS., (f) Debt., (iv), page
28: delete "$35,000,000" wherever it appears and replace with "$100,000,000" and
delete "$20,000,000" and replace with "$50,000,000";
12. SECTION 6.02., NEGATIVE COVENANTS., (g) Dividends., page 28,
lines 10 through 13, inclusive: delete "repurchase up to 500,000 shares of stock
per fiscal year of Borrower on the open market to meet employee stock option
plan requirements for Dastek employees; and (iv) make repurchases of employee
stock and/or employee stock options which in the aggregate do not exceed
$500,000 per fiscal year" and replace with
"repurchase stock of Borrower in an amount not to exceed
$15,000,000 in any calendar year";
13. SECTION 6.02., NEGATIVE COVENANTS., (j) Asset Sales., (i),
page 30: delete "12.5%" and replace with "20%";
14. SECTION 6.02., NEGATIVE COVENANTS., (I) Domestic Assets of
Borrower and its Consolidated Subsidiaries., page 30: delete this section and
its header in their entirety;
15. SECTION 6.02., NEGATIVE COVENANTS., page 30: add a new "(k)"
as follows
"(k)" Debt Service Coverage Ratio. Permit earnings before interest
plus taxes plus depreciation plus amortization ("EBITDA") divided
by interest expense plus scheduled principal payments plus
$15,000,000 to be less than 2.0 to 1.0 at any time during the term
of the Agreement. This ratio will be calculated on a rolling prior
four quarter basis.";
16. SECTION 7.01., EVENTS OF DEFAULT.(h), page 32: delete this
subsection in its entirety;
17. SECTION 7.01., EVENTS OF DEFAULT., subsections (i) and (j),
pages 32 and 33, inclusive: reletter as "(h)" and "(i)", respectively;
18. SECTION 7.01., EVENTS OF DEFAULT., subsection (i), lines 2
through 4, inclusive, page 33: delete "or against any guarantor (at such time or
times as there are any outstandings under the Borrowings which were the subject
of any guarantee executed by such guarantor),";
19. SECTION 9.02., NOTICES, ETC., line 9, page 37: delete "or
VII";
20. SECTION 9.07., EFFECTIVENESS; BINDING EFFECT; GOVERNING
LAW., line 8, page 39: delete "$35,000,000" and replace with "$95,000,000";
<PAGE> 4
Page 3 of 6
21. Signature page, page 41: change the Borrower's zip code from
"95124" to "95035",
22. Signature page, page 41: change Standard Chartered Bank's
address from "707 Wilshire Boulevard, Los Angeles, California 90017, Attention:
Rita Raychaudhuri" to "7 World Trade Center, New York, New York 10048,
Attention: Peter Dodds";
23. Delete Exhibit A and replace with the attached;
24. Delete Exhibit 1 and replace with the attached;
25. Delete Exhibit 4 and replace with the attached; and
26. Borrower shall pay to the Agent a sum not to exceed $5,000
simultaneously with its execution of this Second Amendment to reimburse the
Agent for its attorney's fees in conjunction with the preparation and
negotiation of this Second Amendment.
27. Borrower hereby represents and warrants to the Banks and the
Agent that (a) the representations and warranties contained in the Agreement are
true in all material respects on and as of the date of this Second Amendment,
(b) no event has occurred and is continuing which constitutes an Event of
Default or Potential Event of Default, and (c) the documents previously
delivered to the Agent and the Banks pursuant to clauses (ii), (iii) and (v) of
Section 4.01 (a) remain in full force and effect.
28. Except as specifically amended pursuant to the foregoing
paragraphs of this Second Amendment, all recitals, representations, warranties,
covenants, undertakings, promises, indemnities, terms, conditions and provisions
of the Agreement shall remain in full force and effect and shall be and remain
unaffected by this Second Amendment.
29. This Second Amendment shall become effective when the Agent
(which shall promptly distribute such information to each of the Banks) shall
have received all of the following:
(a) Counterparts of this Second Amendment signed by the
Borrower, the Banks and the Agent.
(b) The Revolving Notes in the form attached hereto as Exhibit A
duly signed by an authorized officer of the Borrower in favor of each of the
Banks. Such promissory notes shall constitute the Revolving Notes as defined in
and for the purpose of the Agreement and shall be deemed to have amended and
restated the Revolving Notes previously executed and delivered by the Borrower
under the Agreement.
<PAGE> 5
Page 4 of 6
30. This Amendment may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Second Amendment and the
Agreement constitute the entire agreement and understanding among the parties
hereto and supersedes any and all prior agreements and understandings, oral or
written, relating to the subject matter hereof.
31. This Amendment shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California
without regard to principles of conflicts of laws.
------------
IN WITNESS WHEREOF, the parties hereto have duly executed this
Second Amendment as of the day and year first hereinabove written.
FIRST INTERSTATE BANK OF CALIFORNIA, KOMAG, INCORPORATED,
as the Agent as Borrower
and as a Bank
By: By:
-------------------------------- ---------------------------------
Title: Title:
------------------------------ ------------------------------
Address:
275 South Hillview Drive
Milpitas, CA 95035
Attention: David H .Allen
Treasurer
Address:
South Bay Regional Corporate
177 Park Center Plaza
San Jose, CA 95113
Attention: Erik B. Larsen
Vice President
Page 5 of 6
<PAGE> 6
COMERICA BANK - CALIFORNIA ABN-AMRO BANK, N.V.
as a Bank as a Bank
By: ABN AMRO North America,
Inc. , as agent
By: By:
------------------------------ ---------------------------------
Its: Its:
------------------------------ --------------------------------
Address: Address:
333 West Santa Clara Street 101 California Street, Suite 4550
San Jose, CA 95113 San Francisco, CA 94111-5812
Attention: Lori S. Edwards Attention: Robin S. Yim
First Vice President Vice President
STANDARD CHARTERED BANK
as a Bank
By:
-------------------------------
Its:
------------------------------
Address:
7 World Trade Center
New York, NY 10048
Attention: Peter Dodds
Vice President
6 of 6
<PAGE> 1
EXHIBIT 10.16
$35,000,000
CREDIT AGREEMENT
DATED AS OF DECEMBER 15, 1995
BETWEEN
KOMAG, INCORPORATED
AND
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
SAN FRANCISCO AGENCY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1. DEFINED TERMS . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2. OTHER DEFINITIONAL PROVISIONS. . . . . . . . . . . . 8
ARTICLE II THE REVOLVING LOANS . . . . . . . . . . . . . . . . . . . 9
SECTION 2.1. THE REVOLVING LOANS. . . . . . . . . . . . . . . . . 9
SECTION 2.2. REPAYMENT. . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.3. INTEREST RATE AND PAYMENT DATES . . . . . . . . . . 13
SECTION 2.4. CONTINUATION AND CONVERSION OPTIONS . . . . . . . . 13
ARTICLE III GENERAL PROVISIONS CONCERNING THE
REVOLVING LOANS . . . . . . . . . . . . . . . . . . 14
SECTION 3.1. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . 14
SECTION 3.2. POST MATURITY INTEREST . . . . . . . . . . . . . . . 14
SECTION 3.3. COMPUTATION OF INTEREST . . . . . . . . . . . . . . 15
SECTION 3.4. PAYMENTS . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3.5. PAYMENT ON NON-BUSINESS DAYS . . . . . . . . . . . . 15
SECTION 3.6. REDUCED RETURN . . . . . . . . . . . . . . . . . . . 15
SECTION 3.7. INDEMNITIES . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.8. FUNDING SOURCES . . . . . . . . . . . . . . . . . . 17
SECTION 3.9 INABILITY TO DETERMINE INTEREST RATE . . . . . . . . 17
SECTION 3.10. REQUIREMENTS OF LAW . . . . . . . . . . . . . . . . 18
SECTION 3.11. ILLEGALITY . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IV CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . 20
SECTION 4.1. CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS . . 20
SECTION 4.2. CONDITIONS PRECEDENT TO EACH BORROWING . . . . . . . 21
ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SECTION 5.1. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 21
ARTICLE VI COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6.1. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6.2. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7.1. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 8.1. AMENDMENTS, ETC . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 8.2. NOTICES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 8.3. RIGHT OF SETOFF . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 8.4. NO WAIVER: REMEDIES . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 8.5. COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 8.6. PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 8.7. EFFECTIVENESS, BINDING EFFECT; GOVERNING LAW . . . . . . . . . . 38
SECTION 8.8. CONSENT TO JURISDICTION; VENUE. BANK FOR SERVICE OF PROCESS . . 39
SECTION 8.9. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.10. SEPARABILITY OF PROVISIONS . . . . . . . . . . . . . . . . . . . 40
SECTION 8.11. EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . . . . 40
SECTION 8.12. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.13. EFFECTIVENESS OF AGREEMENT . . . . . . . . . . . . . . . . . . . 40
</TABLE>
EXHIBIT A: NOTICE OF BORROWING
EXHIBIT B: REVOLVING NOTE
SCHEDULE 1: EXISTING LIENS
SCHEDULE 2: SUBSIDIARIES
-ii-
<PAGE> 4
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of December 15, 1995, is entered into
between KOMAG, INCORPORATED, a Delaware corporation ("Borrower"), and THE
INDUSTRIAL BANK OF JAPAN, LIMITED, SAN FRANCISCO AGENCY ("Bank"). The parties
hereto hereby agree as follows:
I
DEFINITIONS
I.1 DEFINED TERMS. As used in this Agreement, the following terms have
the following meanings:
"Agreement": This Credit Agreement, as amended, supplemented or
modified from time to time.
"Bank": As set forth in the introductory paragraph of this Agreement.
"Borrower": As set forth in the introductory paragraph of this
Agreement.
"Business Day": A day other than a Saturday, Sunday or a day on which
commercial banks in California are authorized or required by law to close.
"Capital Lease": As applied to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee which would, in
accordance with GAAP, be required to be accounted for as a capital lease on the
balance sheet of that Person.
"Commitment": The Commitment of Bank to make Revolving Loans to
Borrower pursuant to Article II up to, but not exceeding, at any time
outstanding the amount of $35,000,000.00.
"Confidentiality Letter": As set forth in Section 8.6(b).
"Consolidated Subsidiary" or "Consolidated Subsidiaries": Any
corporation or other Person more than 50% of the outstanding voting stock of
which shall at the time be owned by Borrower or another Consolidated Subsidiary,
excluding from this definition Asahi Komag Co., Ltd., a Japanese corporation.
-iii-
<PAGE> 5
"Consolidated Tangible Net Worth": At any date of determination, the
excess of total assets over consolidated liabilities of Borrower and its
Consolidated Subsidiaries determined on a consolidated basis, excluding, however
from the determination of total assets (i) all intangible assets, including,
without limitation, goodwill (whether representing the excess cost over book
value of assets acquired or otherwise), patents, trademarks, trade names,
copyrights, franchises, and deferred charges (including, without limitation,
unamortized debt discount and expense, organization and research and product
development costs), (ii) treasury stock, (iii) cash set apart and held in a
sinking or other analogous fund established for the purpose of redemption or
other retirement of capital stock, and (iv) to the extent not already deducted
from total assets, reserves for depreciation, depletion, obsolescence, and/or
amortization of properties and all other reserves or appropriation of retained
earnings which, in accordance with GAAP, should be established in connection
with the business conducted by the relevant corporation.
"Convertible Debt": Debt subordinate by its terms to the Revolving
Loans converted at the option of Borrower to equity securities.
"Dastek(M)": Dastek(M) SDN BHD, a Malaysian corporation.
"Debt": As applied to any Person, (i) all indebtedness for borrowed
money, (ii) that portion of obligations with respect to Capital Leases which is
property classified as a liability on a balance sheet in conformity with GAAP,
(iii) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money, (iv) any obligation
owed for all or any part of the deferred purchase price of property or services
which purchase price is (A) due more than six months from the date of incurrence
of the obligation in respect thereof or (B) evidenced by a note or similar
written instruments, and (v) all indebtedness secured by any Lien on any
property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is
non-recourse to the credit of that Person.
"Dollars" and "$": Dollars in lawful currency of the United States of
America.
-2-
<PAGE> 6
"Employee Benefit Plan": Any Pension Plan, any employee welfare
benefit plan or any other employee benefit plan which is described in Section
3(3) of ERISA and which is maintained for employees of Borrower or any ERISA
Affiliate of Borrower.
