SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. ______________)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
KOMAG, INCORPORATED
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) or Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date filed:
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<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1997
The annual meeting of stockholders (the "Annual Meeting" of Komag,
Incorporated (the "Company")) will be held at Komag, Incorporated, Building 9,
1705 Automation Parkway, San Jose, California, 95131 on Wednesday, May 14, 1997,
at 10:00 a.m. for the following purposes:
1. To elect the Board of Directors for the following year.
2. To approve a series of amendments to the Company's Restated
1987 Stock Option Plan, including an increase in the maximum
number of shares of Common Stock authorized for issuance over
the term of the Option Plan from 15,640,000 to 18,140,000
shares.
3. To approve an amendment to the Company's 1988 Employee Stock
Purchase Plan to increase the number of shares issuable
thereunder by 750,000 shares and extend the term of the Plan
through December 31, 2001.
4. To approve an amendment to the bonus formula in effect under
the Company's Management Bonus Plan.
5. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December
28, 1997.
6. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Stockholders of record at the close of
business on March 17, 1997 will be entitled to vote at the Annual Meeting. A
list of stockholders entitled to vote at the Annual Meeting will be available
for inspection at the offices of the Company. Whether or not you plan to attend
the Annual Meeting in person, please sign, date and return the enclosed proxy in
the reply envelope provided. If you attend the Annual Meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
Annual Meeting will be counted. The prompt return of your proxy will assist us
in preparing for the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Stephen C. Johnson,
President and Chief Executive Officer
Tu Chen,
Chairman of the Board
San Jose, California
April 4, 1997
<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1997
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Komag, Incorporated, a Delaware corporation (the "Company"), for use at the
Annual Meeting to be held on May 14, 1997. The Annual Meeting will begin at
10:00 a.m. at Komag, Incorporated, Building 9, 1705 Automation Parkway, San
Jose, CA 95131. Stockholders of record on March 17, 1997 will be entitled to
notice of and to vote at the Annual Meeting.
This Proxy Statement and accompanying proxy (the "Proxy") were first
mailed to stockholders on or about April 7, 1997.
Voting
On March 17, 1997, the record date for determination of stockholders
entitled to vote at the Annual Meeting, there were 51,888,768 shares of Common
Stock outstanding. Each stockholder is entitled to one (1) vote for each share
of Common Stock held by such stockholder. Directors will be elected by a
plurality vote. Other matters submitted for stockholder approval at this Annual
Meeting will be decided by the affirmative vote of a majority of the shares
present or represented and entitled to vote on each such matter. Abstentions
with respect to any matter other than the election of directors are treated as
shares present or represented and entitled to vote on that matter and thus have
the same effect as negative votes. If shares are not voted by the broker who is
the record holder of the shares, or if shares are not voted in other
circumstances in which proxy authority is defective or has been withheld with
respect to any matter, these non-voted shares are not deemed to be present or
represented for purposes of determining whether stockholder approval of that
matter has been obtained. Each stockholder voting for the election of directors
may cumulate such stockholder's vote. Under cumulative voting, a stockholder is
allowed one (1) vote per share multiplied by the number of directors to be
elected (nine (9) at this meeting) and may cast such cumulative total for one
(1) nominee or may distribute such number among as many nominees as such
stockholder chooses.
Revocability of Proxies
Any person giving a proxy has the power to revoke it at any time before
its exercise. A proxy may be revoked by filing with the Secretary of the Company
at the Company's principal executive office, 1704 Automation Parkway, San Jose,
California, 95131, a notice of revocation or another signed proxy with a later
date. You may also revoke your proxy by attending the Annual Meeting and voting
in person.
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Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement and any
additional soliciting materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward these solicitation materials to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
ITEM NO. 1 --
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall be
comprised of between eight (8) and twelve (12) directors, with the exact number
to be fixed by the Board. The currently authorized number is nine (9) directors.
At the Annual Meeting, nine (9) directors will be elected to serve until the
Company's next Annual Meeting and until their successors are elected and
qualified. The Board of Directors has selected nine (9) nominees, all of whom
are current directors of the Company.
Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unavailable to
serve. Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR the nominees named below. The nine (9) candidates receiving
the highest number of affirmative votes of the shares entitled to vote at the
Annual Meeting will be elected directors of the Company.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote FOR the
election of each of the following nominees to serve as directors of the Company
for the ensuing year until the next Annual Meeting at which time their
successors are elected and qualified.
Directors and Nominees
<TABLE>
Set forth below is information regarding the directors and nominees,
including information furnished by them as to principal occupations, certain
other directorships held by them, any arrangements pursuant to which they were
selected as directors or nominees and their ages as of March 17, 1997.
<CAPTION>
Year
First
Principal Elected
Name Occupation Age Director
---- ---------- --- --------
<S> <C> <C> <C>
Tu Chen(1)(2)..................... Chairman of the Board of the Company 62 1983
Stephen C. Johnson(1)(2).......... President and Chief Executive Officer of the 54 1983
Company
Craig R. Barrett(4)(5)............ Executive Vice President and 57 1989
Chief Operating Officer, Intel Corporation
2
<PAGE>
Chris A. Eyre(1)(3)............... Private Investor 50 1983
Irwin Federman(4)(5).............. General Partner, U.S. Venture Partners 61 1983
George A. Neil(1)(3).............. Senior Vice President, Asahi Glass America, Inc. 59 1994
Max Palevsky(4)(5)................ Private Investor 72 1984
Anthony Sun(3).................... General Partner, Venrock Associates 44 1983
Masayoshi Takebayashi(1)(4)....... President, Chief Executive Officer, 61 1992
Kobe Precision, Incorporated
<FN>
(1) Member of the Nominating Committee.
(2) Member of the Special Stock Option Plan Administration Committee.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Member of the Primary Stock Option Plan Committee.
</FN>
</TABLE>
Business Experience of Directors and Nominees
Dr. Chen is a founder of the Company and has served as Chairman of the
Board of the Company 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 is a director of Asahi Komag Co., Ltd. and
Headway Technologies, Incorporated.
Mr. Johnson is a founder of the Company and has served as President,
Chief Executive Officer and a director of the Company since September 1983. Mr.
Johnson is a director of Komag Overseas, Ltd., Asahi Komag Co. Ltd., Komag
Material Technology, Incorporated, Dastek Holding Company, Dastek (M) Sdn. Bhd.,
3COM Corporation and Uniphase Corporation. 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.
Dr. Barrett has served as a director of the Company since April 1989.
Since 1974 he has been employed by Intel Corporation in a variety of capacities,
currently as a director (elected January 15, 1992) and as Executive Vice
President and Chief Operating Officer. From 1989 to 1990, Dr. Barrett was Senior
Vice President and General Manager of the Microcomputer Components Group. From
1987 to 1989, he was Senior Vice President and General Manager of the Components
Technology and Manufacturing Group, and from 1985 to 1987, he served as Vice
President and General Manager of the Components Technology and Manufacturing
Group.
Mr. Eyre has served as a director of the Company since September 1983.
Mr. Eyre is a private investor and from 1980 to 1987 served as a general partner
of Merrill, Pickard, Anderson & Eyre, a general partnership which manages a
series of venture capital partnerships.
Mr. Federman has served as a director of the Company since September
1983. In April 1990, Mr. Federman joined U.S. Venture Partners, a general
partnership which manages a series of venture capital partnerships, as a general
partner. From February 1988 to March 1990, Mr. Federman served as Managing
Director of Dillon, Read & Co. Incorporated, an investment banking and
securities firm. From 1979 until August 1987, Mr. Federman was President and
Chief Executive Officer of Monolithic Memories, Incorporated. Mr. Federman was
elected Vice Chairman of the Board of Directors of Advanced Micro Devices,
Incorporated ("AMD") when Monolithic Memories merged with AMD, and served in
that capacity until January 1988. He is also a director of
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Western Digital Corporation, SanDisk Corporation, Checkpoint Software
Technologies, Ltd., and TelCom Semiconductor, Incorporated.
Mr. Neil has served as Senior Vice President of Asahi Glass America,
Incorporated since January 1990. From March 1989 to January 1990, Mr. Neil was a
consultant and President for Frenchtown Ceramics, a manufacturer of electronics
and industrial ceramics. From August 1988 to July 1990, Mr. Neil was a
consultant and President for Thunderbird Technologies, a company specializing in
high-speed, low power integrated circuits. From May 1986 to May 1988, Mr. Neil
served as Executive Vice President of Ceramic Process Systems, a manufacturer of
precision electronic molded ceramics. From October 1961 to May 1986, Mr. Neil
served in various management positions with Corning, Incorporated, including
Executive Vice President of Iwaki Glass and President of Corning Japan. Mr. Neil
was selected as a nominee pursuant to the terms of a Common Stock Purchase
Agreement between the Company and Asahi Glass Co., Ltd. (See "Additional
Information--Certain Relationships and Related Transactions" below).
Mr. Palevsky has served as a director of the Company since November
1984. He was a member of the Governing Board of the Institute for Advanced
Study, Princeton, New Jersey. Mr. Palevsky retired as a director and Chairman of
the Executive Committee of Xerox Corporation in 1972. He is a director of Intel
Corporation.
Mr. Sun has served as a director of the Company since September 1983.
Since 1979, he has been associated with Venrock Associates, a venture capital
partnership, and has been a general partner since 1980. Mr. Sun is a director of
Cognex Corporation, Conductus, Incorporated, Inference Corp., Award Software
International, Centura Software Corporation, Fractal Design Corporation,
Worldtalk Communications Corporation, and several privately held companies.
Mr. Takebayashi has served as a director of the Company since May 1992.
Since September 1964, he has served in various positions with Kobe Steel, Ltd.
and its subsidiaries, most recently as President, Chief Executive Officer of
Kobe Precision, Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd.,
since January 1988. From January 1986 to December 1988, he was the General
Manager, International Marketing and Sales Overseas Department of the Aluminum &
Copper Division of Kobe Steel, Ltd. He is a member of the board of directors for
Kobe Precision Technology Malaysia, Bhd., and a member of the Board of Directors
of Komag Material Technology, Incorporated. Mr. Takebayashi was selected as a
nominee pursuant to the terms of a Common Stock Purchase Agreement between the
Company and Kobe Steel USA Holdings Incorporated. (See "Additional
Information--Certain Relationships and Related Transactions" below.)
Board Committees and Meetings
During the fiscal year ended December 29, 1996, the Board of Directors
held four (4) meetings. During this period, each of the directors, except Mr.
Barrett, attended or participated in at least seventy-five percent (75%) of the
aggregate number of Board of Directors meetings and committee meetings of the
Board on which he served. Mr. Barrett attended two (2) Board of Directors
meetings. The Company has five standing committees: an Audit Committee, a
Compensation Committee, a Primary Stock Option Plan Committee, a Nominating
Committee, and a Special Stock Option Plan Administration Committee.
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent auditors and reviewing reports of the
Company's auditors regarding the Company's accounting practices and systems of
internal accounting controls. The Audit Committee formally met four (4) times
during the last fiscal year. This Committee currently consists of Messrs. Eyre,
Neil and Sun.
The Compensation Committee reviews and approves the Company's general
compensation policies and sets compensation levels for the Company's executive
officers. This Committee currently consists of Dr. Barrett and Messrs. Federman,
Palevsky and Takebayashi. During fiscal 1996, the Compensation Committee
formally met two
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<PAGE>
(2) times. The Compensation Committee also met in January 1997 for discussion of
fiscal 1996 and 1997 compensation matters.
The Primary Stock Option Plan Committee administers the discretionary
option grant program of the Company's Restated 1987 Stock Option Plan (the
"Option Plan") with respect to the Company officers who are subject to the
short-swing profit restrictions of the Federal securities laws. The Committee
will also administer the Company's Employee Stock Purchase Plan. This Committee
was created in December 1996 and currently consists of Dr. Barrett and Messrs.
Federman and Palevsky. The Primary Stock Option Plan Committee met in January
1997 for discussion of fiscal 1996 and 1997 stock option matters.
The Nominating Committee is responsible for recommending nominees for
members of the Company's Board of Directors. This Committee currently consists
of Dr. Chen, and Messrs. Eyre, Johnson, Neil and Takebayashi, with Dr. Chen
serving as Chairman. This Committee held one (1) meeting in fiscal year 1996.
The Nominating Committee has not instituted proceedings to consider nominees
recommended by security holders, but may do so in the future.
The Special Stock Option Plan Administration Committee (the "Secondary
Committee") has separate but concurrent jurisdiction with the Primary Stock
Option Plan Committee to administer the discretionary option grant program of
the Option Plan with respect to non-officer employees. The option grants made by
the Secondary Committee will comply with certain guidelines established by the
Primary Stock Option Plan Committee. The Secondary Committee currently consists
of Dr. Chen and Mr. Johnson and performs its duties on an ongoing basis.