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended from time to time and any successor statute.
"ERISA Affiliate": As applied to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) or (c) of the Internal Revenue Code, but excluding any Subsidiary or
other Person that is not a Consolidated Subsidiary.
"Eurodollar Business Day": A day which is a Business Day on which
dealings in Dollar deposits may be carried out in the interbank Eurodollar
market.
"Eurodollar Rate": For each Interest Period (i) the rate of interest
determined by Bank at which deposits for the relevant Interest Period would be
offered to Bank in the approximate amount of the relevant Eurodollar Rate Loan
for the Interest Period requested by Borrower in the interbank Eurodollar market
selected by Bank, upon request of Bank at 11:00 A.M. (San Francisco time) on the
day which is one Eurodollar Business Day prior to the first day of such Interest
Period, divided by (ii) a number equal to 1.00 minus the aggregate (but without
duplication) of the rates, if any, (expressed as a decimal fraction) of reserve
requirements in effect on the day which is one Eurodollar Business Day prior to
the beginning of such Interest Period (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other governmental authority
having jurisdiction with respect thereto, as in effect at the time Bank quotes
the rate to Borrower) for Eurocurrency funding of domestic assets (currently
referred to as "Eurocurrency liabilities" in Regulation D of such Board) which
are required to be maintained by a member bank of such System (such rate to be
adjusted to the next higher 1/16 of 1%).
"Eurodollar Rate Loans": Revolving Loans hereunder at such time as
they accrue interest at a rate
-3-
<PAGE> 7
based upon the Eurodollar Rate.
"Event of Default": As defined in Article VII.
"FICAL": First Interstate Bank of California, a California banking
corporation.
"GAAP": Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, as may be in effect from time to time.
"Interest Payment Date": As to any Prime Rate Loan until payment in
full, the Maturity Date and the last day of each December, March, June, and
September commencing on the first of such days to occur after a Prime Rate Loan
is made. As to any Eurodollar Rate Loan with an Interest Period of three months
or less, the last day of such Interest Period and the Maturity Date, and as to
any Eurodollar Rate Loan with an Interest Period in excess of three months, (i)
the last day of each December, March, June and September following the beginning
of such Interest Period, (ii) the last day of such Interest Period, and (iii)
the Maturity Date.
"Interest Period":
With respect to any Eurodollar Rate Loan:
(i) initially, the period commencing on, as the case may be, the
Revolving Loan or conversion date with respect to such Eurodollar Rate Loan and
ending one, two, three, six, nine, or twelve months thereafter so long as the
Eurodollar Rate is quoted for such period in the applicable interbank Eurodollar
market, as selected by Borrower in the notice of Revolving Loan as provided in
Section 2.1(b) or the notice of conversion as provided in Section 2.4; and
(ii) thereafter, each period commencing on the last day of the
next preceding Interest Period applicable to such Eurodollar Rate Loan and
ending one, two, three, six, nine, or twelve months thereafter so long as the
Eurodollar Rate is quoted for such period in the applicable interbank Eurodollar
market, as selected by Borrower in the notice of continuation as provided in
-4-
<PAGE> 8
Section 2.4;
provided that all of the foregoing provisions relating to Interest Periods are
subject to the following:
(a) if any Interest Period for a Eurodollar Rate Loan would
otherwise end on a day which is not a Eurodollar Business Day, that Interest
Period shall be extended to the next succeeding Eurodollar Business Day; and
(b) there shall be no more than six Interest Periods
outstanding at any time.
"Internal Revenue Code": The Internal Revenue Code of 1986, as amended
to the date hereof and from time to time hereafter.
"Lien": Any lien, mortgage, deed of trust, pledge, security interest,
charge, or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof, and any agreement to
give any security interest).
"Loan Documents": This Agreement, the Revolving Note, and other
documents executed in connection with this Agreement and/or the Revolving Loans
extended hereunder, including, without limitation all amendments, waivers, and
consents relating thereto.
"Material Adverse Effect": As defined in Section 5.1(f).
"Maturity Date": That date which is four years from the date of this
Agreement, unless an extension shall occur under Section 2.1, in which case
"Maturity Date" shall mean the amended Maturity Date resulting from such
extension.
"Multiemployer Plan": A "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is maintained for employees of Borrower or any ERISA
Affiliate of Borrower.
"Pension Plan": Any employee plan which is subject to Section 412 of
the Internal Revenue Code and which is maintained for employees of Borrower or
any ERISA Affiliate of Borrower, other than a Multiemployer Plan.
"Permitted Liens": A lien, security interest,
-5-
<PAGE> 9
encumbrance, or charge (a) for taxes, assessments, charges, or claims of
Borrower either not yet due or being contested in good faith by appropriate
proceedings, (b) arising out of judgments or awards against Borrower with
respect to which an appeal or other proceeding is being prosecuted in good faith
and with respect to which there shall have been secured a stay of execution
pending such appeal or proceedings or which is vacated or discharged within
thirty (30) days after the termination of such stay, (c) materialmen's,
mechanics', workers', repairmen's, employee's, or other like liens arising in
the ordinary course of business for amounts either not yet due or being
contested in good faith by appropriate proceedings, (d) granted by Borrower to
Bank pursuant to this Agreement, (e) liens, deposits, or pledges made to secure
statutory obligations, workers' compensation claims, surety or appeal bonds, or
bonds for the release of attachments or for stay of execution, or to secure the
performance of bids, lenders contracts (other than for the payment of borrowed
money), leases or for purposes of like general nature in the ordinary course of
Borrower's business, (f) purchase money security interests for property
acquired, conditional sale agreements, or other title retention agreements with
respect to property acquired, provided, however, that no such security interest
or agreement shall extend to any property other than such after-acquired
property and proceeds, (g) refunding, refinancing, or extension of the liens or
security interests permitted in the foregoing clause not exceeding the principal
amount of indebtedness so refunded, refinanced, or extended at the time of the
refunding, refinancing, or extension thereof, and applying only to the same
property theretofore subject to such lien or security interest, (h) liens
existing on the date hereof and identified in Schedule 1 attached hereto or
incurred with any refunding, refinancing, or extension of any such indebtedness
secured by such liens, provided that such refinancing, refunding or extension
shall not increase the amount, as of the date of such refinancing, refunding, or
extension, secured by any such lien or security interest, (i) other liens
securing indebtedness, the principal amount of which shall not exceed
$2,000,000; (j) liens in property of Asahi Komag Co., Ltd., a Japanese
corporation; and (k) liens taken by Borrower on its Subsidiaries.
"Person": An individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority, or other entity of
-6-
<PAGE> 10
whatever nature.
"Potential Event of Default": A condition or event which, after notice
or lapse of time or both, would constitute an Event of Default if that condition
or event were not cured or removed within any applicable grace or cure period.
"Prime Rate": On any day, the higher of (a) the rate of interest most
recently announced by The Industrial Bank of Japan, Limited at its New York
branch as its "Prime Rate" ("IBJ Prime Rate") for loans in Dollars in the United
States and (b) the Federal Funds Rate plus a margin of 0.50%. The IBJ Prime Rate
is one of The Industrial Bank of Japan, Limited's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto. The IBJ Prime Rate is evidenced by the recording
thereof after its announcement in such internal publication or publications as
The Industrial Bank of Japan, Limited may designate and may not be the lowest of
The Industrial Bank of Japan, Limited base rates. Any change in any of the
interest rates chargeable hereunder resulting from a change in IBJ Prime Rate
shall become effective as of 12:01 a.m. (San Francisco time): (a) on the
Domestic Business Day on which each change in the IBJ Prime Rate is announced by
The Industrial Bank of Japan, Limited, if such change is announced prior to
11:00 a.m. (San Francisco time) on such day, and (b) on the Domestic Business
Day following the Domestic Business Day on which each change in the IBJ Prime
Rate is announced if such change is announced at or after 11:00 a.m. (San
Francisco time) on such day.
"Prime Rate Loans": Revolving Loans hereunder at such time as they
accrue interest at a rate based upon the Prime Rate.
"Regulation G, T, U and X": Regulations G, T, U and X, respectively,
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"Revolving Loans": As defined in Section 2.1(a).
"Revolving Note": As defined in Section 2.1(f).
"S.E.C.": The United States Securities and Exchange Commission and any
successor institution or body which performs the functions or substantially all
of the
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<PAGE> 11
functions thereof.
"Subsidiary": A corporation or other Person of which at least fifty
percent (50%) of the outstanding voting stock or profit interests shall at the
time be owned by Borrower or another Subsidiary.
"Termination Event": (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder (other than a "Reportable
Event" not subject to the provision for 30-day notice to the Pension Benefit
Guaranty Corporation under such regulations), or (ii) the withdrawal of Borrower
or any of its ERISA Affiliates from a Pension Plan during a plan year in which
it was a "substantial employer" as defined in Section 4001(1)(2) or 4068(f) of
ERISA, or (iii) the filing of a notice of intent to terminate a Pension Plan or
the treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (iv) the institution of proceedings to terminate a Pension Plan by the
Pension Benefit Guaranty Corporation (v) any other event or condition which
might constitute grounds under ERISA for the termination of, or the appointment
by the Pension Benefit Guaranty Corporation of a trustee to administer, any
Pension Plan, or (vi) the imposition of a lien pursuant to Section 412(n) of the
Internal Revenue Code.
"Transfer": As defined in Section 6.2(i).
I.2 OTHER DEFINITIONAL PROVISIONS.
(a) All terms defined in this Agreement shall have the deemed meanings
when used in the Revolving Note or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein and in the Revolving Note, and any certificate or
other document made or delivered pursuant hereto, accounting terms not defined
in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent
not defined, shall have the respective meanings given to them under GAAP, and
all financial data required to be delivered hereunder shall be prepared in
accordance with GAAP, except that foreign currency translation adjustments need
not be included for purposes of determining Borrower's equity or net worth. If
any changes in GAAP from those used in the preparation of the financial
statements referred to in Section 5.1(e) ("GAAP Changes") hereafter occasioned
by the promulgation of rules, regulations, pronouncements, and opinions by or
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<PAGE> 12
required by the Financial Accounting Standards Board of the American Institute
of Certified Public Accountants (or successors thereto or agencies with similar
functions) result in a change in the method of calculation of any of the
financial covenants, standards, or other terms or conditions found in this
Agreement, the parties hereto agree to enter into negotiations to amend such
provisions so as to reflect equitably such GAAP Changes with the desired result
that the criteria for evaluating the financial condition and performance of
Borrower and its Consolidated Subsidiaries shall be the same after such GAAP
Changes as if such GAAP Changes had not been made.
(c) For purposes of this Agreement and unless otherwise specified
herein:
(i) For purposes of computing periods of time: (A) the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding"; and (B) periods measured in days shall be measured in calendar
days.
(ii) References to the plural include the singular and to the
singular include the plural, references to any gender include any other gender,
the part includes the whole, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." References to any fiscal period are references to fiscal
periods of Borrower. References in this Agreement to any determination by Bank
include good faith estimates (in the case of quantitative determinations) by
Bank; any such determination made in good faith by Bank shall be presumptively
correct absent manifest error. The words "hereof," "herein," "hereby," and
"hereunder," and any other similar words, refer to this Agreement as a whole and
not to any particular provision of this Agreement, unless otherwise specified.
Article, section, subsection, clause, exhibit, and schedule references are to
this Agreement. Any reference to this Agreement or any other Loan Document
includes all permitted alterations, amendments, changes, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable.
(iii) All of the exhibits and schedules attached hereto are
incorporated herein by this reference.
(iv) Neither this Agreement nor any other Loan Document nor any
uncertainty or ambiguity herein or therein shall be construed or resolved using
any
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<PAGE> 13
presumption against any party hereto or thereto, whether under any rule of
construction or otherwise. On the contrary, this Agreement and the other Loan
Documents have been reviewed by each of the parties and their counsel and, in
the case of any ambiguity or uncertainty, shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of all parties hereto.
(v) All agreements and covenants hereunder and under the other
Loan Documents shall be given independent effect such that if a particular
action or condition is prohibited by the terms of any such agreement or
covenant, the fact that such action or condition would be permitted within the
limitations of another agreement or covenant shall not be construed as allowing
such action to be taken or condition to exist.
II
THE REVOLVING LOANS
II.1. THE REVOLVING LOANS.
(a) The Commitment. Bank 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 in the aggregate principal amount not to exceed at any one time outstanding
the Commitment, as such amount may be reduced pursuant to Section 2.1(e). Each
Revolving Loan shall be in a minimum amount of $1,000,000 and in an integral
multiple of $100,000 above such amount for a Prime Rate Loan and in a minimum
amount of $1,000,000 and in an integral multiple of $500,000 above such amount
for a Eurodollar Rate Loan. 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 Commitment then in effect.
(b) Making the Revolving Loans. Borrower may borrow under the
Commitment on any Business Day if the Revolving Loan is to be a Prime Rate Loan
and on any Eurodollar Business Day if the Revolving Loan is to be a Eurodollar
Rate Loan, provided Borrower shall give Bank irrevocable notice in the form of
Exhibit A (which notice
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must be received by Bank prior to 9:00 A.M., San Francisco time) (i) three
Eurodollar Business Days prior to the requested borrowing date in the case of a
Eurodollar Rate Loan, and (ii) on the Business Day of the requested borrowing in
the case of a Prime Rate Loan, specifying (A) the amount of the proposed
Revolving Loan, (B) the requested date of the Revolving Loan, (C) whether the
Revolving Loan is to consist of a Prime Rate Loan or a Eurodollar Rate Loan, and
(D) if the Revolving Loan is to be a Eurodollar Rate Loan, the length of the
Interest Period therefor. Upon satisfaction of the applicable conditions set
forth in this Section and in Article IV, the proceeds of such Revolving Loan
will then be made available to Borrower by Bank by crediting the account of
Borrower on the books of Bank, or as otherwise directed by Borrower.
The notice of Revolving Loan may be given orally (including
telephonically) or in writing (including telex or facsimile transmission) and
any conflict regarding a notice or between an oral notice and a written notice
applicable to the same Revolving Loan shall be conclusively determined by Bank's
books and records. Bank shall not incur any liability to Borrower in acting upon
any notice of Revolving Loan which Bank believes in good faith to have been
given by a Person duly authorized to give such notice on behalf of Borrower.
(c) Arrangement Fee. Borrower agrees to pay to Bank, on the date of
Borrower's execution of this Agreement, the arrangement fee specified in the
letter from Bank to Borrower, dated October 26, 1995.
(d) Commitment Fee. Borrower agrees to pay to Bank a commitment fee
equal to 0.10% per annum of the maximum amount of the Commitment (whether or not
used), which shall be calculated on the basis of a 365-day year for the actual
days elapsed, payable quarterly in arrears on the last day of each December,
March, June, and September, commencing the first such date occurring after the
date of this Agreement, and on the Maturity Date.
(e) Reduction of the Commitment. Borrower shall have the right, upon
at least two (2) Business Days' notice to Bank, to terminate in whole or reduce
in part the unused portion of the Commitment, without premium or penalty,
provided that each partial reduction shall be in the aggregate amount of
$1,000,000 or an integral multiple of $1,000,000 thereof and that such reduction
shall not reduce the Commitment to an amount less than the amount
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outstanding hereunder on the effective date of the reduction. Such notice shall
be irrevocable and such reduction shall not be reinstated.
(f) Revolving Note. The Revolving Loans made by Bank pursuant hereto
shall be evidenced by a promissory note of Borrower, substantially in the form
of Exhibit B, with appropriate insertions (the "Revolving Note"), payable to the
order of Bank and representing the obligation of Borrower to pay the aggregate
unpaid principal amount of the Revolving Loans made by Bank to Borrower, with
interest thereon as prescribed in Section 2.3. Bank is hereby authorized to
record in its books and records and on any exhibit annexed to Revolving Note,
the date and amount of each Revolving Loan made by Bank and the date and amount
of each payment of principal thereof, and in the case of Eurodollar Rate Loans,
the Interest Period and interest rate with respect thereto, and any such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded; provided that failure by Bank to effect such
recordation shall not affect Borrower's obligations hereunder. Prior to the
transfer of the Revolving Note, Bank shall record such information on any
exhibit annexed to and forming a part of the Revolving Note.
(g) Non-Utilization Fee. Borrower agrees to pay to Bank a
non-utilization fee on the average daily unused portion of the Commitment from
the date of this Agreement until the Maturity Date, or any extensions thereof,
at the rate of 0.10% per annum, which shall be calculated on the basis of a
365-day year for the actual days elapsed, payable on the last day of each
December, March, June, and September (for the preceding quarter) commencing the
first such date occurring after the date of this Agreement and on the Maturity
Date.
(h) Extension of Maturity Date. Notwithstanding anything to the
contrary contained in this Agreement, the Maturity Date may be extended for
additional one year periods on each anniversary date of this Agreement. A
request for an extension of the Maturity Date may be made by Borrower not more
than 60 nor less than 30 days prior to each anniversary of the date of this
Agreement. Within 15 days of its receipt of a request by Borrower to extend the
Maturity Date, Bank shall notify Borrower whether it agrees to the requested
extension of the Maturity Date (which decision shall be in the absolute
discretion of Bank). The failure by Bank to respond to any extension request
within the applicable period, shall be deemed a
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rejection of such request. Each extension of the Maturity Date agreed to by Bank
shall be evidenced by an amendment to this Agreement. In connection with the
making of any request for an extension of the Maturity Date, Borrower shall
provide to Bank any documents, instruments, records, information, or access to
management personnel that Bank may reasonably request.
II.2. REPAYMENT.
(a) Mandatory Repayments. The aggregate principal amount of the
Revolving Loans outstanding on the Maturity Date, together with accrued interest
thereon, shall be due and payable in full on the Maturity Date. If at any time
the aggregate principal amount of outstanding Revolving Loans exceeds the
Commitment then in effect, Borrower shall immediately repay the Revolving Loans
in an amount equal to the excess.
(b) Optional Payment. Borrower may at its option repay the Revolving
Loans, without penalty except as set forth in Section 3.7(b), in whole or in
part, on any Business Day, prior to the Maturity Date, from time to time,
provided Bank shall have received from Borrower notice of any such payment at
least: (i) three Business Days prior to the date of the proposed payment if the
Revolving Loan being prepaid is a Eurodollar Rate Loan, and (ii) one Business
Day prior to the date of the proposed payment if the Revolving Loan being
prepaid is a Prime Rate Loan. For Prime Rate Loans, each day shall be defined as
and constitute an "Interest Period." Partial payments hereunder shall be in an
aggregate principal amount of not less than the lesser of (a) $1,000,000 and in
an integral multiple of $100,000 for a Revolving Loan consisting of a Prime Rate
Loan; (b) $1,000,000 and in an integral multiple of $500,000 for a Revolving
Loan consisting of a Eurodollar Rate Loan; and (c) the outstanding balance of
the Revolving Loan being paid.
(c) Allocation of Payments Following an Event of Default. Following
the occurrence of an Event of Default and acceleration of the Revolving Loans,
all amounts received by Bank on account of the Revolving Loans shall be applied
by Bank as follows:
(i) First, to the payment of expenses incurred by Bank in the
enforcement of its rights under the Loan Documents, including, without
limitation, all costs and expenses of collection, attorneys' fees and
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court costs; and
(ii) then, to the outstanding principal balance of all Revolving
Loans and interest accrued thereon.
II.3. INTEREST RATE AND PAYMENT DATES.
(a) Payment of Interest. Interest with respect to each Revolving Loan
shall be payable in arrears on each Interest Payment Date for such Revolving
Loan. In no event shall interest on a Revolving Loan exceed the maximum rate
permitted by applicable law.
(b) Prime Rate Loans. Revolving Loans which are Prime Rate Loans
shall bear interest on the unpaid principal amount thereof at a rate per annum
equal to the Prime Rate from the date hereof through the Maturity Date. Bank
shall promptly notify Borrower of the amount and the effective date of each
adjustment in the Prime Rate, provided that no failure or delay in giving any
such notice shall affect or delay the making of any such adjustments or the
obligation of Borrower to pay in a timely manner the interest due on such
Revolving Loans.
(c) Eurodollar Rate Loans. Revolving Loans which are Eurodollar 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 Eurodollar Rate
determined for such Interest Period plus 0.625 percentage points.
II.4. CONTINUATION AND CONVERSION OPTIONS. Borrower may elect from time
to time to convert outstanding Revolving Loans from Revolving Loans bearing
interest at a rate determined by reference to one basis to Revolving Loans
bearing interest at a rate determined by reference to an alternative basis if
Borrower gives Bank (i) at any time irrevocable notice of an election to convert
Eurodollar Rate Loans to Prime Rate Loans and (ii) at least three Eurodollar
Business Days' prior irrevocable notice of an election to convert Prime Rate
Loans to Eurodollar Rate Loans, provided that any conversion of Eurodollar Rate
Loans to Prime Rate Loans shall only be made on the last day of an Interest
Period with respect thereto, and provided further that no Prime Rate Loan may be
converted to a Eurodollar Rate Loan so long as an Event of Default or Potential
Event of Default has occurred and is continuing. Borrower may elect from time to
time to
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continue its outstanding Eurodollar Rate Loans upon the expiration of the
Interest Period(s) applicable thereto if Borrower gives to Bank irrevocable
notice of continuation of such a Eurodollar Rate at least one Eurodollar
Business Days' prior to the expiration thereof and so long as an Event of
Default or Potential Event of Default has not occurred and is not continuing.
Each notice electing to convert or continue a Revolving Loan shall specify: (i)
the proposed conversion/continuation date; (ii) the amount of the Revolving Loan
to be converted/continued; (iii) the nature of the proposed
continuation/conversion; and (iv) in the case of a conversion to, or
continuation of a Eurodollar Rate Loan, the requested Interest Period, and shall
certify that no Event of Default or Potential Event of Default has occurred and
is continuing. On the date on which such conversion or continuation is being
made Bank shall take such action as is necessary to effect such conversion or
continuation. In the event that no notice of continuation or conversion is
received by Bank with respect to outstanding Eurodollar Rate Loans, upon
expiration of the Interest Period(s) applicable thereto, such Eurodollar Rate
Loans shall convert to Prime Rate Loans. Subject to the limitations set forth in
this Section and in the definition of Interest Period, all or any part of
outstanding Revolving Loans may be converted or continued as provided herein,
provided that partial conversions or continuations shall be in an aggregate
principal amount of not less than (a) $1,000,000 and in an integral multiple of
$100,000 for a Revolving Loan consisting of a Prime Rate Loan; (b) $1,000,000
and in an integral multiple of $500,000 above such amount for a Eurodollar Rate
Loan; and (c) the outstanding balance of the Revolving Loan being converted or
continued.
III
GENERAL PROVISIONS CONCERNING THE REVOLVING LOANS
III.1. USE OF PROCEEDS. The proceeds of the Revolving Loans hereunder
shall be used by Borrower for general corporate purposes.
III.2. POST MATURITY INTEREST. Notwithstanding anything to the contrary
contained in Section 2.3, if all or a portion of the principal amount of any of
the Revolving Loans made hereunder or any interest accrued thereon shall not be
paid when due (whether at the stated maturity, by acceleration or otherwise),
any such overdue
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amount shall bear interest at a rate per annum which is equal to the greater of
(a) two percent (2%) above the rate which would otherwise be applicable pursuant
to Section 2.3 and (b) two percent (2%) above the Prime Rate, from the date of
such nonpayment until paid in full (after as well as before judgment), payable
on demand. In addition, such Revolving Loan, if a Eurodollar Rate Loan, shall be
converted to a Prime Rate Loan at the end of the then current Interest Period
therefor.
III.3. COMPUTATION OF INTEREST
(a) Calculations. Interest in respect of the Prime Rate Loans shall
be calculated on the basis of a 365-day year for the actual days elapsed. Any
change in the interest rate on a Prime Rate Loan resulting from a change in the
Prime Rate shall become effective as of the opening of business on the date on
which such change in the Prime Rate shall become effective. Interest with
respect of the Eurodollar Rate Loans shall be calculated on the basis of a
360-day year for the actual days elapsed.
(b) Determination by Bank. Each determination of an interest rate or
fee by Bank pursuant to any provisions of this Agreement shall be conclusive and
binding on Borrower in the absence of manifest error.