Director Remuneration
Non-employee Board members receive $4,500 per fiscal quarter and a
$1,000 meeting fee for each Board of Directors meeting or Board Committee
meeting attended, including telephonic meetings. Non-employee Board members are
also eligible to receive periodic option grants under the Automatic Option Grant
Program in effect for them under the Option Plan. Each individual who first
becomes a non-employee Board member, whether through election by the
stockholders or appointment by the Board, will receive, at the time of such
initial election or appointment, a stock option grant for 30,000 shares of
Common Stock. In addition, on the date of each Annual Stockholders Meeting, each
individual who is re-elected as a non-employee Board member will receive an
option grant for 7,500 shares of Common, provided such individual has served on
the Board for at least six months. Each option grant will have an exercise price
equal to the fair market value of the option shares on the grant date and will
have a maximum term of ten years, subject to earlier termination upon the
optionee's cessation of Board service.
Each of the non-employee Board Members re-elected at the 1996 Annual
Meeting (Messrs. Barrett, Eyre, Federman, Neil, Palevsky, Sun and Takebayashi)
received at the time an option grant for 7,500 shares with an exercise price of
$34.1093 per share. Each option will become exercisable for all the option
shares upon the optionee's completion of one year of Board service measured from
the grant date. However, the option will become immediately exercisable for all
of the option shares upon an acquisition of the Company by merger, consolidation
or asset sale or upon certain other changes in control or ownership of the
Company. Upon the successful completion of a hostile tender offer for more than
50% of the Company's outstanding Common Stock, each of these options will
automatically be canceled, and each optionee will in return receive a cash
distribution from the Company in an amount per canceled option share equal to
the excess of (i) the highest reported price per share of Common Stock paid in
the tender offer over (ii) the option exercise price payable per share.
5
<PAGE>
ITEM NO. 2 -- APPROVAL OF AMENDMENTS TO THE
RESTATED 1987 STOCK OPTION PLAN
Introduction
The stockholders are being asked to approve a series of amendments to
the Company's Restated 1987 Stock Option Plan (the "Option Plan") that will
effect the following changes: (i) increase the maximum number of shares of
Common Stock authorized for issuance over the term of the Option Plan from
15,640,000 to 18,140,000 shares, (ii) render the non-employee Board members
eligible to receive option grants under the Discretionary Option Grant Program
in effect under the Option Plan, (iii) allow unvested shares issued under the
Option Plan and subsequently repurchased by the Company at the option exercise
price paid per share to be reissued under the Option Plan, (iv) remove certain
restrictions on the eligibility of non-employee Board members to serve as Plan
Administrator and (v) effect a series of additional changes to the provisions of
the Option Plan (including the stockholder approval requirements) in order to
take advantage of the recent amendments to Rule 16b-3 of the Securities and
Exchange Commission which exempts certain officer and director transactions
under the Option Plan from the short-swing liability provisions of the Federal
securities laws.
The Board of Directors adopted these amendments in March 1997, subject
to stockholder approval at the Annual Meeting. The Board believes the increase
in the number of shares available for issuance under the Option Plan is
necessary in order to assure that the Company will have a sufficient reserve of
Common Stock to continue to utilize option grants for purposes of attracting and
retaining the services of key individuals essential to the Company's long-term
success. The Board believes the other amendments are needed in order to provide
the Company with more opportunities to make equity incentives available to the
non-employee Board members as an inducement for their continued service and to
facilitate plan administration in light of the new changes to Rule 16b-3.
However, no option grant made under the Option Plan as amended will have value
unless the market price of the Common Stock appreciates over the market price in
effect at the time of grant.
The following is a summary of the principal features of the amended
Option Plan, together with the tax and accounting implications of transactions
effected under the Option Plan. The summary, however, is not intended to be a
complete description of all the terms of the Option Plan. A copy of the Option
Plan will be furnished by the Company to any stockholder upon written request to
the Secretary of the Company at the corporate offices in San Jose, California.
Structure
The Option Plan is divided into two (2) separate components: the
Discretionary Option Grant Program and the Automatic Option Grant Program. Under
the Discretionary Option Grant Program, options may be issued from time to time
to key employees (including officers), non-employee Board members, and
consultants of the Company (or its parent or subsidiary companies) who
contribute to the management, growth and financial success of the Company (or
its parent or subsidiary companies). Under the Automatic Option Grant Program, a
series of automatic option grants will be made to the non-employee Board members
over their continued period of service on the Board.
As of March 17, 1997, approximately 368 employees (including fifteen
(15) executive officers), and seven (7) non-employee Board members were eligible
to participate (assuming approval of this Item No. 2) in the Discretionary
Option Grant Program. The seven (7) non-employee Board members were also
eligible to participate in the Automatic Option Grant Program.
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Administration
The Option Plan (other than the Automatic Option Grant Program) is
administered with respect to the Company's executive officers subject to the
short-swing profit liabilities of Section 16 of the Securities Exchange Act of
1934 ("Section 16 Insiders") by the Primary Stock Option Plan Committee of the
Board. With respect to all other participants, the Option Plan may be
administered by either the Primary Stock Option Plan Committee or the Special
Stock Option Plan Administration Committee, a committee of one or more
employee-Board members appointed by the Board. Each of the committees will be
referred to in this summary as the Plan Administrator, and each Plan
Administrator will have complete discretion (subject to the provisions of the
Option Plan) to authorize option grants under the Option Plan within the scope
of its administrative jurisdiction. However, all grants under the Automatic
Option Grant Program are to be made in strict compliance with the provisions of
that program, and no administrative discretion will be exercised by the Plan
Administrator with respect to the grants made under that program.
Share Reserve
The total number of shares of Common Stock issuable over the term of
the Option Plan may not exceed 18,140,000 shares, (including the 2,500,000-share
increase subject to approval by the stockholders as part of this Item No. 2).
However, no individual participating in the Option Plan may be granted stock
options for more than 3,000,000 shares in the aggregate over the term of the
Option Plan, exclusive of any option grants made to that individual prior to
January 1, 1994. Should any option terminate prior to exercise in full, the
shares subject to the unexercised portion of that option will be available for
subsequent option grants. In addition, any unvested shares issued under the Plan
and subsequently repurchased by the Company at the original exercise price paid
per share pursuant to the Company's repurchase rights under the Plan will be
added back to the number of shares of Common Stock reserved for issuance under
the Plan and will accordingly be available for reissuance through one or more
subsequent option grants made under the Plan.
As of March 17, 1997, 6,703,520 shares were subject to outstanding
option grants under the Option Plan, 3,433,176 shares remained available for
future grant (assuming approval of this Item No. 2), and 8,003,304 shares have
been issued under the Option Plan. Several important features of the outstanding
options should be noted:
* No outstanding option has an exercise price per share less
than the fair market value per share of the Common Stock on the grant date.
* Approximately 75% of the outstanding options are special
"evergreen" options which are intended to maintain the optionee's holdings at a
sufficient level to provide a meaningful incentive for such individual to
continue in the Company's employ. These evergreen options are accordingly
granted to individuals who already hold one or more outstanding options under
the Option Plan and utilize a special vesting schedule under which these options
will not become exercisable for any of the option shares until the
thirty-seventh (37th) month from the date of grant. Once the evergreen option
does become exercisable, that option will vest in a series of twelve (12)
successive equal monthly installments over the optionee's period of continued
employment with the Company. Accordingly, a substantial portion of the
outstanding options will provide no value or benefit to the option holders
unless those individuals make a long-term commitment to continue in the
Company's employ.
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Changes in Capitalization
If any change is made to the Common Stock issuable under the Option
Plan (by reason of any merger, consolidation or reorganization of the Company or
any recapitalization, stock split, stock dividend, combination of shares,
exchange of shares or other similar change affecting the outstanding Common
Stock without the Company's receipt of consideration), then appropriate
adjustments will be made to the maximum number and/or class of securities
available for issuance under the Option Plan, the number and/or class of
securities and price per share in effect under each outstanding option under the
Discretionary Option Grant Program, and the maximum number and/or class of
securities for which stock options may be granted to any one participant after
December 31, 1993. Under the Automatic Grant Program, the number and/or class of
securities for which automatic option grants are subsequently to be made to
newly-elected or re-elected non-employee Board members and the number and/or
class of securities and price per share in effect under each automatic grant
outstanding would be similarly adjusted. All such adjustments will be designed
so as to preclude the enlargement or dilution of participant rights and benefits
under the Option Plan.
Valuation
The fair market value per share of Common Stock on any relevant date
under the Option Plan will be the closing selling price per share on that date
on the Nasdaq National Market. On March 17, 1997, the closing selling price per
share was $29.00.
Discretionary Option Grant Program
Grants
Under the Discretionary Option Grant Program, the Plan Administrator
has complete discretion to determine the eligible individuals who are to receive
discretionary option grants, the time or times when those grants are to be made,
the number of shares subject to each such grant, the vesting schedule applicable
to the grant, the status of that grant as an incentive stock option or
non-statutory option under the Federal tax laws and the remaining terms of each
such grant, subject to the provisions of the Option Plan and applicable Federal
tax laws. All expenses incurred in administering the Option Plan will be paid by
the Company.
Price and Exercisability
The exercise price per share for options granted under the
Discretionary Option Grant Program may not be less than 100% of the fair market
value per share of Common Stock on the grant date. No granted option will have a
term in excess of ten (10) years, and each option will become exercisable in a
series of installments over the optionee's period of service with the Company.
The exercise price may be paid in cash or in shares of the Common Stock
of the Company. Outstanding options may also be exercised through a same-day
sale program pursuant to which a designated brokerage firm is to effect an
immediate sale of the shares purchased under the option and pay over to the
Company, out of the sales proceeds available on the settlement date, sufficient
funds to cover the exercise price for the purchased shares plus all applicable
withholding taxes.
No optionee has any stockholder rights with respect to the option
shares until such optionee has exercised the option and paid the exercise price
for the purchased shares. Options are generally not assignable or transferable
other than by will or the laws of inheritance and, during the optionee's
lifetime, the option may be exercised only by such optionee. However, the Plan
Administrator may allow non-statutory options to be transferred or assigned
during the optionee's lifetime to one or more members of the optionee's
immediate family or to a trust established exclusively for one or more such
family members, to the extent such transfer or assignment is in furtherance of
the optionee's estate plan.
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Termination of Service
Upon the optionee's cessation of employment or service, the optionee
will have a limited period of time in which to exercise his or her outstanding
options for any shares in which the optionee is vested at that time. However, at
any time while the options remain outstanding, the Plan Administrator will have
complete discretion to extend the period following the optionee's cessation of
employment or service during which his or her outstanding options may be
exercised. The Plan Administrator will also have complete discretion to
accelerate the exercisability or vesting of those options in whole or in part at
any time.
Corporate Transaction
Each outstanding option under the Discretionary Option Grant Program
will become immediately exercisable for all of the shares of Common Stock
subject to that option in the event of an acquisition of the Company by merger,
consolidation or asset sale, unless the option is assumed by the successor
corporation. Immediately following the consummation of such acquisition, all
outstanding options will terminate, except to the extent assumed by the
successor corporation (or its parent company).
Limited Stock Appreciation Rights
Officers and non-employee Board members of the Company subject to the
short-swing profit restrictions of the Federal securities laws may be granted
limited stock appreciation rights in tandem with their outstanding options. Any
option with such a limited stock appreciation right will automatically be
canceled upon the completion of a hostile tender offer for more than 50% of the
Company's outstanding shares, and the optionee will in return be entitled to a
cash distribution from the Company in an amount per canceled option share equal
to the excess of (i) the highest reported price per share of Common Stock paid
in the tender offer over (ii) the option exercise price payable per share.
Automatic Option Grant Program
Terms
Under the Automatic Option Grant Program, non-employee Board members
will receive option grants at specified intervals over their period of Board
service. The terms and conditions of these special grants may be summarized as
follows:
1. Each individual who becomes a non-employee Board member, whether
through election by the stockholders or appointment by the Board, will
automatically be granted, at the time of such initial election or appointment, a
non-statutory stock option to purchase 30,000 shares of Common Stock to become
exercisable in a series of four (4) successive equal annual installments upon
the optionee's completion of each year of Board service over the four (4)-year
period measured from the grant date.
2. On the date of each Annual Stockholders Meeting, each individual who
is re-elected as a non-employee Board member with at least six (6) months of
Board service will receive a non-statutory stock option to purchase an
additional 7,500 shares of Common Stock to become 100% exercisable upon the
optionee's completion of one (1) year of Board service measured from the grant
date.
3. The exercise price per share will be equal to 100% of the fair
market value per share of Common Stock on the automatic grant date, and each
automatic option is to have a maximum term of ten (10) years measured from such
grant date.
9
<PAGE>
4. Each automatic option will remain exercisable for a six (6) month
period following the optionee's termination of service as a Board member.