III.4. PAYMENTS. Borrower shall make each payment of principal, interest,
and fees referred to in Section 2.2 due from it hereunder and under the
Revolving Note, without setoff or counterclaim, not later than 12:00 P.M. (San
Francisco time) on the day when due in lawful money of the United States of
America to Bank, at the office of Bank designated from time to time in
immediately available funds.
III.5. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made
hereunder or under the Revolving Note shall be stated to be due on a day which
is not a Business Day, such payment may be made on the next succeeding Business
Day and with respect to payments of principal, interest thereon shall be payable
at the then applicable rate during such extension.
III.6. REDUCED RETURN. If Bank shall have determined that any new or
additional applicable law, regulation, rule, or regulatory requirement
(collectively in this Section 3.6 "Requirement") regarding capital
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adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation of administration thereof, or
compliance by Bank with any new or additional request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank, or comparable agency, has or would have the effect of reducing the
rate of return on Bank's capital as a consequence of the Commitment and
obligations hereunder to a level below that which would have been achieved but
for such Requirement, change, or compliance (taking into consideration Bank's
policies with respect to capital adequacy) by an amount deemed by Bank to be
material (which amount shall be determined by Bank's reasonable allocation of
the aggregate of such reductions resulting from such events), then from time to
time, within thirty (30) Business Days after written demand by Bank, Borrower
shall pay to Bank such additional amount or amounts as will compensate Bank for
such reduction. Notwithstanding the foregoing, no additional compensation will
be required from Borrower under this Section 3.6 if the reason for additional
compensation was based solely on Bank's failure to comply with any existing or
new law, treaty, rule, or regulation or requirement. In addition, Bank shall
promptly notify Borrower of any proposed request for compensation under this
Section 3.6 and shall provide Borrower with reasonable support therefor. Any
request by Bank for additional compensation shall be structured to allocate such
additional costs over the term of the credit affected thereby.
III.7. INDEMNITIES.
(a) General. Whether or not the transactions contemplated hereby
shall be consummated, Borrower agrees to indemnify, pay and hold Bank, and the
shareholders, officers, directors, employees, and agents of Bank, harmless from
and against any and all claims, liabilities, losses, damages, costs, and
expenses (whether or not any of the foregoing Persons is a party to any
litigation), including, without limitation, reasonable attorneys' fees and costs
(including, without limitation, the reasonable estimate of the allocated cost of
in-house legal counsel and staff) and costs of investigation, document
production, attendance at a deposition, or other discovery, with respect to or
arising out of any proposed acquisition by Borrower or any of its Consolidated
Subsidiaries of any Person or any securities (including a self-tender), this
Agreement or any use of proceeds
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hereunder, or any claim, demand, action or cause of action being asserted
against Borrower or any of its Consolidated Subsidiaries (collectively, the
"Indemnified Liabilities"), provided that Borrower shall have no obligation
hereunder with respect to Indemnified Liabilities arising from the gross
negligence or willful misconduct of any such Persons. If any claim is made, or
any action, suit or proceeding is brought, against any Person indemnified
pursuant to this Section, the indemnified Person shall notify Borrower of such
claim or of the commencement of such action, suit or proceeding, and Borrower
will assume the defense of such action, suit or proceeding, employing counsel
selected by Borrower and reasonably satisfactory to the indemnified Person, and
pay the fees and expenses of such counsel. This covenant shall survive
termination of this Agreement and payment of the outstanding Revolving Note.
(b) Funding Losses. Borrower agrees to indemnify Bank and to hold
Bank harmless from any loss or expense including, but not limited to, any such
loss or expense arising from interest or fees payable by Bank to lenders of
funds obtained by Bank in order to maintain its Eurodollar Rate Loans hereunder,
which Bank may sustain or incur as a consequence of (i) default by Borrower in
payment of the principal amount of or interest on the Eurodollar Rate Loans of
Bank, (ii) default by Borrower in making a conversion or continuation after
Borrower has given a notice thereof, (iii) default by Borrower in making any
payment after Borrower has given a notice of payment or (iv) Borrower making any
payment of a Eurodollar Rate Loan on a day other than the last day of the
Interest Period for such Revolving Loan. For purposes of this Section and
Section 3.10, it shall be assumed that Bank had funded or would have funded one
hundred percent (100%) of each Eurodollar Rate Loan in the interbank Eurodollar
market for a corresponding amount and term. In the event of a payment set forth
in (iv) above, Borrower shall be credited with a reinvestment interest rate
equal to one sixteenth of one percent (.0625%) less than the rate of interest
generally available to Bank at the time of the payment for a period of time
approximately equal to the period remaining on the then applicable Interest
Period and for an amount approximately equal to the amount of the payment. The
determination of such amount by Bank shall be presumed correct in the absence of
manifest error. This covenant shall survive termination of this Agreement and
payment of the outstanding Revolving Note.
III.8. FUNDING SOURCES. Nothing in this Agreement
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shall be deemed to obligate Bank to obtain the funds for any Revolving Loan in
any particular place or manner or to constitute a representation by Bank that it
has obtained or will obtain the funds for any Revolving Loan in any particular
place or manner.
III.9. INABILITY TO DETERMINE INTEREST RATE. In the event that Bank shall
have determined (which determination shall be conclusive and binding upon
Borrower) that by reason of circumstances affecting the interbank Eurodollar
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate applicable pursuant to Section 2.3 for any Interest Period with
respect to a Eurodollar Rate Loan that will result from a requested Eurodollar
Rate Loan or that such rate of interest does not adequately cover the cost of
funding such Revolving Loan, Bank shall forthwith give notice of such
determination to Borrower not later than 1:00 P.M., San Francisco time, on the
requested Borrowing date, the requested conversion date or the last day of an
Interest Period of a Revolving Loan which was to have been continued as a
Eurodollar Rate Loan. If such notice is given and has not been withdrawn (i) any
requested Eurodollar Rate Loan shall be made as a Prime Rate Loan, or, at
Borrower's option, such Revolving Loan shall not be made, (ii) any Revolving
Loan that was to have been converted to a Eurodollar Rate Loan, shall be
continued as, or converted into, a Prime Rate Loan and (iii) any outstanding
Eurodollar Rate Loan shall be converted, on the last day of the then current
Interest Period with respect thereto, to a Prime Rate Loan. Until such notice
has been withdrawn by Bank, no further Eurodollar Rate Loans shall be made and
Borrower shall not have the right to convert a Revolving Loan to a Eurodollar
Rate Loan. Bank will review the circumstances affecting the interbank Eurodollar
market from time to time and Bank will withdraw such notice at such time as it
shall determine that the circumstances giving rise to said notice no longer
exist.
III.10. REQUIREMENTS OF LAW. In the event that any law, regulation, or
directive or any change therein or in the interpretation or application thereof
or compliance by Bank with any request or directive (whether or not having the
force of law) from any central bank or other governmental authority, agency or
instrumentality:
(a) does or shall subject Bank to any new or additional tax of any
kind whatsoever with respect to this Agreement, the Revolving Note, or any
Revolving Loan made hereunder, or change the basis of taxation of payments to
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Bank of principal, commitment fee, non-utilization fee, interest, or any other
amount payable hereunder (except for changes in the rate of tax on the overall
net income of Bank);
(b) does or shall impose, modify, or hold applicable any reserve,
assessment rate, special deposit, compulsory loan, or other requirement
(collectively in this Section 3.10 "Requirements") against assets held by, or
deposits or other liabilities in or for the account of, advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
Bank which Requirements are not otherwise included in the determination of any
Eurodollar Rate at the last Borrowing conversion or continuation date of a
Revolving Loan;
(c) does or shall impose, modify or hold applicable any of the
Requirements against the Commitment; or
(d) does or shall impose on Bank any other new or additional
condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining the Commitment or the Eurodollar Rate Loans or
to reduce any amount receivable thereunder by an amount determined by Bank, in
its sole discretion, to be material (which increase or reduction shall be
determined by Bank's reasonable allocation of the aggregate of such cost
increases or reduced amounts receivable resulting from such events), then, in
any such case, Borrower shall pay to Bank, within thirty (30) Business Days of
its demand, any additional amounts necessary to compensate Bank for such
additional cost or reduced amount receivable as determined by Bank with respect
to this Agreement. If Bank becomes entitled to claim any additional amounts
pursuant to this subsection, it shall notify Borrower of the event by reason of
which it has become so entitled. A statement incorporating the calculation as to
any additional amounts payable pursuant to the foregoing sentence submitted by
Bank to Borrower shall be conclusive in the absence of manifest error.
Notwithstanding the foregoing, no additional compensation will be required from
Borrower under this Section 3.10 if the reason for said additional compensation
was based solely on Bank's failure to comply with any existing or new law,
treaty, rule, regulation, or requirement. In addition, Bank shall promptly
notify Borrower of any proposed request for compensation under this Section 3.10
and shall provide
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Borrower with reasonable support therefor. Any request by Bank for additional
compensation shall be structured to allocate such additional costs over the term
of the credit affected thereby.
III.11. ILLEGALITY. Notwithstanding any other provisions herein, if any
law, regulation, treaty, or directive or any change therein or in the
interpretation or application thereof, shall make it unlawful, impossible or
impracticable for Bank to make or maintain Eurodollar Rate Loans as contemplated
by this Agreement, (a) the commitment of Bank hereunder to make Eurodollar Rate
Loans or convert Prime Rate Loans to Eurodollar Rate Loans shall forthwith be
suspended and (b) Bank's Revolving Loans then outstanding as Eurodollar Rate
Loans, if any, shall be converted automatically to Prime Rate Loans on the next
succeeding Interest Payment Date or within such earlier period as allowed by
law. Borrower hereby agrees to pay Bank, within thirty (30) Business Days of its
demand, any additional amounts necessary to compensate Bank for any costs
incurred by Bank in making any conversion in accordance with this Section,
including, but not limited to, any interest or fees payable by Bank to lenders
of funds obtained by it in order to make or maintain its Eurodollar Rate Loans
hereunder (Bank's notice of such costs, as certified to Borrower to be
conclusive absent manifest error). Notwithstanding the foregoing, no additional
compensation will be required from Borrower under this Section 3.11 if the
reason for said additional compensation was based solely on Bank's failure to
comply with any existing or new law, treaty, rule or regulation or requirement.
In addition Bank shall promptly notify Borrower of any proposed request for
compensation under this Section 3.11 and shall provide Borrower with reasonable
support therefor. Any request by Bank for additional compensation shall be
structured to allocate such additional costs over the term of the credit
affected thereby.
IV
CONDITIONS OF LENDING
IV.1. CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS. The obligation
of Bank to make its initial Revolving Loan is subject to the conditions
precedent that:
(a) Bank shall have received on or before the date of this Agreement
the following, each dated such day
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(except for the documents referred to in clause (ii) and (iv)), in form and
substance satisfactory to Bank:
(i) The Revolving Note issued by Borrower to the order of Bank;
(ii) Borrower's certificate that the copies of the Certificate of
Incorporation or other organizational documents of Borrower certified by the
Secretary of State of its state of formation or incorporation, heretofore
provided to Bank are in full force and effect and have not been amended and/or
supplemented;
(iii) Borrower's certificate that the copies of the Bylaws, if
any, of Borrower, certified by the Secretary or an Assistant Secretary of
Borrower heretofore provided to Bank are in full force and effect and have not
been amended and/or supplemented;
(iv) Copies of resolutions of the Board of Directors or other
authorizing documents of Borrower, in form and substance satisfactory to Bank,
approving the Loan Documents and the Borrowings hereunder;
(v) Borrower's certificate that the copy of the incumbency
certificate executed by the Secretary or an Assistant Secretary of Borrower or
equivalent document, certifying the names and signatures of the officers of
Borrower or other Persons authorized to sign the Loan Documents and the other
documents to be delivered hereunder heretofore provided to Bank is in full force
and effect and has not been amended and/or supplemented; and
(vi) Executed copies of all Loan Documents;
(b) All corporate legal proceedings and instruments and documents in
connection with the transactions contemplated by this Agreement shall be
reasonably satisfactory in content, form and substance to Bank and its counsel,
and Bank and such counsel shall have received any and all further information
and documents which Bank or such counsel may reasonably have requested in
connection therewith, such documents where appropriate to be certified by proper
corporate or governmental authorities.
IV.2. CONDITIONS PRECEDENT TO EACH BORROWING. The obligation of Bank to
make a Revolving Loan on the
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occasion of such Revolving Loan (including the initial Revolving Loan) shall be
subject to the further conditions precedent that on the date of such Revolving
Loan (a) the following statements shall be true and Bank shall have received the
notice required by Section 2.1(b), which notice shall be deemed to be a
certification by Borrower that:
(i) The representations and warranties contained in Section 5.1
are correct on and as of the date of such Revolving Loan 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 shall be true and correct
as of such earlier date and except that Section 5.1(e) shall be deemed instead
to refer to the last day of the most recent fiscal year and fiscal quarter for
which financial statements have then been delivered),
(ii) No event has occurred and is continuing, or would result
from such Revolving Loan, which constitutes an Event of Default or Potential
Event of Default, and
(iii) All Loan Documents are in full force and effect,
and (b) Bank shall have received such other approvals, opinions, or documents as
Bank may reasonably request.
V
REPRESENTATIONS AND WARRANTIES
V.1. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to make the
Revolving Loans, Borrower represents and warrants as follows:
(a) Organization. Borrower is duly organized, validly existing, and
in good standing under the laws of the state of its formation. Borrower is also
duly authorized, qualified, and licensed in all applicable jurisdictions, and
under all applicable laws, regulations, ordinances, or orders of public
authorities, to carry on its business in the locations and in the manner
presently conducted, to the extent that the failure to do so could not
reasonably be expected to have a Material Adverse Effect. All of the
Subsidiaries and Consolidated Subsidiaries of Borrower and the percentage of
Borrower's
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ownership interest therein as of the date of this Agreement are identified on
Schedule 2.
(b) Authorization. The execution, delivery, and performance by
Borrower of the Loan Documents, and the making of Borrowings hereunder, are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not contravene (i) Borrower's certificate of
incorporation, by-laws or other organizational documents or (ii) any law or
regulation (including Regulations G, T, U, and X) or any contractual restriction
binding on or affecting Borrower.
(c) Governmental Consents. No authorization or approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body (except routine reports required pursuant to the Securities
Exchange Act of 1934, as amended (if such act is applicable to Borrower), which
reports will be made in the ordinary course of business) is required for the due
execution, delivery, and performance by Borrower of the Loan Documents.
(d) Validity. The Loan Documents are the binding obligations of
Borrower, enforceable 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 of general
application and equitable principles relating to or affecting creditors' rights.
(e) Financial Condition. The balance sheets of Borrower and its
Consolidated Subsidiaries as at the fiscal quarter ended July 2, 1995 and the
fiscal year ended January 1, 1995, and the related statements of income and
retained earnings of Borrower and its Consolidated Subsidiaries to that date and
the fiscal year then ended, copies of which have been furnished to Bank, fairly
present the financial condition of Borrower and its Consolidated Subsidiaries as
at such dates and the results of the operations of Borrower and its Consolidated
Subsidiaries for the respective periods ended on such dates, all in accordance
with GAAP, consistently applied. Since January 1, 1995, there has been no
material adverse change in the business, operations, properties, assets, or
condition (financial or otherwise) of Borrower and its Consolidated
Subsidiaries, taken as a whole.
(f) Litigation. Except as set forth in the
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financial statements delivered on or prior to the date hereof, to the best of
Borrower's knowledge there is no pending or threatened action or proceeding
affecting Borrower or any of its Consolidated Subsidiaries before any court,
governmental agency, or arbitrator, which may materially adversely affect the
consolidated financial condition or operations of Borrower or which may have a
material adverse effect on Borrower's ability to perform its obligations under
the Loan Documents, having regard for its other financial obligations (a
"Material Adverse Effect").
(g) Employee Benefit Plans. Borrower and each of its ERISA Affiliates
is in compliance in all material respects with any applicable provisions of
ERISA and the regulations and published interpretations thereunder wish respect
to all Employee Benefit Plans. No Termination Event has occurred or is
reasonably expected to occur with respect to any Pension Plan that would
reasonably be expected to have a Material Adverse Effect.
(h) Disclosure. No representation or warranty of Borrower contained
in this Agreement or any other document, certificate, or written statement
furnished to Bank or on behalf of Borrower for use in connection with the
transactions contemplated by this Agreement contains any untrue statement of a
material fact or omits to state a material fact (known to Borrower in the case
of any document not furnished by it) necessary in order to make the statements
contained herein or therein not misleading. To the best of Borrower's knowledge,
there is no fact known to Borrower (other than matters of a general economic
nature) which materially adversely affects the business, operations, property,
assets, or condition (financial or otherwise) of Borrower and its Consolidated
Subsidiaries, taken as a whole, which has not been disclosed herein or in such
other documents, certificates and statements furnished to Bank for use in
connection with the transactions contemplated hereby.
(i) Margin Stock. The aggregate value of all margin stock (as defined
in Regulation U) directly or indirectly owned by Borrower and its Consolidated
Subsidiaries is less than 25% of the aggregate value of Borrower's assets.
(j) Environmental Matters. Except as set forth in the financial
statements delivered on or prior to the date hereof and except for certain
claims associated with Great Western Chemical, neither Borrower nor any
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<PAGE> 29
Consolidated Subsidiary, nor, to the best of their knowledge, any other person,
has treated, stored, processed, discharged, spilled, or otherwise disposed of
any substance defined as hazardous or toxic by any applicable federal, state, or
local law, rule, regulation, order, or directive, or any waste or by-product
thereof, at any real property or any other facility owned, leased, or used by
Borrower or any Consolidated Subsidiary, in violation of any applicable
statutes, regulations, ordinances, or directives of any governmental authority
or court, which violations may result in liability to Borrower or any
Consolidated Subsidiary in an amount for all such violations that could
reasonably be expected to have a Material Adverse Effect; and the unresolved
violations, if any, set forth in the financial statements delivered on or prior
to the date hereof will not result in liability to Borrower or any Consolidated
Subsidiary in an amount for all such unresolved violations that could reasonably
be expected to have a Material Adverse Effect. Except as set forth in the
financial statements delivered on or prior to the date hereof, no employee or
other person has ever made a claim or demand against Borrower or any
Consolidated Subsidiary based on alleged damage to health caused by any such
hazardous or toxic substance or by any waste or by-product thereof in an amount
that could reasonably be expected to have a Material Adverse Effect; and the
unsatisfied claims, if any, or demands against Borrower or any Consolidated
Subsidiary set forth in the financial statements delivered on or prior to the
date hereof will not result in uninsured liability to Borrower or any
Consolidated Subsidiary or any of their respective officers, employees,
representatives, agents, or shareholders in an amount that could reasonably be
expected to have a Material Adverse Effect for all such unsatisfied claims or
demands. Except as set forth in the financial statements delivered on or prior
to the date hereof neither Borrower nor any Consolidated Subsidiary has been
charged by any governmental authority with improperly using, handling, storing,
discharging, or disposing of any such hazardous or toxic substance or waste or
by-product thereof or with causing or permitting any pollution of any body of
water in an amount that could reasonably be expected to have a Material Adverse
Effect; and the outstanding charges, if any, set forth in the financial
statements delivered on or prior to the date hereof will not result in liability
to Borrower or any Consolidated Subsidiary or any or their respective officers,
employees, representatives, agents, or shareholders in an amount that could
reasonably be expected to have a Material Adverse Effect for all such
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<PAGE> 30
outstanding charges.
(k) Employee Matters. There is no strike or work stoppage in
existence or, to the best of Borrower's knowledge, threatened involving Borrower
or its Consolidated Subsidiaries that could reasonably be expected to have a
Material Adverse Effect.
VI
COVENANTS
VI.1. AFFIRMATIVE COVENANTS. So long as the Revolving Note shall remain
unpaid or Bank shall have any Commitment hereunder, Borrower will, unless Bank
shall otherwise consent in writing:
(a) Financial Information. Furnish to Bank:
(i) as soon as available, but in any event within 120 days
after the end of each fiscal year of Borrower, a copy of Borrower's consolidated
balance sheet of itself and its Consolidated Subsidiaries as at the end of each
fiscal year and the related consolidated statements of income, stockholders'
equity, and statement of cash flows for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an
unqualified report and opinion thereon of Ernst & Young or other independent
certified public accountants acceptable to Bank;
(ii) as soon as available, but in any event within 60 days
after the end of each of Borrower's fiscal quarters, Borrower's unaudited
consolidated balance sheet of itself and its Consolidated Subsidiaries as at the
end of such period and the related unaudited consolidated statements of income,
stockholders' equity, and statement of cash flows for such period and year to
date, setting forth in each case in comparative form the figures as at the end
of the previous fiscal year as to the balance sheet and the figures for the
previous corresponding period as to the other statements, certified by a duly
authorized officer of Borrower as being fairly stated in all material respects
subject to year end adjustments;
all such financial statements to be complete and correct in all material
respects and to be prepared in reasonable detail acceptable to Bank and in
accordance with GAAP
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<PAGE> 31
applied consistently throughout the periods reflected therein (except as
approved by such accountants and disclosed therein);
(iii) together with each delivery of financial statements of
Borrower and its Consolidated Subsidiaries pursuant to subdivisions (i) and (ii)
above, (A) an officer's certificate stating that the signers have reviewed the
terms of the Loan Documents and have made, or caused to be made under their
supervision, a review in reasonable detail of the transactions and condition of
Borrower and its Consolidated Subsidiaries during the accounting period covered
by such financial statements and that such review has not disclosed the
existence during or at the end of such accounting period, and that the signers
do not have knowledge of the existence as at the date of the officers'
certificate, of any existing condition or event which constitutes an Event of
Default or Potential Event of Default, or, if any such condition or event
existed or exists, specifying the nature and period of existence thereof and
what action Borrower has taken, is taking and proposes to take with respect
thereto; and (B) a compliance certificate, in form and substance satisfactory to
Bank, setting forth in such detail as Bank may request the calculation of the
ratios and amounts necessary to determine Borrower's compliance with Sections
6.2(a), 6.2(b), 6.2(c), 6.2(e), and 6.2(j) hereof for the accounting period
covered by such financial statements, certified by Borrower's chief executive
officer or chief financial officer; and
(iv) as soon as available, copies of all reports which
Borrower sends to any of its security holders, and copies of all reports and
registration statements which Borrower or any Subsidiary files with the S.E.C.
or any national securities exchange, including, but not limited to: Form 8-K
Current Report, Form 10-K Annual Report, Form 10-Q Quarterly Report, Annual
Report to Shareholders, Proxy Statements, and Registration Statements.
(b) Notices and Information. Deliver to Bank:
(i) promptly upon any officer of Borrower obtaining
knowledge (a) of any condition or event which constitutes an Event of Default or
existing Potential Event of Default, (b) that any Person has given any notice to
Borrower or any Consolidated Subsidiary or taken any other action with respect
to a claimed default or event or condition of the type referred to in Section
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7.1(e), (c) of the institution of any litigation involving an alleged liability
(including possible forfeiture of property) of Borrower or any of its
Consolidated Subsidiaries equal to or greater than $5,000,000 or any adverse
determination in any litigation involving a potential liability of Borrower or
any of its Consolidated Subsidiaries equal to or greater than $5,000,000, or (d)
of a material adverse change in the business, operations, properties, assets, or
condition (financial or otherwise) of Borrower and its Consolidated
Subsidiaries, taken as a whole, an officer's certificate specifying the nature
and period of existence of any such condition or event, or specifying the notice
given or action taken by such holder or Person and the nature of such claimed
default, Event of Default, Potential Event Of Default, event, or condition, and
what action Borrower has taken, is taking, and proposes to take with respect
thereto;
(ii) promptly upon becoming aware of the occurrence of or
forthcoming occurrence of any (a) Termination Event, or (b) "prohibited
transaction," as such term is defined in Section 4975 of the Internal Revenue
Code or Section 406 of ERISA, in connection with any Employee Benefit Plan
(other than the Dastek, Inc. Savings and Deferred Profit-Sharing Plan which is
proposed to be terminated effective as of June 30, 1994) or any trust created
thereunder, a written notice specifying the nature thereof, what action Borrower
has taken, is taking, or proposes to take with respect thereto, and, when known,
any action taken or threatened by the Internal Revenue Service, the Department
of Labor, or the Pension Benefit Guaranty Corporation with respect thereto;
(iii) with reasonable promptness copies of (a) all notices
received by Borrower or any of its ERISA Affiliates of the Pension Benefit
Guaranty Corporation's intent to terminate any material Pension Plan or to have
a trustee appointed to administer any Pension Plan; (b) each Schedule B
(Actuarial Information) to the annual report (Form 5500 Series) filed by
Borrower or any of its ERISA Affiliates with the Internal Revenue Service with
respect to each material Pension Plan; and (c) all notices received by Borrower
or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the
material imposition or material amount of withdrawal liability pursuant to
Section 4202 of ERISA;
(iv) promptly, and in any event within thirty (30) days
after receipt thereof, a copy of any notice, summons, citation, directive,
letter, or other
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form of communication from any governmental authority or court
in any way concerning any material action or omission on the part of Borrower or
any of its Consolidated Subsidiaries in connection with any substance defined as
toxic or hazardous by any applicable federal, state, or local law, rule,
regulation, order, or directive or any waste or by product thereof, or
concerning the filing of a material lien upon, against, or in connection with
Borrower, its Consolidated Subsidiaries, or any of their leased or owned real or
personal property, in connection with a Hazardous Substance Superfund or a
Post-Closure Liability Fund as maintained pursuant to ss. 9507 of the Internal
Revenue Code; and
(v) promptly, and in any event within ten (10) days after
request, such other information and data with respect to the business affairs
and financial condition of Borrower or any of its Consolidated Subsidiaries as
from time to time may be reasonably requested by Bank.