However, should the optionee die while serving as a Board member or during the
six (6)-month period following his or her cessation of Board service, then such
option will remain exercisable for a twelve (12)-month period following such
optionee's death and may be exercised by the personal representative of the
optionee's estate or the person to whom the grant is transferred by the
optionee's will or the laws of inheritance. In no event, however, may the option
be exercised after the expiration date of the option term. During the applicable
post-service exercise period, the option may not be exercised for more than the
number of shares (if any) for which the option is exercisable at the time of the
optionee's cessation of Board service.
5. Each automatic option will become immediately exercisable for all of
the option shares as fully-vested shares of Common Stock in the event the
Company is acquired by merger, consolidation or asset sale or should there occur
certain other changes in control or ownership of the Company.
6. Each automatic option will automatically be canceled upon the
successful completion of a hostile tender offer, and the optionee will in return
be entitled to a cash distribution from the Company in an amount per canceled
option share equal to the excess of (i) the highest reported price per share of
Common Stock paid in the tender offer over (ii) the option price payable per
share. Stockholder approval of this Item No. 2 will constitute pre-approval of
each option subsequently granted with such an automatic cancellation provision
and the subsequent cancellation of that option in accordance with such
provision.
7. The remaining terms and conditions of each automatic option grant
will in general conform to the terms summarized above for option grants made
under the Discretionary Option Grant Program and will be incorporated into the
option agreement evidencing the automatic grant.
Options Granted
The table below shows, as to each of the Named Executive Officers and
each of the indicated groups, the following information with respect to stock
options granted during the period from January 1, 1996 to March 17, 1997 (i) the
number of shares of Common Stock subject to options granted under the Option
Plan during that period and (ii) the weighted average option price per share for
such options. Typically options held by the Named Executive Officers and other
current executive officers do not become exercisable for any of the option
shares until the thirty-seventh (37th) month following the date of grant. Each
option will thereupon become exercisable in a series of twelve (12) successive
equal monthly installments over the optionee's period of continued employment
with the Company. However, of the 1,092,732 option shares granted to executive
officers during January 1, 1996 to March 17, 1997: (i) 538,150 shares will
become exercisable per the schedule noted above; (ii) 235,000 shares granted to
new officers will vest incrementally over the next four (4) years of their
continued service; and (iii) 319,582 special retention grant shares will become
exercisable at twelve (12) month intervals over a three to four year period.
Over 75% of the options held by employees who are not executive officers of the
Company have the same vesting schedule (beginning in the 37th month) as applied
to the executive officers. In addition, Messrs. Barrett, Eyre, Federman,
Palevsky, Sun and Takebayashi, as non-employee Board members, will, upon
re-election to the Board at the Annual Meeting, receive at that time an
automatic option grant for 7,500 shares with an exercise price per share equal
to the closing selling price per share of Common Stock on the grant date and
vesting as specified in the Automatic Option Grant Program.
10
<PAGE>
------------------------------------ -------------------- --------------------
Number of Option Weighted Average
Name Shares Granted Option Price
Stephen C. Johnson 136,791 $26.59
Tu Chen 136,791 $26.59
Willard Kauffman 45,900 $25.40
William L. Potts, Jr. 45,900 $25.53
William V. Whitmer 26,100 $25.46
All current executive 1,092,732 $26.34
officers as a group (15 persons)
All current directors 52,500 $34.11
(other than executive officers)
as a group (7 persons)
All employees including current 1,884,463 $25.31
officers, who are not executive
officers, as a group (341 persons)
------------------------------------ -------------------- --------------------
Amendment and Termination of the Plan
The Board may amend or modify the Option Plan in any or all respects
whatsoever. However, certain amendments to the Option Plan may require
stockholder approval pursuant to applicable laws or regulations.
The Board may terminate the Option Plan at any time, but in all events
the Option Plan will terminate upon the earlier of January 22, 2002 or the date
all shares available for issuance under the Option Plan are issued or canceled
pursuant to the exercise or surrender of options granted under the Option Plan.
Any options outstanding at the time of the termination of the Option Plan will
remain in force in accordance with the provisions of the instruments evidencing
such grants.
Federal Tax Consequences
Options granted under the Option Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to satisfy such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
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<PAGE>
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition.
For Federal tax purposes, dispositions are divided into two (2)
categories: qualifying and disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or disposition is made more than
two (2) years after the grant date of the option and more than one (1) year
after the exercise date. If the optionee fails to satisfy either of these two
holding periods prior to sale or disposition, then a disqualifying disposition
of the purchased shares will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be taxable
as ordinary income to the optionee. Any additional gain or loss recognized upon
the disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased
shares, the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the date the option was exercised over (ii) the
exercise price paid for such shares. If the optionee makes a qualifying
disposition of the purchased shares, the Company will not be entitled to any
income tax deduction.
Non-statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price, and the optionee will be required to satisfy the tax withholding
requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee in connection with the
exercise of the non-statutory option. The deduction will in general be allowed
for the taxable year in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights. If an option granted under the Option Plan
is canceled for an appreciation distribution paid in cash, the recipient will
generally realize ordinary income, equal in amount to the cash received, and the
Company will be entitled to a corresponding income tax deduction.
Deductibility of Executive Compensation. The Company anticipates that
any compensation deemed paid by it in connection with disqualifying dispositions
of incentive stock option shares or exercises of non-statutory options will
qualify as performance-based compensation for purposes of Code Section 162(m)
and will not have to be taken into account for purposes of the one (1) million
dollar limitation per covered individual on the deductibility of the
compensation paid to certain executive officers of the Company. Accordingly, all
compensation deemed paid under the Option Plan will remain deductible by the
Company without limitation under Code Section 162(m).
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<PAGE>
Accounting Treatment
The Company's earnings per share is computed using the weighted average
number of shares of Common Stock outstanding and dilutive common stock
equivalents. Common stock equivalents include shares issuable upon the assumed
exercise of outstanding options reflected under the treasury stock method.
Under generally accepted accounting principles, the grant or the
exercise of options to purchase shares of the Company's Common Stock with an
exercise price equal to the fair market value of the Company's Common Stock on
the grant date does not generally require a charge to the Company's earnings.
However, the Company is required to disclose in the notes to the Company's
financial statements the fair value of options granted under the Option Plan and
the pro forma impact on the Company's annual net income and earnings per share
as though the computed fair value of such options had been treated as
compensation expense.
Recommendation of the Board of Directors
The affirmative vote of a majority of the issued and outstanding shares
present or represented and entitled to vote at the 1997 Annual Meeting is sought
for approval of the amendments to the Option Plan. The Board of Directors
believes that option grants under the Option Plan play an important role in the
Company's efforts to attract, employ, and retain employees, directors, and
consultants of outstanding ability. Accordingly, the Board of Directors
recommends that the stockholders vote FOR this proposal. If the stockholders do
not approve the proposal, then any options granted on the basis of the
2,500,000-share increase which forms part of this proposal will terminate
without becoming exercisable for any of the shares of Common Stock subject to
those options, and no further options will be granted on the basis of such share
increase. In addition, the non-employee Board members will not become eligible
to participate in the Discretionary Option Grant Program, and any unvested
shares repurchased by the Company at the option exercise price paid per share
will not be added back to the share reserve for reissuance. The Option Plan
will, however, continue to remain in effect, and option grants may continue to
be made pursuant to the provisions of the Option Plan in effect prior to the
amendments summarized in this Item No. 2, until the available reserve of Common
Stock as last approved by the stockholders has been issued pursuant to option
grants made under the Option Plan.
New Plan Benefits
As of March 17, 1997, no options have been granted on the basis of the
2,500,000-share increase which forms part of this Item No. 2.
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<PAGE>
ITEM NO. 3 -- APPROVAL OF AMENDMENT
TO 1988 EMPLOYEE STOCK PURCHASE PLAN
Introduction
The stockholders are being asked to vote on a proposal to approve an
amendment to the Company's 1988 Employee Stock Purchase Plan (the "Purchase
Plan") which will (i) increase the number of shares available for issuance by
750,000 shares of Common Stock from 2,800,000 to 3,550,000 shares and (ii)
extend the termination date of the Purchase Plan from December 31, 1998 to
December 31, 2001.
The Board of Directors believes that it is in the best interests of the
Company's stockholders to increase the number of shares reserved for issuance
under the Purchase Plan and to extend the term of such plan so that eligible
employees of the Company and its participating affiliates will continue to have
the opportunity to acquire an equity interest in the Company and thereby further
align their interests with those of the stockholders.
The Purchase Plan was adopted by the Board of Directors on January 21,
1988, and was approved by the stockholders on June 7, 1988. On January 22, 1997,
the Board of Directors adopted the amendment to the Purchase Plan which is the
subject of this Item No. 3.
The terms and provisions of the Purchase Plan, as amended, are
summarized below. This summary, however, does not purport to be a complete
description of the Purchase Plan. Copies of the actual plan document may be
obtained by any stockholder upon written request to the Secretary of the Company
at the corporate offices in San Jose, California.
Administration
The Purchase Plan will be administered by a committee of two or more
Board members appointed by the Board. Effective December 1, 1996, the Purchase
Plan will be administered by the new Primary Stock Option Plan Committee. Such
Committee, as Plan Administrator, has full authority to adopt administrative
rules and procedures and to interpret the provisions of the Purchase Plan. All
costs and expenses incurred in the administration of the Purchase Plan are paid
by the Company without charge to participants.
Securities Subject to the Purchase Plan
The maximum number of shares of Common Stock that may be sold to
participants over the term of the Purchase Plan may not exceed 3,550,000 shares,
assuming stockholder approval of this Item No. 3. However, not more than 795,646
shares may be issued under the Purchase Plan after March 17, 1997.
The shares of Common Stock issuable under the Purchase Plan may be
either shares newly issued by the Company or shares reacquired by the Company,
including shares purchased on the open market.
14
<PAGE>
In the event any change is made to the Company's outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
combination of shares, or other similar change in the corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
purchasable under the Purchase Plan, (ii) the class and maximum number of
securities purchasable per participant on any one purchase date, and (iii) the
class and number of securities purchasable and the price per share payable under
each outstanding purchase rights. Such adjustments will prevent any dilution or
enlargement of participant rights under the Purchase Plan.
Eligibility and Participation
Any individual who is employed on a basis under which he or she is
expected to work more than twenty (20) hours per week for more than five (5)
months per calendar year in the employ of the Company or any participating
parent or subsidiary corporation (including any corporation which subsequently
becomes such at any time during the term of the Purchase Plan) is eligible to
participate in the Purchase Plan upon commencement of employment. Currently,
Komag Materials Technology and Komag U.S.A. (Malaysia) Sdn. are participating
corporate affiliates.
As of March 17, 1997, 2,754,354 shares of Common Stock had been issued
under the Purchase Plan, and 795,646 shares were available for future issuance
(assuming stockholder approval of this Item No. 3). As of March 17, 1997,
approximately 4,202 employees (including 15 executive officers) were eligible to
participate in the Purchase Plan.
Purchase Periods
The Purchase Plan will be implemented in a series of overlapping
purchase periods, each to be of duration (not to exceed twenty-four (24) months
per purchase period) as determined by the Plan Administrator prior to the
commencement date of the purchase period. Purchase periods may begin, at the
Plan Administrator's discretion, on the first day or the first Monday of each
fiscal quarter or each alternate fiscal quarter. Accordingly, either four (4) or
two (2) separate purchase periods may commence in each fiscal year during which
the Purchase Plan remains in existence.
A participant will have a separate purchase right for each purchase
period in which he or she participates. The purchase right will be granted on
the first day of the purchase period and will automatically be exercised on the
last date of each successive three (3)-month or six (6)-month period within that
purchase period ("Purchase Date"). An employee may participate in only one
purchase period at a time. Accordingly, an employee who wishes to join a new
purchase period must withdraw from the current purchase period in which he or
she is participating.
Purchase Price
The purchase price of the Common Stock acquired on each Purchase Date
will be equal to eighty-five percent (85%) of the lower of (i) the fair market
value per share of Common Stock on the date on which such purchase right is
granted or (ii) the fair market value on such Purchase Date. The fair market
value of Common Stock on any relevant date will be the closing price per share
on such date as reported on the Nasdaq National Market. The fair market value on
March 17, 1997 was $29.00 per share.
15
<PAGE>
Purchase Rights and Stock Purchases
Each participant may authorize periodic payroll deductions in any
multiple of one percent (1%) (up to a maximum of ten percent (10%)) of his or
her base pay during the relevant purchase period for the purchase of Common
Stock under the Purchase Plan. On each Purchase Date, the payroll deductions of
each participant will be automatically applied to the purchase of whole shares
of Common Stock at the purchase price in effect for that Purchase Date. Unless
the participant's purchase right is terminated or the participant no longer
remains eligible to participate in the Purchase Plan, any amount remaining in a
participant's account after the purchase of whole shares will be held for
purchase of Common Stock on the next quarterly or semi-annual Purchase Date
within the purchase period. The maximum number of shares purchasable by the
participant on any Purchase Date may not exceed 3,000 shares in the case of
quarterly Purchase Dates or 6,000 shares in the case of semi-annual Purchase
Dates.