(c) Corporate Existence, Etc. At all times preserve and keep in full
force and effect Borrower's and its Consolidated Subsidiaries' corporate
existence and rights and franchises material to Borrower's business and those of
each of its Consolidated Subsidiaries; provided, however, that the corporate
existence of any such Consolidated Subsidiary may be terminated if such
termination is in the best interest of Borrower and is not materially
disadvantageous to the holder of the Revolving Note.
(d) Payment of Taxes and Claims. Pay, and cause each of its
Consolidated Subsidiaries (except Dastek(M)) to pay, all taxes, assessments, and
other governmental charges imposed upon it or any of its properties or assets or
in respect of any of its franchises, business, income, or property before any
penalty or interest accrues thereon, and all claims (including, without
limitation, claims for labor, services, materials, and supplies) for sums which
have become due and payable and which by law have or may become a lien upon any
of its properties or assets, prior to the time when any penalty or fine shall be
incurred with respect thereto; provided that no such charge or claim need be
paid if being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if such reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor.
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<PAGE> 34
(e) Maintenance of Properties; Insurance. Maintain or cause to be
maintained in good repair, working order and condition all material properties
used or useful in the business of Borrower and its Consolidated Subsidiaries
(except Dastek(M)) and from time to time will make or cause to be made all
appropriate repairs, renewals, and replacements thereof. Borrower will maintain
or cause to be maintained, with financially sound and reputable insurers,
insurance with respect to its properties and business and the properties and
business of its Consolidated Subsidiaries (except Dastek(M)) against loss or
damage of the kinds customarily insured against by corporations of established
reputation engaged in the same or similar businesses and similarly situated, of
such types and in such amounts as are customarily carried under similar
circumstances by such other corporations.
(f) Inspection. Permit any authorized representatives designated by
Bank to visit and inspect any of the properties of Borrower or any of its
Consolidated Subsidiaries (except Dastek(M)), including its and their financial
and accounting records, and to make copies and take extracts therefrom, and to
discuss its and their affairs, finances, and accounts with its and their
officers and independent public accountants, all at such reasonable times during
normal business hours and under Borrower's supervision and as often as may be
reasonably requested. Any such additional information together with other
nonpublic information received hereunder shall be held in confidence by Bank and
may not be used for any purpose other than to monitor the creditworthiness of
Borrower and its Consolidated Subsidiaries (except Dastek(M)) and shall not be
disclosed or disseminated to any other Person for any reason, and the
Confidentiality Letters shall apply thereto.
(g) Compliance with Laws, Etc. Exercise, and cause each of its
Consolidated Subsidiaries to exercise, all due diligence in order to comply with
the requirements of all applicable laws, rules, regulations, and orders of any
governmental authority, including, without limitation, all environmental laws,
rules, regulations, and orders, noncompliance with which would have a Material
Adverse Effect.
VI.2. NEGATIVE COVENANTS. So long as the Revolving Note shall remain
unpaid or Bank shall have any Commitment hereunder, Borrower will not, without
the written consent of Bank:
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<PAGE> 35
(a) Profitability. Permit, on a consolidated after-tax basis, a loss
in more than two consecutive fiscal quarters.
(b) Leverage Ratio. Permit Borrower's ratio of consolidated total
liabilities (excluding Convertible Debt and minority interests in Subsidiaries)
to Consolidated Tangible Net Worth at the end of any fiscal quarter to exceed
.85 to 1.00.
(c) Consolidated Tangible Net Worth. Permit Borrower's Consolidated
Tangible Net Worth, on a quarterly consolidated basis, to be less than
$250,000,000, plus (i) 85% of Borrower's cumulative consolidated net income
(without deduction for any losses), adjusted on an annual basis beginning with
Borrower's fiscal year ending 1994 (said adjustment for fiscal 1994 shall
include Borrower's future net income after July 3, 1994), plus (ii) 100% of the
net proceeds of equity investments and issues received by Borrower or its
Consolidated Subsidiaries (other than equity investments by Borrower in its
Consolidated Subsidiaries or equity investments by Borrower's Consolidated
Subsidiaries in Borrower) adjusted on a quarterly basis. 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 and the definition shall be exclusive of any effect of
minority interests.
(d) Liens, Etc. Create or suffer to exist, or permit any of its
Consolidated Subsidiaries (except Dastek(M)) to create or suffer to exist, any
Lien upon or with respect to any of its properties, whether now owned or
hereafter acquired, or assign, or permit any of its Consolidated Subsidiaries
(except Dastek(M)) to assign, any right to receive income, in each case to
secure any Debt of any Person other than (i) Liens in favor of Bank; (ii) Liens
reflected on the financial statements referred to in Section 5.1(e) and other
Liens existing on the date hereof heretofore disclosed to Bank; and (iii)
Permitted Liens.
(e) Dividends, Etc. Declare or pay any dividends, purchase or
otherwise acquire for value its capita] stock now or hereafter outstanding, or
make any distribution of assets to its stockholders as such, or permit any of
its Consolidated Subsidiaries (except Dastek(M)) to purchase or otherwise
acquire for value any
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<PAGE> 36
stock of Borrower, except that Borrower and/or its Consolidated Subsidiaries
(except Dastek(M)) may (i) declare and deliver dividends and distributions
payable in its capital stock; (ii) in any fiscal year declare and pay cash
dividends to its stockholders and purchase or otherwise acquire shares of its
own outstanding capital stock for cash in an aggregate amount up to 15% of net
income after taxes of Borrower and its Consolidated Subsidiaries (except
Dastek(M)) for the immediately preceding fiscal year; and (iii) repurchase stock
of Borrower in an amount not to exceed $15,000,000 in any calendar year.
(f) Consolidation, Merger, or Acquisition. Regarding Borrower and its
Consolidated Subsidiaries (except Dastek(M)), liquidate or dissolve or enter
into any consolidation, merger, acquisition, material partnership, material
joint venture, syndication, or other combination without Bank's prior written
consent, which consent will not be unreasonably withheld, except that Borrower
may consolidate with, merge into or acquire any other corporation or entity,
except that any corporation or entity may consolidate with or merge into
Borrower, provided that Borrower shall be the surviving entity of such merger or
consolidation, and provided further, that immediately after the consummation or
such consolidation or merger there shall exist no condition or event which
constitutes an Event of Default or a Potential Event of Default. In addition
Borrower may purchase any, all or substantially all of the assets of any other
Person in connection with acquisitions reasonably related to Borrower's existing
lines of business, provided that immediately after the effectiveness of any such
acquisition, there shall have occurred and be continuing no Event of Default or
Potential Event of Default.
(g) Loans, Investments, and Secondary Liabilities. Make or permit to
remain outstanding, or permit any Consolidated Subsidiary (except Dastek(M)) to
make or permit to remain outstanding, any loan or advance to, or guaranty,
induce or otherwise become contingently liable, directly or indirectly, in
connection with the obligations, stock, or dividends of, or own, purchase, or
acquire any stock, obligations, or securities of or any other interest in, or
make any capital contribution to, any other Person, except Borrower and its
Consolidated Subsidiaries may:
(i) own, purchase, or acquire certificates of deposit, time
deposits and bankers'
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acceptances issued by Bank, commercial paper rated Moody's P-2 or better and/or
Standard & Poor's A-2 or better, obligations or instruments issued by or
guaranteed by an entity designated as Standard & Poor's A-2 or better, or
Moody's P-2 or better or the equivalent by a nationally recognized credit
agency, municipal bonds, and other governmental and corporate debt obligations
rated Standard & Poor's A or better and/or Moody's A2 or better, direct
obligations of the United States of America or its agencies, and obligations
guaranteed or insured by the United States of America, and any funds investing
in any of the foregoing;
(ii) acquire and own stock, obligations, or securities
received in connection with debts created in the ordinary course of business
owing to Borrower or a Subsidiary;
(iii) continue to own the existing capital stock of
Borrower's Subsidiaries;
(iv) endorse negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(v) make loans, advances to, or investments in a Subsidiary
or joint venture in connection with the normal operations of the business of
such Subsidiary or joint venture and allow Borrower's Subsidiaries or any joint
venture to which it is a party to make or permit to remain outstanding advances
from Borrower's Subsidiaries or such joint venture to Borrower;
(vi) make or permit to remain outstanding loans or advances
to Borrower's Subsidiaries or any joint venture to which it is a party or enter
into or permit to remain outstanding guarantees in connection with the
obligations of Borrower's Subsidiaries or such joint venture; and
(vii) make or permit to remain outstanding (a) loans and/or
advances to Borrowers' officers, stockholders and/or employees, which, in the
aggregate, would not exceed $3,000,000 during the term of this Agreement, (b)
loans to Borrower's vendors, in the ordinary course of Borrower's business,
which, in the aggregate, do not exceed $5,000,000, (c) progress payments to
Borrower's vendors made in the ordinary course of Borrower's business, (d) (i)
loans and/or advances for the purpose of purchasing Borrower's shares of stock
pursuant
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<PAGE> 38
to its employee stock purchase or option plans, (ii) advances for
salary, travel, and other expenses, advances against commission and other
similar advances made to officers or employees in the ordinary course of
Borrower's business, and (iii) loans and/or advances to or for the benefit of
officers, directors, or employees in connection with litigation and other
proceedings involving such persons by virtue of their status as officers,
directors, or employees, respectively, and (e) investments under deferred
compensation plans for the benefit of the employees of Borrower and its
Subsidiaries.
(h) Asset Sales. Convey, sell, lease, transfer, or dispose of
(individually, a "Transfer"), or permit any Consolidated Subsidiary (except
Dastek(M)) to Transfer, in one transaction or a series of transactions all or
any part of its or its Consolidated Subsidiary's (except Dastek(M)) business,
property or fixed assets outside the ordinary course of business, whether now
owned or hereafter acquired, except that Borrower and its Consolidated
Subsidiaries (except Dastek(M)) may make Transfers of business, property or
fixed assets in transactions outside the ordinary course of business for
consideration which in the aggregate does not exceed 20% of Consolidated
Tangible Net Worth in any fiscal year of Borrower without the prior written
consent of Bank, which consent shall not be unreasonably withheld.
VII
EVENTS OF DEFAULT
VII.1. EVENTS OF DEFAULT. If any of the following events ("Events of
Default") shall occur and be continuing:
(a) Borrower shall fail to pay any installment of the principal of the
Revolving Note outstanding hereunder when due or any installment of interest on
the Revolving Note or other amount payable hereunder within 10 Business Days of
the date when due; or
(b) Any representation or warranty made by Borrower herein or by
Borrower (or any of its officers) in connection with the Loan Documents shall
prove to have been incorrect in any material respect when made; or
(c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in this Agreement or in any and all documents executed in
conjunction with this
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<PAGE> 39
Agreement, which failure continues uncured for more than 30 consecutive days.