Termination of Purchase Rights
The purchase right of a participant will terminate upon (i) the
participant's termination of employment or (ii) the participant's election to
withdraw from the Purchase Plan. Any payroll deductions which the participant
may have made with respect to the terminated purchase right will be refunded.
Stockholder Rights
No participant will have any stockholder rights with respect to the
shares covered by his or her purchase rights until the shares are actually
purchased on the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
Assignability
No purchase rights will be assignable or transferable by the
participant except by will or by laws of inheritance. The purchase rights,
during the lifetime of the participant, will be exercisable only by the
participant.
Merger or Liquidation of Company
In the event the Company or its stockholders enter into an agreement to
dispose of all or substantially all of the assets or outstanding capital stock
of the Company by means of a sale, merger or reorganization in which the Company
will not be the surviving corporation or in the event the Company is liquidated,
then all outstanding purchase rights will, in connection with the consummation
of such transaction, be exercised immediately prior to such transaction by
applying all payroll deductions previously collected from participants during
the purchase period to the purchase of whole shares of Common Stock.
Amendment and Termination
The Purchase Plan will terminate upon the earlier of (i) December 31,
2001 (assuming stockholder approval of this Item No. 3) or (ii) the date on
which all shares available for issuance thereunder are sold pursuant to
exercised purchase rights. However, the Board may at any time alter, suspend or
discontinue the Purchase Plan.
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The Board may not, without stockholder approval, (i) increase the
number of shares issuable under the Purchase Plan, except in connection with
certain changes in the Company's capital structure, (ii) alter the purchase
price formula so as to reduce the purchase price or (iii) modify the eligibility
requirements for participation in the Purchase Plan.
Stock Issuances
<TABLE>
The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated groups, the
number of shares of Common Stock purchased under the Purchase Plan between
January 1, 1996 and March 17, 1997, together with the weighted average purchase
price paid per share.
<CAPTION>
PURCHASE PLAN TRANSACTIONS
- ----------------------------------------------------------- ------------------------- ------------------------------
Number of Weighted Average
Name Purchased Shares Purchase Price
---- ---------------- --------------
<S> <C> <C>
Stephen C. Johnson 2,384 $8.91
Tu Chen 2,507 $8.47
Willard Kauffman 1,965 $10.79
William L. Potts, Jr. 1,746 $12.00
William V. Whitmer 1,783 $11.88
All executive officers as a group (15 persons) 21,715 $11.54
All employees, including current officers who are not 330,639 $14.53
executive officers, as a group (2,563 persons)
- ------------------------------------------------------------- ------------------------- ----------------------------
</TABLE>
New Plan Benefits
As of March 17, 1997, no purchase rights had been granted under the
Purchase Plan on the basis of the 750,000-share increase which forms part of
this Item No. 3.
Federal Tax Consequences
The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan or in the event the participant should die while still owning the purchased
shares.
17
<PAGE>
If the participant sells or otherwise disposes of the purchased shares
within two (2) years after his or her entry date into the offering period in
which such shares were acquired or within one (1) year after the date on which
those shares were actually purchased, then the participant will recognize
ordinary income in the year of sale or disposition equal to the amount by which
the fair market value of the shares on the purchase date exceeded the purchase
price paid for those shares, and the Company will be entitled to an income tax
deduction, for the taxable year in which such disposition occurs, equal in
amount to such excess.
If the participant sells or disposes of the purchased shares more than
two (2) years after his or her entry date into the offering period in which the
shares were acquired and more than one year after the purchase date of those
shares, then the participant will recognize ordinary income in the year of sale
or disposition equal to the lesser of (i) the amount by which the fair market
value of the shares on the sale or disposition date exceeded the purchase price
paid for those shares or (ii) fifteen percent (15%) of the fair market value of
the shares on the participant's entry date into that offering period. Any
additional gain upon the disposition will be taxed as a long-term capital gain.
The Company will not be entitled to an income tax deduction with respect to such
disposition.
If the participant still owns the purchased shares at the time of
death, the lesser of (i) the amount by which the fair market value of the shares
on the date of death exceeds the purchase price or (ii) fifteen percent (15%) of
the fair market value of the shares on his or her entry date into the offering
period in which those shares were acquired will constitute ordinary income in
the year of death.
Accounting Treatment
Under current accounting rules, the issuance of Common Stock under the
Purchase Plan will not result in a compensation expense chargeable against the
Company's reported earnings. However, the Company must disclose, in notes the to
the Company's financial statements, the pro forma impact which the purchase
rights granted under the Purchase Plan would have upon the Company's reported
earnings were the value of those purchase rights treated as compensation
expense.
Recommendation of the Board of Directors
The Company is seeking the affirmative vote of a majority of the issued
and outstanding shares present or represented and entitled to vote at the 1997
Annual Meeting for approval of the amendments to the Purchase Plan. The Board of
Directors believes that the amendments to the Purchase Plan are necessary in
order to continue to provide equity incentives to attract and retain the
services of high quality employees. For this reason, the Board of Directors
recommends that the stockholders vote FOR this proposal. If the stockholders do
not approve the proposal, then no purchase rights will be granted under the
Purchase Plan on the basis of the 750,000-share increase, and the Purchase Plan
will continue in effect until the earlier of (i) December 31, 1998, or (ii) the
date on which the available reserve of Common Stock under the Purchase Plan as
last approved by the stockholders is issued.
18
<PAGE>
ITEM NO. 4 --
APPROVAL OF AMENDMENT TO MANAGEMENT BONUS PLAN
The stockholders are being asked to approve an amendment to the
Company's Management Bonus Plan (the "Bonus Plan") which will change the formula
for calculating the dollar amount of the bonus pool available for distribution
each year so that one formula will be in effect if the Company's actual
operating income for the fiscal year equals or exceeds 66.67% of the operating
income target set for that year and a second formula will be in effect under
which a smaller pool will be available for distribution in the event the
Company's actual operating income does not reach 66.67% of the target for that
year.
The amendment was adopted by the Board of Directors on January 22,
1997, subject to stockholder approval at the Annual Meeting. Stockholder
approval is necessary in order to assure that the compensation paid under the
Bonus Plan will continue to qualify as performance-based compensation under
Internal Revenue Code Section 162(m). By reason of that Code provision, the
compensation which the Company pays to certain executive officers will be
deductible for federal income tax purposes only to the extent that compensation
does not exceed one (1) million dollars per covered individual for the fiscal
year. However, any compensation which qualifies as performance-based
compensation under Code Section 162(m) will not be subject to this dollar
limitation.
The following is a summary of the principal features of the Bonus Plan
as amended. The summary, however, does not purport to be a complete description
of all the provisions of the Bonus Plan. Any stockholder of the Company who
wishes to obtain a copy of the actual plan document may do so upon written
request to the Corporate Secretary at the Company's principal executive offices
in San Jose, California.
Purpose
The Bonus Plan will provide the Company's executive officers and other
eligible individuals with a meaningful incentive to contribute to the Company's
financial success by allowing them to share in a portion of the consolidated
operating income of the Company and one or more subsidiaries of the Company
selected by the Compensation Committee within the first ninety (90) days of each
fiscal year.
Administration
The Bonus Plan will be administered by the Compensation Committee. Each
Board member currently serving on this Committee qualifies as an "outside
director" pursuant to the applicable requirements of Internal Revenue Code
Section 162(m).
Eligibility
The individuals eligible for participation in the Bonus Plan will be
limited to the Company's executive officers. However, the Compensation Committee
will have the authority, exercisable at the start of any fiscal year, to include
as participants for that fiscal year one or more employees in certain specified
job grade levels who are not executive officers of the Company. In no event,
however, will any individual be eligible to participate in the Bonus
19
<PAGE>
Plan for a particular fiscal year, unless that individual has completed at least
six (6) months of employment with the Company or a participating subsidiary
prior to the end of that fiscal year.
The actual participants for each fiscal year will be selected by the
Compensation Committee. An executive officer, once selected, will continue to
participate in each succeeding fiscal year, unless the Compensation Committee
affirmatively elects, prior to the start of any fiscal year, to exclude that
individual from participation for one or more subsequent fiscal years.
As of March 17, 1997, 15 executive officers and approximately 296 other
individuals in the specified job grade levels were eligible for participation in
the Bonus Plan.
Aggregate Bonus Pool
The aggregate bonus pool payable under the Bonus Plan each fiscal year
will not exceed seven percent (7%) of the operating income of the Company and
the participating subsidiaries. In no case, however, will the pool exceed eight
percent (8%) of Company's total consolidated operating income for that year. In
each case, the calculations of operating income and consolidated operating
income will be in determined in accordance with generally accepted accounting
principles, adjusted to exclude the following: (i) any amounts accrued by the
Company or its subsidiaries pursuant to management bonus plans, discretionary
bonus plans or cash profit sharing plans and related employer payroll taxes for
such fiscal year, (ii) any discretionary or matching contributions made to the
Company's Savings and Deferred Profit-Sharing Plan or to the Company's Deferred
Compensation Plan for such fiscal year, (iii) all items of gain, loss or expense
for such fiscal year determined to be extraordinary or unusual in nature or
infrequent in occurrence or related to the disposal of a segment of a business
or related to a change in accounting principles, all as determined in accordance
with the standards established by Opinion No. 30 of the Accounting Principles
Board (APB No. 30), (iv) all items of gain, loss or expense for such fiscal year
related to restructuring charges of subsidiaries whose operations are not
included in Operating Income for such fiscal year, (v) all items of gain, loss
or expense for such fiscal year related to discontinued operations which do not
qualify as a segment of a business as defined under APB No. 30 and (vi) any
profit or loss attributable to the business operations of any entity acquired by
the Company during such fiscal year. Operating income will not be adjusted for a
minority interest holder's share of a consolidated subsidiary's operating income
or loss.
The actual percentage of operating income to be allocated to the bonus
pool for each fiscal year will be determined pursuant to the following formula:
X is the percentage of the operating income of the Company and
participating subsidiaries which is to comprise the bonus pool
for that year.
Y is the actual operating income of the Company and
participating subsidiaries for the fiscal year divided by the
operating income target established for the fiscal year by the
Compensation Committee not later than ninety (90) days after
the start of such fiscal year.
If Y is 0.6667 or greater, then X = 9Y - 4
If Y is less than 0.6667, then X = 3Y
20
<PAGE>
No amount will be paid under the Bonus Plan if Y is zero or
less.
For example, if actual operating income is at 66.67% of target, the
bonus pool will be equal to 2% of that operating income. If actual operating
income were only 33.33% of target, the bonus pool would be equal to 1% of that
operating income.
Individual Bonus Award
The bonus pool for each fiscal year will be allocated, in accordance
with the following procedures, to all active participants who continue in the
Company's employ through the date the allocation is made.
A. Each of the Company's executive officers will be assigned an index
which is the product of their base salary, measured as of the close of the
fiscal year for which the bonus allocation is to be made, times the applicable
multiplier. The multiplier for the President and Chief Executive Officer and for
the Chairman of the Board will be two (2), for Senior Vice Presidents
one-point-five (1.5) and for other Vice Presidents one (1).
B. Bonuses will be awarded to each executive officer by multiplying the
aggregate bonus pool for the fiscal year by a fraction, the numerator of which
will be the individual officer's index and the denominator of which will be the
sum of the indices for all executive officers.
C. The Compensation Committee may, in its sole judgment and discretion,
reduce the bonus allocation to any or all of the executive officers. In no event
will the bonus award allocated to any participant for any fiscal year exceed
five (5) million dollars.
D. To the extent the bonus otherwise allocable to any executive officer
for a fiscal year is reduced by reason of the Compensation Committee's action or
the dollar limitation on the maximum bonus award, the unallocated amount will
serve as a separate bonus pool which may be allocated to other eligible
individuals in specified job grades. One or more executive officers of the
Company may make recommendations to the Chief Executive Officer and President
and the Chairman of the Board with respect to the eligible employees who should
share in that separate pool and the portion of such pool to be allocated to each
such individual. The Chief Executive Officer and President and the Chairman of
the Board will each review such recommendations and may, in their discretion,
submit one or more of such recommendations (with such adjustments as they deem
appropriate) to the Compensation Committee for consideration. On the basis of
such recommendations, the Compensation Committee may select one or more such
eligible employees to share in the bonus pool and determine the amount of such
pool to be allocated to each selected individual. All determinations of the
Compensation Committee will be final.
E. No bonus payment will be made to any participant who leaves the
employ of the Company or a participating subsidiary prior to the date the bonus
is allocated, unless his or her termination of employment occurs by reason of
retirement at or after age 65, disability or death. In addition, the bonus
payable to a participant who works part of the fiscal year in the employ of the
Company or any participating subsidiary and the balance in the employ of one or
more of the Company's subsidiaries not otherwise covered by the Plan will be
pro-rated to reflect only the time such individual remained in the employ of the
Company or such participating subsidiary.
21
<PAGE>
Payment
The bonus will be paid in cash to each eligible participant within
thirty (30) days after the completion of the annual audit of the Company's
financial statements by the Company's independent auditors.
Amendment and Termination
The Board may at any time amend, suspend or terminate the Bonus Plan in
whole or in part. However, no such action by the Board may adversely affect the
rights and interests of the participants and their beneficiaries with respect to
any earned but unpaid bonuses outstanding at the time. All material amendments
to the Bonus Plan will require stockholder approval.
Federal Tax Consequences
Under present federal income tax law, participants will realize
ordinary income immediately upon receipt of their bonus distribution under the
Bonus Plan. The Company will be entitled to an income tax deduction, in the
amount of such ordinary income, for the fiscal year for which the bonus payment
is made, provided the payment is made within two and one-half months after the
close of that fiscal year; otherwise, the payment will be deductible in the
succeeding fiscal year. The deduction will, to the extent attributable to
bonuses paid to the Company's executive officers, be subject to the provisions
of Internal Revenue Code Section 162(m), which limits the deductibility of all
nonperformance-based compensation paid to certain corporate executives to $1
million per covered individual. However, if the amendment to the Bonus Plan
which is the subject of this Item No. 4 is approved by the stockholders at the
Annual Meeting, then all payments under the Plan should remain fully deductible
by the Company for federal income tax purposes and should not be subject to the
limitations of Section 162(m). Prior to the amendment of the Bonus Plan, the
Company had obtained a ruling from the Internal Revenue Service that the bonuses
payable to the Company's executive officers under the Plan would qualify as
performance-based compensation. The Company intends to apply to the Internal
Revenue Service for an update to that ruling which will cover the new amendment
to the Bonus Plan, if the amendment is approved at the Annual Meeting.
Recommendation of the Board of Directors
Approval of the amendment to the Bonus Plan requires the affirmative
vote of the holders of a majority of the shares of Common Stock present or
represented and entitled to vote at the Annual Meeting. No amounts will be paid
under the Bonus Plan for the 1997 fiscal year or any subsequent fiscal year
unless the stockholders approve the amendment to Bonus Plan at the 1997 Annual
Meeting. However, whether or not such stockholder approval is obtained, bonus
amounts may become payable to one or more executive officers and other key
employees under the Company's Discretionary Bonus Plan which the Board of
Directors implemented in December 1996 as a special retention-based bonus
program to maintain a competitive level of total cash compensation for those
individuals whose retention is essential to the Company's long-term financial
success.
Because the Board of Directors believes that the Bonus Plan is a
valuable incentive program which will serve to align the interests of management
with those of the stockholders in seeking to maximize the Company's
profitability, the Board recommends a vote FOR the approval of the amendment to
the Bonus Plan.
22
<PAGE>
Plan Benefits
Bonuses will be paid under the Bonus Plan only if the Company's
operations are profitable. No bonuses were paid under the Bonus Plan for the
1996 fiscal year because the Company's actual operating income for that year was
less than 66.67% of the operating income target. The bonuses which may become
payable for the 1997 fiscal year pursuant to the amended bonus formula in effect
under the Bonus Plan are not currently determinable.
ITEM NO. 5 --
RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the stockholders to ratify the selection of Ernst
& Young LLP as the Company's independent auditors for the fiscal year ending
December 28, 1997. The affirmative vote of the holders of a majority of the
shares represented and voting at the Annual Meeting will be required to ratify
the selection of Ernst & Young LLP.
In the event the stockholders fail to ratify the appointment, the Board
of Directors will reconsider its selection. Even if the selection is ratified,
the Board in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board feels that
such a change would be in the best interests of the Company and its
stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them FOR the ratification of the selection of Ernst & Young
LLP.
Ernst & Young LLP has audited the Company's financial statements
annually beginning in 1986. Representatives of the firm, who are expected to be
present at the Annual Meeting, will have the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate questions.
Recommendation of the Board of Directors
The affirmative vote of a majority of the issued and outstanding voting
shares is sought for the ratification of the selection of Ernst & Young LLP. The
Board of Directors recommends that the stockholders vote FOR this proposal.
23
<PAGE>
ADDITIONAL INFORMATION
Principal Stockholders
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of March 17,
1997 for (i) each director and nominee who owns Common Stock, (ii) each
executive officer named in the Summary Compensation Table below, (iii) all
executive officers and directors as a group, and (iv) all persons who are
beneficial owners of five percent or more of the Company's Common Stock. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws where applicable.
Shares Beneficially Owned
-------------------------
Number Percentage
------ ----------
Tu Chen(1).................................. 613,343 1.2%
Stephen C. Johnson(2)....................... 396,214 *
Max Palevsky(3)............................. 199,378 *
Anthony Sun(3).............................. 87,060 *
Irwin Federman(4)........................... 75,121 *
Craig R. Barrett(3)......................... 55,250 *
Chris A. Eyre(3)............................ 34,250 *
George A. Neil(5)........................... 22,000 *
Masayoshi Takebayashi(4)(6)................. 7,500 *
Willard Kauffman(7)......................... 104,584 *
William L. Potts, Jr.(8).................... 93,453 *
William V. Whitmer (9)...................... 32,625 *
Executive officers and Directors
as a group (22 persons) (10)........... 2,079,589 4.0%
Neuberger & Berman (11)..................... 5,538,516 10.7%
Merrill Lynch Asset Management (11)......... 3,500,000 6.8%
Sanford C. Bernstein & Co (11).............. 3,033,271 5.9%
J.W. Seligman & Co., Incorporated (11)...... 3,014,000 5.8%
Spears, Benzak, Salomon & Farrell (11)...... 2,588,330 5.0%
* Less than 1%
(1) Includes 113,674 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 229,297 shares subject to options
which will not become exercisable within such sixty-day period.
24
<PAGE>
(2) Includes 188,134 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 229,297 shares subject to options
which will not become exercisable within such sixty-day period.
(3) Includes 33,250 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 5,250 shares subject to options which
will not become exercisable within such sixty-day period.
(4) Includes 7,500 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 5,250 shares subject to options which
will not become exercisable within such sixty-day period.
(5) Includes 21,000 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 3,500 shares subject to options which
will not become exercisable within such sixty-day period. Excludes
shares held by Asahi Glass America, Incorporated, a wholly-owned
subsidiary of Asahi Glass Co., Ltd., and on such basis may be deemed,
under the 1934 Act, the beneficial owner of the 2,000,002 shares
beneficially owned by such corporations with shared voting and
investment power with respect thereto. Mr. Neil disclaims beneficial
ownership of the shares owned by Asahi Glass America, Incorporated.
(6) Excludes shares held by Kobe Steel, Ltd. and Kobe Steel USA Holdings
Incorporated Mr. Takebayashi is an Executive Officer of Kobe Precision,
Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd., and on
such basis may be deemed, under the 1934 Act, the beneficial owner of
the 2,000,000 shares beneficially owned by such corporations with
shared voting and investment power with respect thereto. Mr.
Takebayashi disclaims beneficial ownership of these shares.
(7) Includes 57,995 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 106,505 shares subject to options
which will not become exercisable within such sixty-day period.
(8) Includes 58,867 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 78,603 shares subject to options
which not become exercisable within such sixty-day period.
(9) Includes 4,097 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 56,803 shares subject to options
which will not become exercisable within such sixty-day period.
(10) Includes 853,716 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days
after March 17, 1997 and excludes 1,613,074 shares subject to options
which will not become exercisable within such sixty-day period. Also
excludes 4,000,002 shares which may be deemed to be beneficially owned
by certain of the Company's directors. See footnotes (5) and (6) above.
(11) Beneficially owned shares per most recent SEC schedule 13G filing.
Executive Compensation and Related Information
In compliance with the Securities and Exchange Commission's regulations
on disclosure of Executive Compensation, this section presents the Report of the
Compensation Committee, a Stock Performance Graph comparing Company stockholder
return relative to a broad market index and a peer group index, and Summary and
Companion Compensation Tables presenting a detailed representation of the
Company's executive compensation practices.
25
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Committee's members, Craig R. Barrett, Irwin Federman, Max Palevsky
and Masayoshi Takebayashi, are independent directors who are not employees of
the Company and who qualify as outside directors under Section 162(m) of the
Internal Revenue Code. The Committee is accountable for the approval of
cash-based executive compensation programs that fairly compensate key executives
and employees and that relate the pay levels of officers to the performance of
the Company. Prior to December 1996, the Committee also had the exclusive
authority to make option grants under the Company's Stock Option Plan to the
Company's executive officers. However, as a result of the November 1, 1996
amendments to the Rule 16b-3 of the Securities and Exchange Commission, the
Board of Directors created a special committee of the Board, the Primary Stock
Option Plan Committee, to assume that authority.
Objectives of Executive Compensation Plans and Actions of the Committee
The Committee, relying on research performed by an independent
compensation consulting firm and advice from the Company's human resources
department, has structured compensation incentives for officers and certain
other key employees to optimize short-term and long-term corporate performance
for the benefit of the Company's stockholders, customers, employees and the
communities in which the Company operates. For comparison purposes, the Company
has identified a group of high-performing companies ("peer companies") both
within and outside the Company's industry. The Company competes with the peer
companies for the hiring and retention of key executives and accordingly
compares its executive compensation practices to these companies. Each peer
company shares at least one attribute, such as high technology, location or
size, with the Company. Such comparisons also include the relative financial
performance of the Company and the peer companies. Since executive search and
retention is not industry specific, currently only 3 of the 29 peer companies
are included in the NASDAQ Computer Manufacturers Index, the Company's Industry
Index in the "Stock Performance Graph".
In future fiscal years, the Committee may add or delete companies which
are to be included in the group of peer companies, and may take different
measures of financial performance into account in setting executive
compensation.
Base Salary
The Committee intends that base salary be sufficient to attract and
retain executives of the caliber required to manage a company that employs
demanding technology in a competitive, high growth market. However, the
Committee also intends that a substantial portion of each executive's cash
compensation be tied to Company performance through the Management Bonus Plan.
Accordingly, the base salaries of the executive officers are targeted at the
50th percentile of base salaries for similar positions among the peer companies,
subject to special adjustments for individual qualifications. Annual increases
in base salary will generally reflect expected changes in salary levels at peer
companies.
During 1996, the salaries of Stephen C. Johnson, President and Chief
Executive Officer, and Tu Chen, Chairman of the Board, were at approximately the
fiftieth percentile of salaries paid for executives in comparable positions at
the peer companies based on 1995 compensation data. The salaries of the other
executive officers ranged from the second to the fourth quartiles for executives
in similar positions based on the Committee's judgment of each individual's
performance.
26
<PAGE>
Annual Incentive Bonus
To complement base salary, the Committee adopted the Management Bonus
Plan (the "Bonus Plan") in March 1996 as an incentive bonus program to continue
in effect from year to year for the Company's executive officers and other
eligible individuals. The principal features of the Bonus Plan are summarized in
Item No. 4 to this Proxy Statement. However, no bonuses were paid under the
Bonus Plan for the 1996 fiscal year because the operating income of the Company
and certain designated subsidiaries did not reach 66.67% of the operating income
target established by the Committee for that fiscal year.
Discretionary Bonus Plan
In December 1996, the Board of Directors authorized the implementation
of the Discretionary Bonus Plan (the "Discretionary Plan") to be administered by
this Committee. The purpose of the Discretionary Plan is to assure that a
competitive level of total cash compensation is paid, through a combination of
base salary and bonus awards to executives and other eligible individuals whose
retention is critical to the Company's financial success. Accordingly, the
Committee will, with the assistance of the Company's management and such outside
compensation specialists as the Committee deems appropriate, undertake a
competitive analysis of the Company's compensation each fiscal year to assure
that the compensation levels for the Company's key employees remain competitive
with other opportunities offered in the relevant marketplace. If the analysis
for any fiscal year suggests that the level of cash compensation for that year
is not competitive with the industry, then a cash bonus pool for that year will
be established for distribution to selected key employees. The bonus
distribution will be targeted to those employees considered essential to the
Company's continued financial success who would otherwise be vulnerable to
competitor recruiting by offers of more attractive compensation. For the 1996
fiscal year, bonuses in the aggregate amount of $267,500 were paid to the
Company's executive officers under the Discretionary Plan.
Stock Options
Options are designed to align the interests of the executive officers
with those of the stockholders, providing each officer with a significant
incentive to manage the Company from the long-term perspective of an owner with
an equity stake in the business. The stock option plan encourages long-term
retention and provides rewards to executives and other eligible employees
commensurate with growth in stockholder value. It is the Committee's practice to
grant options to purchase shares at the market price on the date of grant with a
term of up to ten years. The majority of options granted during 1996 to the
Company's executive officers will vest in twelve equal monthly installments,
beginning with the thirty-seventh (37th) month following the grant date.
Accordingly, these options will provide a return to the option recipient only if
he or she remains in the Company's employ and the market price of the underlying
shares of common stock appreciates.