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), (f), and (h) shall
constitute an Event of Default without regard to any lapse of time or cure
period; or
(d) Borrower shall fail to perform or observe any term, covenant or
agreement contained in this Agreement other than those referred to in
Subsections 7.1(a), (b) and (c) above on its part to be performed or observed
and any such failure shall remain unremedied for 30 days after Borrower knows of
such failure; or
(e) Borrower or any of its Consolidated Subsidiaries (except
Dastek(M)) shall, after written demand, fail to pay any principal of or premium
or interest on, any Debt in which Borrower may be obligated as either a borrower
or guarantor, the aggregate outstanding amount of which is at least $1,000,000
(excluding Debt evidenced by the Revolving Notes), when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or otherwise) and
such failure shall continue after the applicable grace period, if any is
specified in the agreement or instrument relating to such Debt; or
(f) (i) Borrower or any of its Consolidated Subsidiaries (except
Dastek(M)) shall commence any case, proceeding or other action (A) under any
existing or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, or relief of debtors, seeking to have an
order for relief entered with respect to it, or seeking to adjudicate it
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition, or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets, or Borrower or any of
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<PAGE> 40
its Consolidated Subsidiaries (except Dastek(M)) shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against
Borrower or any of its Consolidated Subsidiaries (except Dastek(M)) any case,
proceeding or other action of a nature referred to in clause (i) above which (A)
results in the entry of an order for relief or any such adjudication or
appointment or (B) remains undismissed, undischarged, or unbonded for a period
of 30 days; or (iii) there shall be commenced against Borrower or any of its
Consolidated Subsidiaries (except Dastek(M)) any case, proceeding, or other
action seeking issuance of a warrant of attachment, execution, distraint, or
similar process against all or any substantial part of its assets which results
in the entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 30 days from the entry
thereof; or (iv) Borrower or any of its Consolidated Subsidiaries (except
Dastek(M)) shall take any action in furtherance of, or indicating its consent
to, approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), and (iii) above; or (v) Borrower or any of its Consolidated Subsidiaries
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or
(g) One judgment or decree shall be entered against Borrower or any of
its Consolidated Subsidiaries (except Dastek(M)) involving a liability (not paid
or 75% covered by insurance or the third party indemnity of a solvent
indemnitor) equal to or greater than $5,000,000 or one or more judgements or
decrees shall be entered against Borrower or any of its Consolidated
Subsidiaries (except Dastek(M)) involving in the aggregate a liability (not paid
or 75% covered by insurance or the third party indemnity of a solvent
indemnitor) equal to or greater than $10,000,000 and all such judgments or
decrees shall not have been vacated, discharged, or stayed or bonded pending
appeal within 30 days from the entry thereof; or
(h) (i) Borrower or any of its ERISA Affiliates fails to make full
payment when due of all material amounts which, under the provisions of any
Pension Plan or Section 412 of the Internal Revenue Cede, Borrower or any of its
ERISA Affiliates is required to pay as contributions thereto;
(i) any material accumulated funding deficiency occurs or
exists, whether or not waived, with respect to any Pension Plan;
(ii) the excess of the actuarial present value of all benefit
liabilities under all material Pension Plans over the fair market value of the
assets of such Pension Plans (excluding on such computation Pension Plans with
assets greater than benefit liabilities) allocable to such benefit liabilities
are greater than 5% of Consolidated Tangible Net Worth;
(iii) Borrower or any of its ERISA
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<PAGE> 41
Affiliates enters into any transaction which has as its principal purpose the
evasion of liability under Subtitle D of Title IV of ERISA;
(iv) (A) Any material Pension Plan maintained by Borrower or any
of its ERISA Affiliates shall be terminated within the meaning of Title IV of
ERISA, or (B) a trustee shall be appointed by an appropriate United States
district court to administer any material Pension Plan, or (C) the Pension
Benefit Guaranty Corporation (or any successor thereto) shall institute
proceedings to terminate any material Pension Plan or to appoint a trustee to
administer any Pension Plan, or (D) Borrower or any of its ERISA Affiliates
shall withdraw (under Section 4063 of ERISA) from any material Pension Plan, if
as of the date of the event listed in subclauses (A)-(C) above or any subsequent
date, either Borrower or its ERISA Affiliates has any material liability (such
liability to include, without limitation, any material liability to the Pension
Benefit Guaranty Corporation, or any successor thereto, or to any other party
under Sections 4062, 4063, or 4064 of ERISA or any other provision of law)
resulting from or otherwise associated with the events listed in subclauses
(A)-(C) above;
(v) As used in this subsection 7.1(i)(vi) the term "accumulated
funding deficiency" has the meaning specified in Section 412 of the Internal
Revenue Codes and the terms "actuarial present value" and "benefit liabilities"
have the meanings specified in Section 4001 of ERISA; or
(i) There shall be instituted against Borrower, or any of its
Consolidated Subsidiaries (except Dastek(M)), any proceeding for which
forfeiture (not paid or 75% covered by insurance or the third party indemnity of
a solvent indemnitor) of any property equal to or greater than $5,000,000 is a
potential penalty and such proceeding shall not have been vacated or discharged
within 30 days of its institution;
THEN (i) upon the occurrence of any Event of Default described in clause (f)
above, the Commitment shall immediately terminate and all Revolving Loans
hereunder with accrued interest thereon, and all other amounts owing under this
Agreement, the Revolving Note, and the other Loan Documents shall automatically
become due and payable, and (ii) upon the occurrence and continuance of any
other Event of Default, Bank may by notice to Borrower, declare the Commitment
to be terminated forthwith, whereupon the
-38-
<PAGE> 42
Commitment shall immediately terminate; and by notice to Borrower, declare the
Revolving Loans hereunder, with accrued interest thereon, and all other amounts
owing under this Agreement, the Revolving Note, and the other Loan Documents to
be due and payable forthwith, whereupon the same shall immediately become due
and payable. Except as expressly provided above in this Section, presentment,
demand, protest, and all other notices of any kind are hereby expressly waived.
Notwithstanding any other provision of this Agreement, notices to Borrower
pursuant to this Section may be communicated orally (including by telephone with
a written notice to Borrower to be subsequently provided by Bank) or in writing
(including telex or facsimile transmission).
VIII
MISCELLANEOUS
VIII.1. AMENDMENTS, ETC. No amendment or waiver of any provision of the
Loan Documents nor consent to any departure by Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by Bank, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
VIII.2. NOTICES, ETC. Except as otherwise set forth in this Agreement, all
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, or facsimile communication) and mailed or
telegraphed or telexed or sent by facsimile or delivered, if to Borrower, at
Borrower's address set forth on the signature page hereof; and if to Bank, at
its address set forth on the signature page hereof; or, as to each party at such
other address as shall be designated by such party in a written notice to the
other parties. All such notices and communications shall be effective when
deposited in the mails, delivered to the telegraph company, sent by telex or
sent by facsimile respectively, except that notices and communications to Bank
pursuant to Article II shall not be effective until received by Bank.
VIII.3. RIGHT OF SETOFF. Upon and during the continuance of any Event of
Default, Bank and any participant with Bank in the Commitment pursuant to
Section 8.6 is hereby authorized by Borrower, at any time, and from time to
time, without prior notice, (a) to set off against, and to appropriate and apply
to the payment of, the obligations and liabilities of Borrower under the
-39-
<PAGE> 43
Loan Documents (whether matured or unmatured, fixed or contingent or liquidated
or unliquidated) any and all amounts owing by Bank or such participant to
Borrower (whether payable in Dollars or any other currency, whether matured or
unmatured, and, in the case of deposits, whether general or special, time or
demand and however evidenced), and (b) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank or such participant
in its sole discretion may elect. Bank agrees promptly to notify Borrower (and
to cause each such participant to notify Borrower) after any such set-off and
application is made. Upon and during the continuance of any Event of Default,
Bank and all such participants are authorized to debit any account maintained
with it by Borrower for any amount of principal, interest, or fees which are
then due and owing to Bank or such participants by Borrower.
VIII.4. NO WAIVER: REMEDIES. No failure on the part of Bank to exercise,
and no delay in exercising, any right under any of the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
VIII.5. COSTS AND EXPENSES. Borrower agrees to pay, within 30 days of
demand therefor by Bank (but on demand if there shall then exist any Event of
Default), all costs and expenses (i) of Bank (including reasonable and
documented attorneys' fees and reasonable and documented costs of in-house
counsel and staff) in connection with the preparation, amendment, or
modification of the Loan Documents, and (ii) of Bank in connection with the
enforcement (including, without limitation, in appellate, bankruptcy,
insolvency, liquidation, reorganization, moratorium, or other similar
proceedings) or restructuring of the Loan Documents; provided that Borrower's
obligation to reimburse Bank for such attorneys' fees in connection with the
preparation of the Loan Documents shall be limited to $5,000; provided further
that the foregoing limitation shall not apply to any such costs and expenses
attributable (in the reasonable judgment of Bank) to (i) any material change
(other than at the request of Bank) in the terms and conditions set forth in the
Summary of Terms and Conditions (attached to a letter from Bank to
-40-
<PAGE> 44
Andrew Koslow, Esq., dated October 16, 1995), dated October 16, 1995, or (ii)
any failure by Borrower, or any representative acting on behalf of Borrower
reasonably to cooperate with the efficient closing of the transaction
contemplated by the Loan Documents.
VIII.6. PARTICIPATIONS. (a) Bank may sell, negotiate, or grant
participations in all or part of the obligations of Borrower outstanding under
the Loan Documents, subject to the prior written approval of Borrower (which
approval shall not be unreasonably withheld); provided that any such sale,
negotiation or participation shall be in compliance with the applicable federal
and state securities laws. Notwithstanding the foregoing, Bank shall not sell,
negotiate, or grant participations unless it retains at least $20,000,000 of the
Commitment or another amount as agreed upon by Borrower and Bank. Bank shall not
transfer or grant any participating interest under which the participant shall
have rights: (i) greater than Bank under Sections 3.6, 3.7, or 3.10 of this
Agreement, or (ii) to approve any amendment to, or any consent or waiver with
respect to, this Agreement or any other Loan Document, except to the extent such
amendment, consent or waiver would:
(A) increase the amount or extend the Maturity Date of the
Commitment;
(B) reduce the principal of, or interest on, the Revolving Loans
or any fee or other amount payable to the participant hereunder;
(C) postpone any date fixed for any payment in respect of
principal of, or interest on, the Revolving Loans or any fee or other amount
payable to Bank hereunder; or
(D) amend the provisions of this sentence.
In the event that Borrower requests a modification to any of the provisions set
forth in clauses (A) through (D) above (a "Modification Request") and any
existing participant refuses to agree to such modifications (a "Nonaccepting
Participant"), Bank shall use good faith efforts to secure a participant willing
to accept such modifications as a replacement participant for the Nonaccepting
Participant (an "Accepting Participant") and, in the event that Bank shall be
unable to secure an Accepting Participant within 60 days from Bank's receipt
from Borrower of the related Modification Request, then
-41-
<PAGE> 45
Borrower shall, at its option, be entitled to purchase the Nonaccepting
Participant's participation interest. No participant shall constitute "Bank"
under any Loan Document, and Borrower shall continue to deal solely and directly
with Bank.
(b) Bank may disclose to any proposed participant which is a financial
institution any information relating to Borrower or any of its Consolidated
Subsidiaries; provided, that prior to such disclosure such participant and Bank
shall have executed Borrower's standard Confidential Disclosure Statement
("Confidentiality Letter").
VIII.7. EFFECTIVENESS, BINDING EFFECT; GOVERNING LAW. This Agreement is
being executed on the date hereof by Borrower, and Bank and is binding on and
effective against each such party as of the date hereof. This Agreement shall
become effective when it shall have been executed by Borrower and Bank and
thereafter shall be binding upon and inure to the benefit of Borrower, Bank and
their respective permitted successors and assigns, except that Borrower shall
not have the right to assign its rights hereunder or any interest herein without
the prior written consent of Bank. THIS AGREEMENT AND THE REVOLVING NOTE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.