For the 1996 fiscal year, the Committee had the sole responsibility for
making option grants to the Company's executive officers. The Committee also
approved the guidelines for the option grants made to other key employees during
that fiscal year. The number of option shares awarded for the 1996 fiscal year
was based on several factors. First, as a result of its review of competitive
market data, the Committee targeted total option grants for the 1996 fiscal year
between 3% and 3.5% of total shares outstanding. Actual options granted for that
fiscal year totaled 3.1% of the weighted average number of shares issued and
outstanding. Based on subsequent review of more recent competitive data, the
Committee believes that the target for total annual option grants may be below
current industry standards and is reviewing that target. Second, since
competitive data on the number of options granted to specific management levels
and key individual contributors is typically not available, the Committee
established guidelines based upon internal estimates of the number of options
required to attract and retain these employees. Finally, the Committee
considered individual performance in making grants to specific executives. While
no explicit consideration was given to the number of unvested options held by an
individual at the time the grant was made, the vesting terms of the options
typically granted annually to current employees, which specify that the vesting
will take place entirely in the fourth year after the grant, are designed so
that the vesting will not overlap
27
<PAGE>
with previous options. In the case of three new officers, their new-hire options
will vest incrementally over the next four (4) years of their continued service.
In 1996, the Committee awarded stock options to purchase 43,500 shares of Common
Stock each to Mr. Johnson and Dr. Chen in recognition of their continued
importance to the Company's success. Option grants to other executive officers
ranged from 11,100 shares to 110,000 shares based on their level of
responsibility and the Committee's assessment of their individual performance.
Compliance with Internal Revenue Code Section 162(m)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a Federal income tax
deduction for compensation paid to certain officers, to the extent that
compensation exceeds one (1) million dollar per officer in any one year. This
limitation will be in effect for each fiscal year of the Company beginning after
December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based. Compensation
which does qualify as performance-based compensation will not have to be taken
into account for purposes of this limitation. At the 1994 Annual Meeting, the
Company obtained stockholder approval for certain amendments to the Company's
Stock Option Plan which were designed to assure that any compensation deemed
paid in connection with the exercise of stock options granted under that plan
will qualify as performance-based compensation. In March 1996, the Bonus Plan
was restructured, effective with the 1996 fiscal year, so that the payments made
under that plan would also qualify as performance-based compensation under
Section 162(m). The Bonus Plan was approved by the stockholders at the 1996
Annual Meeting, and the Company obtained a ruling from the Internal Revenue
Service that the payments under the Bonus Plan will qualify as performance-based
compensation. If the stockholders approve the amendment to the Bonus Plan, as
described in Item No. 4 in the Proxy Statement, at the Annual Meeting, then
future payments under the Bonus Plan should continue to qualify as
performance-based compensation which would not be subject to the Code Section
162(m) limitation on deductibility.
Other Plans
All employees, including the Company's executive officers, are eligible
to participate in the Company's Employee Stock Purchase Plan and, to the extent
that the subsidiary in which they are employed participate, in its cash and
deferred profit sharing plans.
MEMBERS OF THE COMPENSATION COMMITTEE
Craig R. Barrett Irwin Federman Max Palevsky Masayoshi Takebayashi
Compensation Committee Interlock and Insider Participation
The members of the Compensation Committee of the Company's Board of
Directors are as named above in the Compensation Committee Report. No member of
the Compensation Committee was at any time during the 1996 fiscal year, or at
any other time, an officer or employee of the Company.
No executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more of its executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. Mr. Takebayashi, a member of the Company's Board of Directors and the
Compensation Committee, is an executive officer of Kobe Precision, Incorporated,
a wholly-owned subsidiary of Kobe Steel, Ltd. ("Kobe") and is a member of the
Board of Komag Materials Technology, a joint venture of the Company and Kobe.
For further information concerning this joint venture, see the section below
entitled Certain Relationships and Related Transactions.
28
<PAGE>
Stock Performance Graph
[GRAPHIC OMITTED]
<TABLE>
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
- --------------------------- --------------- --------------- --------------- ------------- ------------- -------------
Prices indexed to an
initial investment of
$100 12/27/91 12/31/92 12/31/93 12/30/94 12/29/95 12/27/96
- --------------------------- --------------- --------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Komag, Incorporated $100.00 $122.81 $124.56 $183.33 $323.68 $377.19
- --------------------------- --------------- --------------- --------------- ------------- ------------- -------------
Nasdaq Composite $100.00 $120.59 $138.43 $135.31 $191.35 $235.68
- --------------------------- --------------- --------------- --------------- ------------- ------------- -------------
Nasdaq Computer Mfg. $100.00 $137.37 $130.19 $142.99 $225.23 $311.71
- --------------------------- --------------- --------------- --------------- ------------- ------------- -------------
</TABLE>
29
<PAGE>
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation earned, by the
Company's Chief Executive Officer and each of the Company's four other
highest-paid executive officers whose base salary and bonus for the 1996 fiscal
year was in excess of $100,000 (the "Named Executive Officers"), for services
rendered in all capacities to the Company and its subsidiaries for the 1996,
1995 and 1994 fiscal years. No executive officer who would have otherwise been
included in such table on the basis of salary and bonus earned for the 1996
fiscal year resigned or terminated employment during that fiscal year.
<TABLE>
I. SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Long Term
Annual Compensation Awards
Name and ------------------- Securities All Other
Principal Underlying Compen-
Position Year Salary Bonus Option Granted sation
-------- ---- ------ ----- -------------- ------
($) (1) ($) (2) (#) ($) (3)
<S> <C> <C> <C> <C> <C>
Stephen C. Johnson 1996 $402,000 $ 66,949 43,500 $29,744
President and 1995 $387,000 $1,049,619 58,000 $39,567
Chief Executive Officer 1994 $368,000 $411,288 46,000 $9,993
Tu Chen 1996 $402,000 $ 66,949 43,500 $29,744
Chairman of the Board 1995 $387,000 $1,049,619 58,000 $39,514
1994 $368,000 $411,288 46,000 $9,993
Willard Kauffman 1996 $289,000 $ 78,147 25,500 $21,559
Senior Vice President and 1995 $278,000 $395,699 30,600 $28,609
Chief Operating Officer 1994 $265,000 $208,462 40,000 $10,306
William L. Potts, Jr. 1996 $231,000 $ 62,523 22,950 $17,358
Senior Vice President, Chief 1995 $210,001 $286,967 20,400 $21,687
Financial Officer and Secretary 1994 $197,001 $148,675 16,400 $9,993
William V. Whitmer 1996 $218,000 $ 83,983 13,800 $16,416
Vice President-Manufacturing- 1995 $210,001 $266,967 18,400 $21,687
U.S. Operations 1994 $200,000 $138,808 16,400 $9,993
- ------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes salary deferred under the Company's Savings and Deferred
Profit Sharing Plan and the Company's Deferred Compensation Plan.
30
<PAGE>
(2) Includes amounts earned for the indicated year under the Company's Cash
Profit Sharing Plan, the Management Bonus Plan and the Discretionary
Bonus Plan. Amount earned under the Cash Profit Sharing Plan are
accrued during a given year and are paid in July of that year and
January or February of the following year. Bonuses earned under the
Management Bonus Plan are accrued during a given year and paid in
January or February of the following year. Bonuses under the
Discretionary Bonus Plan are awarded by the Compensation Committee for
a particular fiscal year solely on the basis of such Committee's
competitive compensation analysis for that year and are paid in January
or February of the following year.
(3) Includes for the fiscal years indicated below: (i) the matching
contributions ($0.25 match per $1.00 individual contribution) made by
the Company on behalf of each Named Executive Officer to the Section
401(k) Savings Program, up to a maximum match of $625 and (ii) the
semi-annual profit sharing contributions made by the Company on behalf
of each named executive officer to the Savings and Deferred
Profit-Sharing Plan and Deferred Compensation Plan:
</FN>
</TABLE>
--------------------------------------------------------------
Matching Profit Sharing
Contribution Contribution
------------ ------------
Stephen C. Johnson 1996 $625 $29,119
1995 $237 $39,330
1994 $312 $9,681
Tu Chen 1996 $625 $29,119
1995 $184 $39,330
1994 $312 $9,681
Willard Kauffman 1996 $625 $20,934
1995 $312 $28,297
1994 $625 $9,681
William L. Potts Jr. 1996 $625 $16,733
1995 $312 $21,375
1994 $312 $9,681
William V. Whitmer 1996 $625 $15,791
1995 $312 $21,375
1994 $312 $9,681
--------------------------------------------------------------
31
<PAGE>
Stock Options
The following table provides information with respect to the stock
option grants made for the 1996 fiscal year under the Company's Restated 1987
Stock Option Plan to the Named Executive Officers. Except for the limited stock
appreciation right described in Footnote (1) below, which formed part of the
option grant made to each of the Named Executive Officers, no stock appreciation
rights were granted to such individuals during the 1996 fiscal year.
<TABLE>
II. OPTION GRANTS TABLE
- ---------------------- ------------------------------------------ ----------- --------------------------- ----------------
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Individual Grants Appreciation for Option Term
----------------- ----------------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base Expira- Valuation
Options Employees Price tion per SFAS 123
Granted in Fiscal ($/Share) Date 5%($)(3) 10%($)(3) pro forma(4)
Name (#)(1) Year (2) -------- --------- --------- ------------
---- ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Johnson 43,500 2.63% $24.31 1/02/06 $665,110 $1,685,528 $686,648
Tu Chen 43,500 2.63% $24.31 1/02/06 $665,110 $1,685,528 $686,648
Willard Kauffman 25,500 1.54% $24.31 1/02/06 $389,892 $988,068 $402,518
William L. Potts, Jr. 22,950 1.39% $24.31 1/02/06 $350,903 $889,261 $362,266
William V. Whitmer 13,800 .84% $24.31 1/02/06 $211,000 $534,718 $217,833
- ---------------------- -------------- ------------- ------------- ----------- ------------ -------------- ----------------
<FN>
(1) The option granted to each officer will not become exercisable for any
of the option shares prior to the officer's completion of 36 months of
service with the Company, measured from the grant date. Following the
satisfaction of such service requirement, the option will become
exercisable in a series of twelve (12) equal and successive monthly
installments upon the officer's completion of each additional month of
service thereafter. Each option was granted on January 3, 1996 and has
a maximum term of 10 years, subject to earlier termination upon the
optionee's cessation of service. Each option will become immediately
exercisable for all the option shares in the event the Company is
acquired by a merger or asset sale (unless the option is assumed or
replaced by the acquiring entity) or in the event the optionee's
employment terminates by reason of death, permanent disability or
retirement at or after age 65. Each option includes a limited stock
appreciation right which would result in the cancellation of that
option upon a take-over of the Company effected through a hostile
tender offer for more than 50% of the Company's outstanding Common
Stock. In return, the optionee will be entitled to a cash distribution
from the Company per canceled option share equal to the highest
reported price paid per share of Common Stock in such tender offer,
less the option exercise price per share.
32
<PAGE>
(2) The exercise price may be paid in cash, in shares of the Company's
Common Stock valued at fair market value on the exercise date, or
through a cashless exercise procedure involving a same-day sale of the
purchased shares.
(3) There is no assurance provided to any executive officer, or any other
holder of the Company's securities, that the actual stock price
appreciation over the 10 year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of
the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the executive officers.
(4) For purposes of such pro forma disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest
rate of 6.1%; volatility factor of the expected market price of the
Company's Common Stock of 60%; and a weighted-average expected life of
such options of 5.9 years. There was no dividend yield included in the
calculation since the Company does not pay dividends. The
weighted-average fair value of options granted to all employees during
1996 was $12.88. For officer grants of January 3, 1996, the
weighted-average fair value of the options was $15.785.
</FN>
</TABLE>
33
<PAGE>
Option Exercises and Holdings
The table below sets forth information concerning the exercise of
options during the 1996 fiscal year and unexercised options held as of the end
of such year by the Named Executive Officers. No stock appreciation rights were
exercised during such fiscal year, and except for the limited stock appreciation
rights described in Footnote (1) to the Option Grant Table above which form part
of each stock option grant, no stock appreciation rights were outstanding at the
end of such fiscal year.
<TABLE>
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value:
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options In-The-Money
Shares At Fiscal Options at Fiscal
Acquired Value Year-End(#) Year-End ($) (2)
on Exercise Realized (1) Exercisable (E)/ Exercisable (E)/
Name (#) (#) Unexercisable (U) Unexercisable (U)
---- --- --- ----------------- -----------------
<S> <C> <C> <C> <C>
Stephen C. Johnson -- -- 176,640 E $3,317,168 E
147,500 U $1,800,467 U
Tu Chen 78,000 $2,109,313 102,180 E $1,847,518 E
147,500 U $1,800,467 U
Willard Kauffman -- -- 46,760 E $816,430 E
97,340 U $1,272,161 U
William L. Potts, Jr. 8,250 $163,969 54,770 E $1,120,666 E
59,750 U $657,008 U
William V. Whitmer 46,520 $1,031,371 23,475 E $393,205 E
50,745 U $640,989 U
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1) Value Realized equals the market price value of the shares at the time
of exercise less the exercise price thereof.
(2) Excess of the market price per share of the Company's Common Stock at
the end of the fiscal year ($26.875) over the option exercise price.
</FN>
</TABLE>
34
<PAGE>
Employment Contracts and Termination of Employment Agreements
None of the Company's executive officers have employment or severance
agreements with the Company.
Certain Relationships and Related Transactions
In March 1989, the Company formed a joint venture with Kobe Steel USA
Holdings Incorporated ("Kobe USA") whereby for $1,400,000 Kobe USA purchased a
45 percent equity ownership in the Company's then wholly-owned subsidiary, Komag
Material Technology, Incorporated ("KMT"). Kobe USA, along with its parent
corporation, Kobe Steel, Ltd. ("Kobe Steel") (collectively with Kobe USA,
"Kobe") is a former holder of greater than 5% of the Company's stock. From March
1989 through December 1990, the Company and Kobe USA have contributed $3,090,000
of additional paid-in capital and made loans totaling $6,090,000 (which were
fully repaid by the end of fiscal 1995) to KMT, both in proportion to their
respective ownership interests in KMT. On December 28, 1995, the Company
purchased 25% of KMT's outstanding stock from Kobe, thereby reducing Kobe's
ownership to 20%. The purchase price of this transaction was $6,750,000.
Under the joint venture agreements, Kobe agreed to supply substrate
blanks to KMT and the Company agreed to purchase KMT's entire output of finished
substrates. The Company made payments of approximately $43,168,551 to KMT in
1996 for the purchase of finished aluminum substrates. These payments were
determined pursuant to a formula-based price whereby the prices paid by the
Company may be higher or lower than those available from unrelated third
parties. In 1996 the Company also purchased approximately $53,554,000 of
products from Kobe Steel and its subsidiaries and distributors. The Company
believes that the terms and conditions for the above payments are as favorable
as could be obtained from unrelated third parties.
Pursuant to the terms of a Common Stock Purchase Agreement between Kobe
USA and the Company (the "Kobe Agreement"), in March 1990 Kobe USA purchased
2,000,000 shares of the Company's Common Stock for $20,000,000. Kobe has agreed
to limit its ownership of the Company's total voting securities to not greater
than twenty percent (20%), except that under circumstances such as a potential
change of control or the emergence of a larger stockholder, Kobe has a right of
first refusal with respect to the issuance of new securities by the Company, and
is also entitled to consideration as a future joint venture partner of the
Company. In addition, the Kobe Agreement generally restricts the right of Kobe
to sell or transfer the shares acquired under the Kobe Agreement. Kobe is also
required to vote its shares as directed by the Board of Directors of the
Company, subject to certain exceptions, such as upon the liquidation or
disposition of the Company. Further, so long as Kobe continues to own at least
2,000,000 shares of the Company's Common Stock, the Kobe Agreement provides that
the Board of Directors of the Company and its Nominating Committee are generally
required to facilitate the election of a designee of Kobe to the Company's Board
of Directors and to the Nominating Committee. See "Item No. 1--Election of
Directors" above.
The Company and Asahi Glass Co., Ltd. ("Asahi"), a former holder of
greater than 5% of the Company's stock, also entered into a Common Stock
Purchase Agreement (the "Asahi Agreement") for the purchase of 2,000,000 shares
of the Company's Common Stock for $20,000,000 in January, 1989. The Asahi
Agreement was amended in March, 1990 to conform substantially with the terms and
conditions of the Kobe Agreement. Mr. Neil, a member of the Company's Board of
Directors, is an executive officer of Asahi Glass America, Incorporated ("Asahi
America"), an affiliate of Asahi Glass Co. See "Item No. 1--Election of
Directors" above. In 1996, the Company purchased approximately $58,000 worth of
equipment from Asahi. The Company believes that the terms and conditions of
these purchases were as favorable as could be obtained from unrelated third
parties.
35
<PAGE>
In 1996, the Company recorded sales of approximately $39,876,000 to
Asahi Komag Co., Ltd. ("AKCL"), a joint venture between the Company and Asahi
that manufacturers thin-film media in Japan, and made purchases of approximately
$12,145,000 from AKCL. The Company believes that the terms and conditions of
these purchases were as favorable as could be obtained from unrelated third
parties.
In September 1994, the Company announced its participation in Headway
Technologies, Inc. ("Headway"), a new company formed to research, develop and
manufacture advanced magnetoresistive ("MR") heads for the data storage
industry. Hewlett-Packard Company ("HP") and AKCL provided the initial cash
funding to Headway in exchange for equity interests. The Company and Asahi Glass
America, Inc., a wholly-owned subsidiary of Asahi, licensed to Headway MR
technology and contributed research and production equipment in exchange for
equity. The total investment made or committed by the above-mentioned parties
approximated $36,000,000 in cash and assets plus the contribution of certain
technology in exchange for additional equity ownership. As a result of these
transactions, directly or indirectly Asahi contributed $8,400,000 and had a
voting interest in Headway of less than 20%. Effective February 4, 1997, AKCL,
Asahi Glass America, Inc., HP and Komag sold all of their interest in Headway to
new investors. The Company retains no remaining interest in Headway.
Compliance with Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of common stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon written review of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 29, 1996, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten percent stockholders were met in a timely manner,
except that (i) Mr. Neil did not file a timely Form 4 report with respect to his
purchase of 1,000 shares of the Company's common stock in August 1996, and (ii)
Mr. Wey did not file a timely Form 5 report with respect to his gifts of 1,494
shares of the Company's common stock made in January 1996. Mr. Neil subsequently
reported his purchase transaction on a Form 5 report timely filed for the 1996
fiscal year, and Mr. Wey reported his gift on a late Form 5 report filed in
March 1997.
36
<PAGE>
OTHER BUSINESS
The Board of Directors knows of no other business that will be
presented for consideration at the Annual Meeting. If other matters are properly
brought before the Annual Meeting, however, it is the intention of the persons
named in the accompanying proxy to vote the shares represented thereby on such
matters in accordance with their best judgment.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the
Company's Annual Meeting of Stockholders to be held in 1998 must be received by
the Company no later than December 27, 1997 in order to be included in the proxy
statement and proxy relating to that meeting.
By Order of the Board of Directors
TU CHEN
Chairman of the Board
37
<PAGE>
KOMAG, INCORPORATED
RESTATED 1987 STOCK OPTION PLAN
(Amended and Restated March 28, 1997)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
This Restated 1987 Stock Option Plan (the "Plan") is intended
to promote the interests of Komag, Incorporated, a Delaware corporation (the
"Corporation"), by providing a method whereby eligible individuals may be
offered incentives and rewards which will encourage them to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation and continue to render services to the Corporation (or its parent or
subsidiary corporations).
II. STRUCTURE OF THE PLAN
A. Option Programs. The Plan shall be divided into two
separate components: the Discretionary Option Grant Program described in Article
Two and the Automatic Option Grant Program described in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may, at the discretion
of the Plan Administrator, be granted options to purchase shares of Common Stock
in accordance with the provisions of Article Two. Under the Automatic Option
Grant Program, each eligible member of the Corporation's Board of Directors (the
"Board") will automatically receive an option grant to purchase shares of Common
Stock in accordance with the provisions of Article Three.
B. General Provisions. Unless the context clearly indicates
otherwise, the provisions of Articles One and Four of the Plan shall apply to
the Discretionary Option Grant Program and the Automatic Option Grant Program
and shall accordingly govern the interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Discretionary Option Grant Program shall be
administered by one or more committees comprised of Board members. The primary
committee (the "Primary Committee") shall be comprised of two or more
non-employee Board members and shall
<PAGE>
have sole and exclusive authority to grant stock options and stock appreciation
rights under the Discretionary Option Grant Program to officers and
employee-directors of the Corporation subject to the short-swing profit
restrictions of the Federal securities laws. Stock options may be granted under
the Discretionary Option Grant Program to all other eligible employees and
consultants by either the Primary Committee or a second committee comprised of
two or more employee-Board members (the "Secondary Committee"). The members of
the Primary Committee and the Secondary Committee shall each serve for such
period of time as the Board may determine and shall be subject to removal by the
Board at any time.
B. Subject to the limited authority provided the Secondary
Committee to effect option grants in accordance with the provisions of paragraph
III.A of this Article One, the Primary Committee shall serve as the Plan
Administrator and shall have full power and authority (subject to the express
provisions of the Discretionary Option Grant Program) to establish such rules
and regulations as it may deem appropriate for the proper administration of such
program and to make such determinations under the program and any outstanding
option as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties with an interest in the
Plan or any outstanding option under this Discretionary Option Grant Program.
C. Administration of the Automatic Option Grant Program shall
be self- executing in accordance with the express terms and conditions of
Article Three.
IV. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to receive options pursuant to the
Discretionary Option Grant Program under Article Two of the Plan shall be
- those key employees (including officers and
directors) of the Corporation (or its parent or subsidiary
corporations) who render services which tend to contribute materially
to the success of the Corporation (or its parent or subsidiary
corporations) or which may reasonably be anticipated to contribute
materially to the future success of the Corporation (or its parent or
subsidiary corporations),
- non-employee Board members who render valuable
services to the Corporation (or its parent or subsidiary corporations),
and
- those independent contractors and consultants who
provide valuable services to the Corporation (or its parent or
subsidiary corporations).
B. Non-employee Board members shall also be eligible to
receive automatic option grants under the provisions of Article Three.
2.
<PAGE>
C. The Plan Administrator shall have full authority to select
the eligible individuals who are to receive option grants under the Plan, the
number of shares to be covered by each granted option, whether such option is to
be an incentive stock option ("Incentive Option") which satisfies the
requirements of Section 422 of the Internal Revenue Code or a non-statutory
option ("Non-Statutory Option") not intended to meet such requirements, the time
or times at which such option is to become exercisable and the maximum term for
which the option is to be outstanding.
D. For purposes of the Plan, the following provisions shall be
applicable in determining the parent and subsidiary corporations of the
Corporation:
Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the
Corporation's authorized but unissued or reacquired Common Stock. The aggregate
number of shares which may be issued over the term of the Plan shall not exceed
18,140,000* shares (subject to adjustment from time to time in accordance with
paragraph V.D of this Article One). Such share reserve includes an increase of
2,500,000 shares that was adopted by the Board on March 28, 1997, subject to
stockholder approval at the 1997 Annual Meeting.
- --------
*Adjusted to reflect (i) the two-for-one split of the Common Stock effected in
December 1995 and (ii) the 3,000,000-share (post-split) increase adopted by the
Board in January 1996 and approved by the stockholders at the 1996 Annual
Meeting. In no event, however, shall more than shares of Common Stock
(post-split) be issuable under the Plan after March 17, 1997, subject to
adjustment under paragraph V.D of this Article One in the event of certain
changes in the Corporation's capital structure.
3.
<PAGE>
B. In no event any one individual participating in the Plan be
granted stock options and separately exercisable stock appreciation rights for
more than 3,000,000 shares of Common Stock (as adjusted for the December 1995
split) in the aggregate over the remaining term of the Plan, subject to
adjustment from time to time in accordance with paragraph V.D of this Article
One. For purposes of such limitation, no stock options or stock appreciation
rights granted prior to January 1, 1994 shall be taken into account.
C. Should an option be terminated for any reason prior to
exercise in whole or in part, the shares subject to the portion of the option
not so exercised shall be available for subsequent option grants under this
Plan. In addition, unvested shares issued under the Plan and subsequently
repurchased by the Corporation at the original exercise price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants under the Plan. However, shares subject to any option
or portion thereof cancelled in accordance with paragraph IV of Article Two or
paragraph III of Article Three and shares repurchased by the Corporation
pursuant to its repurchase rights under the Plan shall not be available for
subsequent option grants under the Plan.
D. In the event any change is made to the Common Stock
issuable under the Plan (whether by reason of (i) merger, consolidation or
reorganization or (ii) recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other similar change affecting the
outstanding Common Stock as a class without receipt of consideration), then
unless such change results in the termination of all outstanding options
pursuant to the provisions of paragraph III of Articles Two and Three of the
Plan, appropriate adjustments shall be made to (i) the aggregate number and/or
class of shares issuable under the Plan, (ii) the maximum number and/or class of
shares for which stock options and separately exercisable stock appreciation
rights may be granted to any one participant in the aggregate after December 31,
1993, (iii) the number and/or class of shares and price per share in effect
under each outstanding option under the Discretionary Option Grant Program, (iv)
the number and/or class of shares per non-employee Board member for which
automatic option grants are subsequently to be made under the Automatic Option
Grant Program, and (v) the number and/or class of shares and price per share of
the Common Stock in effect under each automatic grant outstanding under the
Automatic Option Grant Program. The purpose of such adjustments to the
outstanding options shall be to preclude the enlargement or dilution of rights
and benefits under such options.