VIII.8. CONSENT TO JURISDICTION; VENUE. BANK FOR SERVICE OF PROCESS. All
judicial proceedings brought against Borrower with respect to this Agreement and
the Loan Documents may be brought in any state or federal court of competent
jurisdiction in the County of San Francisco in the State of California, and by
execution and delivery of this Agreement, Borrower accepts for itself and in
connection with its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement. Borrower
irrevocably waives any right it may have to assert the doctrine of forum non
conveniens or to object to venue to the extent any proceeding is brought in
accordance with this Section. Borrower designates and appoints Borrower's Chief
Financial Officer, from time to time, Komag Incorporated, 275 South Hillview
Drive, Milpitas, California 95035, and such other Persons as may hereafter be
selected by Borrower irrevocably agreeing in writing to so serve (as its agent
to receive on its behalf
-42-
<PAGE> 46
service of all process in any such proceedings in any such court, such service
being hereby acknowledged by Borrower to be effective and binding service in
every respect). A copy of any such process so served shall be mailed by
registered mail to Borrower at its address provided in the applicable signature
page hereto, except that unless otherwise provided by applicable law, any
failure to mail such copy shall not affect the validity of service of process.
If any agent appointed by Borrower refuses to accept service, Borrower hereby
agrees that service upon it by mail shall constitute sufficient notice. Nothing
herein shall affect the right to serve process in any other manner permitted by
law or shall limit the right of Bank, on behalf of Bank or Bank to bring
proceedings against Borrower in courts of any jurisdiction.
VIII.9. ENTIRE AGREEMENT. This Agreement with Exhibits and the other Loan
Documents embody the entire agreement and understanding between the parties
hereto and supersedes all prior agreements and understandings relating to the
subject matter hereof.
VIII.10. SEPARABILITY OF PROVISIONS. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
VIII.11. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
VIII.12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that Borrower may not assign or transfer any of its rights or
obligations under this Agreement or any other Loan Document without the consent
of Bank.
VIII.13. EFFECTIVENESS OF AGREEMENT. This Agreement shall become effective
on the later to occur of (i) December 15, 1995 and (ii) such other date that
Borrower notifies Bank that any necessary approvals of any other lenders to
Borrower have been obtained and that this Agreement is effective, provided that
if this Agreement
-43-
<PAGE> 47
has not become effective on or before January 31, 1996 as hereinabove provided,
then this Agreement shall be null and void and Bank shall have no obligation to
Borrower on account of the Commitment or otherwise pursuant to this Agreement.
-44-
<PAGE> 48
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.
"BORROWER"
KOMAG, INCORPORATED
By:
-------------------------------------
Title:
----------------------------------
Address for notices:
275 South Hillview Drive
Milpitas, California 95035
Attention: David H. Allen
Treasurer
"BANK"
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, SAN FRANCISCO AGENCY
By:
-------------------------------------
Title:
----------------------------------
Address for notices:
555 California Street, Suite 3110
San Francisco, California 94104
Attention: Michael McCorriston
-45-
<PAGE> 49
EXHIBIT A
NOTICE OF BORROWING
Date: ___________________, 19____
To: The Industrial Bank of Japan, Limited, San Francisco Agency, with
respect to the Credit Agreement, dated as of December 15, 1995 (as
extended, renewed, amended, or restated from time to time, the "Credit
Agreement"), between Komag, Incorporated and The Industrial Bank of
Japan, Limited, San Francisco Agency.
Ladies and Gentlemen:
The undersigned, Komag, Incorporated ("Borrower"), refers to the
Credit Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably, pursuant to Section 2.1(b) of
the Credit Agreement, of the Revolving Loan specified below:
1. The Business Day of the proposed Revolving Loan
is ______________________, 19___.
2. The aggregate amount of the proposed Revolving Loan is
$__________________________.
3. The Revolving Loan is to be comprised of $____________ of
a [Prime Rate] [Eurodollar Rate] Loan.
[4. The duration of the Interest Period for the Eurodollar
Rate Loan shall be [one] [two] [three] [six] [nine] [twelve] months.]
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the proposed Revolving
Loan, before and after giving effect thereto and to the application of the
proceeds therefrom:
(a) the representations and warranties of Borrower
contained in Article V of the Credit Agreement are true and correct as though
made on and as of such date (except to the extent such representations and
warranties relate to an earlier date, in which case they are true and
-1-
<PAGE> 50
correct as of such date);
(b) no Event of Default or Potential Event of Default
has occurred and is continuing, or would result from such proposed Revolving
Loan; and
(c) The proposed Revolving Loan will not cause the
aggregate principal amount of all outstanding Revolving Loans to exceed the
Commitment.
KOMAG, INCORPORATED
By:
-------------------------------------
Title:
----------------------------------
-2-
<PAGE> 51
EXHIBIT B
REVOLVING NOTE
$35,000,000 San Jose, California
December __, 1995
FOR VALUE RECEIVED, KOMAG, INCORPORATED (Borrower"), promises to pay to
the order of THE INDUSTRIAL BANK OF JAPAN, LIMITED, SAN FRANCISCO AGENCY
("Bank") the principal amount of THIRTY-FIVE MILLION DOLLARS ($35,000,000), or,
if less, the aggregate amount of Revolving Loans (as defined in the Credit
Agreement referred to below), made by Bank to Borrower pursuant to the Credit
Agreement referred to below, outstanding on the Maturity Date (as defined in the
Credit Agreement referred to below). All unpaid amounts of principal and
interest shall be due and payable in full on the Maturity Date as defined in the
Credit Agreement referred to below.
Borrower also promises to pay interest on the unpaid principal amount
hereof from the date hereof until paid at the rates and at the times which shall
be determined in accordance with the provisions of the Credit Agreement referred
to below.
All payments of principal and interest in respect of this Note shall be
made in lawful money of the United States of America in same day funds at the
office of Bank located at 555 California Street, San Francisco, California
94104, or at such other place as shall be designated in writing for such purpose
in accordance with the terms of the Credit Agreement referred to below. Until
notified of the transfer of this Note, Borrower shall be entitled to deem Bank
or such person who has been so identified by the transferor in writing to
Borrower as the holder of this Note, as the owner and holder of this Note. Each
of Bank and any subsequent holder of this Note agrees that before disposing of
this Note or any part hereof it will make a notation hereon of all principal
payments previously made hereunder and of the date to which interest hereon has
been paid on the schedule attached hereto, if any; provided, however, that the
failure to make notation of any payment made on this Note shall not limit or
otherwise affect the obligation of Borrower hereunder with respect to payments
of principal or interest on this Note.
-1-
<PAGE> 52
This Note is referred to in, and is entitled to the benefits of, the
Credit Agreement, dated as of December 15, 1995 (the "Credit Agreement"),
between Borrower and Bank. The Credit Agreement, among other things, (i)
provides for the making of advances (the "Loans") by Bank to Borrower from time
to time in an aggregate amount not to exceed at any time outstanding the U.S.
dollar amount first above mentioned, the indebtedness of Borrower resulting from
each such Loan being evidenced by this Note, and (ii) contains provisions for
acceleration of the maturity hereof upon the happening of certain stated events
and also for prepayments on account of principal hereof prior to the maturity
hereof upon the terms and conditions therein specified.
The terms of this Note are subject to amendment only in the manner
provided in the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this
Note or the Credit Agreement shall alter or impair the obligation of Borrower,
which is absolute and unconditional, to pay the principal of and interest on
this Note at the place, at the respective times, and in the currency herein
prescribed.
Borrower promises to pay all costs and expenses, including reasonable
attorneys' fees, incurred in the collection and enforcement of this Note.
Borrower hereby consents to renewals and extensions of time at or after the
maturity hereof, without notice, and hereby waives diligence, presentment,
protest, demand, and notice of every kind and, to the full extent permitted by
law, the right to plead any statute of limitations as a defense to any demand
hereunder.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered by its duly authorized officer, as of the date and the place first
above written.
KOMAG, INCORPORATED
By:
-------------------------------------
Title:
----------------------------------
-2-
<PAGE> 53
SCHEDULE 1
EXISTING LIENS AND SECURITY INTERESTS
1. Purchase money security interests in equipment; and
2. UCC filings evidencing leased equipment.
-3-
<PAGE> 54
SCHEDULE 2
<TABLE>
<CAPTION>
SUBSIDIARIES AND PERCENTAGE OF
CONSOLIDATED SUBSIDIARIES BORROWER'S OWNERSHIP
- ------------------------- --------------------
<S> <C>
1. Komag Material Technology, Inc. 55%
2. Komag Technology Partners 50%
3. Asahi Komag Co., Ltd. 0%(1)
4. Komag Bermuda Ltd. 100%
5. Komag Overseas Ltd. 100%
6. Komag USA (Malaysia) Sdn 0%(2)
7. Dastek Holding Company 60%
8. Dastek(M) SDN BHD 0%(3)
9. Headway Technologies, Inc. 17%(4)
10. Asahi Komag (Thailand) Co., Ltd. 0%(5)
</TABLE>
- -------------------------
(1) Borrower owns 50% of Komag Technology Partners, which owns 98% of
Asahi Komag Co., Ltd.
(2) Komag Bermuda Ltd. (97%) and Komag Overseas Ltd. (3%) own 100% of
Komag USA (Malaysia) Sdn.
(3) Dastek Holding Company owns 100% of Dastek(M) SDN BHD.
(4) Borrower, through Asahi Komag Co, Ltd., owns an additional 9.5% of
Headway Technologies, Inc.
(5) Asahi Komag Co., Ltd. owns 100% of Asahi Komag (Thailand) Co., Ltd.
<PAGE> 1
EXHIBIT 11.1
KOMAG, INCORPORATED
COMPUTATION OF INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended (2)
----------------------------------------------------------------------
December 31, 1995 January 1, 1995 January 2,
-------------------------- ---------------------------
primary fully diluted primary fully diluted 1994 (1)
-------- ------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Weighted average shares of
Common Stock outstanding 47,589 47,589 44,782 44,782 42,744
Weighted average shares of
Common Stock equivalents:
Stock Options 2,316 2,284 1,212 1,592 --
-------- -------- ------- ------- -------
Number of shares used in per
share computation 49,905 49,873 45,994 46,374 42,744
======== ======== ======= ======= =======
Net income (loss) $106,815 $106,815 $58,522 $58,522 $(9,901)
======== ======== ======= ======= =======
Net income (loss) per share $2.14 $2.14 $1.27 $1.26 $(0.23)
======== ======== ======= ======= =======
</TABLE>
(1) Common Stock equivalents related to stock options and warrants were not
included in the computation of loss per share for the year ended January
2, 1994 as their effect would be anti-dilutive.
(2) The shares and earnings per share amounts have been restated to reflect
the two-for-one stock split effective December 21, 1995.
<PAGE> 1
KOMAG, INCORPORATED
Exhibit 21
List of Subsidiaries
Asahi Komag Co., Ltd., a Japanese corporation
Komag USA (Malaysia) Sdn., a Malaysian corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos.33-62453, 33-80594, 33-53432, 33-45469, 33-41945, 33-25230,
33-19851 and 33-16625) pertaining to the Komag Material Technology, Inc. 1995
Stock Option Plan, the Komag, Incorporated Employee Stock Purchase Plan, the
Komag, Incorporated Restated 1987 Stock Option Plan, the Dastek International
Stock Option Plan and the Dastek, Inc. 1992 Stock Option Plan and in the
Registration Statement (Form S-3 No. 33-61161) of Komag, Incorporated and in the
related Prospectus of our report dated January 17, 1996, with respect to the
consolidated financial statements and schedule of Komag, Incorporated included
in this Annual Report (Form 10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
San Jose, California
March 6, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this annual report on Form 10-K of our report
dated January 27, 1996 on our audit of the financial statements of Asahi Komag
Co., Ltd. as of December 31, 1995 and 1994 and for the three years in the period
ended December 31, 1995.
CHUO AUDIT CORPORATION
Tokyo, Japan
March 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 14,879
<SECURITIES> 198,799
<RECEIVABLES> 70,953
<ALLOWANCES> 4,259
<INVENTORY> 29,021
<CURRENT-ASSETS> 323,158
<PP&E> 543,842
<DEPRECIATION> 214,668
<TOTAL-ASSETS> 686,315
<CURRENT-LIABILITIES> 70,940
<BONDS> 0
0
0
<COMMON> 507
<OTHER-SE> 574,057
<TOTAL-LIABILITY-AND-EQUITY> 686,315
<SALES> 512,248
<TOTAL-REVENUES> 512,248
<CGS> 314,762
<TOTAL-COSTS> 314,762
<OTHER-EXPENSES> 26,546
<LOSS-PROVISION> 1,519
<INTEREST-EXPENSE> 1,856
<INCOME-PRETAX> 135,219
<INCOME-TAX> 33,809
<INCOME-CONTINUING> 106,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,815
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
</TABLE>