4.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to this Article Two shall be
authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees may only be granted Non-Statutory
options. The granted options shall be evidenced by instruments in such form as
the Plan Administrator shall from time to time approve; provided, however, that
each such instrument shall comply with and incorporate the terms and conditions
specified below. Each instrument evidencing an Incentive Option shall, in
addition, be subject to the applicable provisions of paragraph II of this
Article Two.
A. Option Price.
1. The option price per share shall be fixed by the
Plan Administrator. In no event, however, shall the option price per share be
less than one hundred percent (100%) of the fair market value per share of
Common Stock on the date of the option grant.
2. The option price shall become immediately due upon
exercise of the option and shall, subject to the provisions of paragraph VI of
this Article Two and the instrument evidencing the grant, be payable as follows:
(i) full payment in cash or check drawn to the
Corporation's order;
(ii) full payment in shares of Common Stock
held by the optionee for the requisite period necessary to avoid a
charge to the Corporation's earnings for financial reporting purposes
and valued at fair market value on the Exercise Date (as such term is
defined below) equal to the option price; or
(iii) full payment through a combination of
shares of Common Stock held by the optionee for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at fair market value on the Exercise Date
and cash or check, equal in the aggregate to the option price.
(iv) to the extent the option is exercised for
vested shares, the option price may also be paid through a
broker-dealer sale and
5.
<PAGE>
remittance procedure pursuant to which the optionee shall provide
irrevocable instructions to (I) a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
an amount equal to the aggregate option price payable for the purchased
shares plus all applicable Federal and State income and employment
taxes required to be withheld by the Corporation by reason of such
purchase and (II) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm.
For purposes of this subparagraph 2, the Exercise
Date shall be the date on which notice of the exercise of the option is
delivered to the Corporation. Except to the extent the sale and remittance
procedure is utilized in connection with the exercise of the option, payment of
the option price for the purchased shares must accompany such notice.
3. The fair market value of a share of Common Stock
on any relevant date under subparagraph 1 or 2 above (and for all other
valuation purposes under the Plan) shall be determined in accordance with the
following provisions:
(i) If the Common Stock is at the time traded
on the Nasdaq National Market, then the fair market value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the fair market value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed
on either the New York Stock Exchange or the American Stock Exchange,
then the fair market value shall be the closing selling price per share
of Common Stock on the date in question on such exchange, as such price
is officially quoted in the composite tape of transactions on that
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the fair market value shall be the closing
selling price on the last preceding date for which such quotation
exists.
B. Term and Exercise of Options.
Each option granted under this Article Two shall be
exercisable at such time or times, during such period, and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
instrument evidencing such option; provided,
6.
<PAGE>
however, that no option granted under this Article Two shall have a maximum term
in excess of ten (10) years from the grant date.
C. Limited Transferability of Options.
During the lifetime of the optionee, the option shall be exercisable
only by the optionee and shall not be assignable or transferable by the optionee
otherwise than by will or by the laws of descent and distribution following the
optionee's death. However, the Plan Administrator may grant one or more
Non-Statutory Options under this Article Two which may, in connection with the
optionee's estate plan, be assigned in whole or in part during the optionee's
lifetime to one or more members of the optionee's immediate family or to a trust
established exclusively for one or more such family members. The assigned
portion may only be exercised by the person or persons who acquire a proprietary
interest in the option pursuant to the assignment. The terms applicable to the
assigned portion shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
D. Termination of Service.
1. Should an optionee cease to remain in Service for
any reason (including death, permanent disability or retirement at or after age
65) while the holder of one or more outstanding options granted to such optionee
under the Plan, then such option or options shall not (except to the extent
otherwise provided pursuant to paragraph VII below) remain exercisable for more
than a twelve (12)-month period (or such shorter period as is determined by the
Plan Administrator and set forth in the option agreement) following the date of
cessation of Service; provided, however, that under no circumstances shall any
such option be exercisable after the specified expiration date of the option
term. Except to the extent otherwise provided pursuant to subparagraph I.D.4
below, each such option shall, during such twelve (12)-month or shorter period,
be exercisable for any or all vested shares for which that option is exercisable
on the date of such cessation of Service. Upon the expiration of such twelve
(12)-month or shorter period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be exercisable for any such vested
shares for which the option has not been exercised. However, the option shall,
immediately upon the optionee's cessation of Service, terminate and cease to be
outstanding with respect to any option shares in which the optionee is not
otherwise at that time vested or for which the option is not otherwise at that
time exercisable.
2. Should the optionee die while in Service, or cease
to remain in Service and thereafter die while the holder of one or more
outstanding options under the Plan, each such option may be exercised by the
personal representative of the optionee's estate or by the person or persons to
whom the option is transferred pursuant to the optionee's will or in accordance
with the laws of descent and distribution but, except to the extent otherwise
provided pursuant to subparagraph I.D.4 below, only to the extent of the
7.
<PAGE>
number of vested shares (if any) for which the option is exercisable on the date
of the optionee's death. Such exercise must be effected prior to the earlier of
(i) the first anniversary of the date of the optionee's death or (ii) the
specified expiration date of the option term. Upon the occurrence of the earlier
event, the option shall terminate and cease to be exercisable.
3. If (i) the optionee's Service is terminated for
cause (including, but not limited to, any act of dishonesty, willful misconduct,
fraud or embezzlement or any unauthorized disclosure or use of confidential
information or trade secrets) or (ii) the optionee makes or attempts to make any
unauthorized use or disclosure of confidential information or trade secrets of
the Corporation or its parent or subsidiary corporations, then in any such event
all outstanding options granted the optionee under the Plan shall terminate and
cease to be exercisable immediately upon such cessation of Service or (if
earlier) upon such unauthorized use or disclosure of confidential or secret
information or attempt thereat.
4. The Plan Administrator shall have complete
discretion, exercisable either at the time the option is granted or at the time
the optionee dies, retires at or after age 65, or ceases to remain in Service,
to establish as a provision applicable to the exercise of one or more options
granted under the Plan that during the limited period of exercisability
following death, retirement at or after age 65, or cessation of Employee status
as provided in subparagraph I.D.1 or I.D.2 above, the option may be exercised
not only with respect to the number of vested shares for which it is exercisable
at the time of the optionee's cessation of Service, but also with respect to one
or more subsequent installments in which the optionee would have otherwise
vested had such cessation of Service not occurred.
5. For purposes of the foregoing provisions of this
paragraph I.D (and all other provisions of the Plan),
- The optionee shall be deemed to remain in the
Service of the Corporation for so long as such individual renders
services on a periodic basis to the Corporation (or any parent or
subsidiary corporation) in the capacity of an Employee, a non-employee
member of the Board or an independent consultant or advisor.
- The optionee shall be considered to be an Employee
for so long as such individual remains in the employ of the Corporation
or one or more of its parent or subsidiary corporations, subject to the
control and direction of the employer not only as to the work to be
performed but also as to the manner and method of performance.
8.
<PAGE>
D. Stockholder Rights.
An option holder shall have none of the rights of a
stockholder with respect to any shares covered by the option until such
individual shall have exercised the option, paid the option price and been
issued a stock certificate for the purchased shares. No adjustment shall be made
for dividends or distributions (whether paid in cash, securities or other
property) for which the record date is prior to the date the stock certificate
is issued.
E. Repurchase Rights.
The shares of Common Stock acquired upon the exercise
of options granted under this Article Two may be subject to repurchase by the
Corporation in accordance with the following provisions:
The Plan Administrator shall have the discretion to
authorize the issuance of unvested shares of Common Stock under this Article
Two. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase any or all of those unvested
shares at the option price paid per share. The terms and conditions upon which
such repurchase right shall be exercisable (including the period and procedure
for exercise and the appropriate vesting schedule for the purchased shares)
shall be established by the Plan Administrator and set forth in the instrument
evidencing such repurchase right.
All of the Corporation's outstanding repurchase
rights shall automatically terminate, and all shares subject to such terminated
rights shall immediately vest in full, upon the occurrence of any Corporate
Transaction under paragraph III of this Article Two, except to the extent: (i)
any such repurchase right is to be assigned to the successor corporation (or
parent thereof) in connection with the Corporate Transaction or (ii) such
termination is precluded by other limitations imposed by the Plan Administrator
at the time the repurchase right is issued.
The Plan Administrator shall have the discretionary
authority, exercisable either before or after the optionee's cessation of
Service, to cancel the Corporation's outstanding repurchase rights with respect
to one or more shares purchased or purchasable by the optionee under this
Article Two and thereby accelerate the vesting of such shares in connection with
the optionee's cessation of Service.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Incentive Options may
only be granted to individuals who are Employees. Options which are specifically
designated as "non-qualified"
9.
<PAGE>
or "non-statutory" options when issued under the Plan shall not be subject to
such terms and conditions:
A. Option Price. The option price per share of the Common
Stock subject to an Incentive Option shall in no event be less than one hundred
percent (100%) of the fair market value of a share of Common Stock on the date
of grant.
B. Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the shares of Common
Stock for which one or more options granted to any employee under the Plan (or
any other option plan of the Corporation or any parent or subsidiary
corporation) may for the first time become exercisable as Incentive Options
during any one (1) calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the employee holds two (2) or more
such options which become exercisable for the first time in the same calendar
year, the foregoing limitation on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which such
options are granted.
C. 10% Stockholder. If any individual to whom an Incentive
Option is granted is the owner of stock (as determined under Section 424(d) of
the Internal Revenue Code) possessing 10% or more of the total combined voting
power of all classes of stock of the Corporation or any one of its parent or
subsidiary corporations, then the option price per share shall not be less than
one hundred and ten percent (110%) of the fair market value per share of Common
Stock on the grant date, and the option term shall not exceed five (5) years,
measured from the grant date.
Except as modified by the preceding provisions of this
paragraph II, the provisions of Articles One, Two and Four of the Plan shall
apply to all Incentive Options granted hereunder.
III. CORPORATE TRANSACTIONS
A. In the event of any of the following stockholder-approved
transactions (a "Corporate Transaction"):
(i) a merger or acquisition in which the
Corporation is not the surviving entity, except for a transaction the
principal purpose of which is to change the State of the Corporation's
incorporation,
(ii) the sale, transfer or other disposition
of all or substantially all of the assets of the Corporation, or
(iii) any reverse merger in which the
Corporation is the surviving entity,
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then each option outstanding under this Article Two
shall automatically become exercisable, during the five (5) business day period
immediately prior to the specified effective date for the Corporate Transaction,
with respect to the full number of shares of Common Stock purchasable under such
option and may be exercised for all or any portion of such shares as fully
vested shares of Common Stock. An outstanding option under the Plan shall not be
so accelerated, however, if and to the extent (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof or (ii) the acceleration of such option is subject to other limitations
imposed by the Plan Administrator at the time of grant.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Plan shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be exercisable.
C. Each outstanding option under this Article Two which is
assumed in connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issuable, in consummation of such Corporate Transaction, to an
actual holder of the same number of shares of Common Stock as are subject to
such option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the option price payable per share, provided
the aggregate option price payable for such securities shall remain the same. In
addition, the class and number of securities available for issuance under the
Plan following the consummation of the Corporate Transaction shall be
appropriately adjusted.
D. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction shall remain subject to the applicable
limitations of paragraph II.B.
E. Option grants under this Article Two shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
IV. STOCK APPRECIATION RIGHTS
A. Officers and non-employee Board members of the Corporation
subject to the short-swing profit restrictions of the Federal securities laws
may, in the Plan Administrator's sole discretion, be granted limited stock
appreciation rights in tandem with their outstanding options under this Article
Two. Upon the occurrence of a Hostile Take-Over effected at any time after the
Corporation's outstanding Common Stock is registered under Section 12(g) of the
Exchange Act, each outstanding option with such a limited stock
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appreciation right shall automatically be cancelled and the optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to the cancelled option (whether or not the option is otherwise
at the time exercisable for such shares) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Take-Over. The Plan Administrator shall pre-approve, at the time the limited
right is granted, the subsequent exercise of that right in accordance with the
terms of the grant and the provisions of this Section IV. No additional approval
of the Plan Administrator or the Board shall be required at the time of the
actual option cancellation and cash distribution.
B. For purposes of paragraph IV.A, the following definitions
shall be in effect:
A Hostile Take-Over shall be deemed to occur in the
event any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer which the Board does not recommend the Corporation's stockholders
to accept.
The Take-Over Price per share shall be deemed to be
equal to the greater of (a) the fair market value per share on the date
of cancellation, as determined pursuant to the valuation provisions of
subparagraph I.A.3, or (b) the highest reported price per share paid in
effecting such Hostile TakeOver. However, if the cancelled option is an
Incentive Option, the Take-Over Price shall not exceed the clause (a)
price per share.
C. The shares of Common Stock subject to any option cancelled
for an appreciation distribution pursuant to this paragraph V shall not be
available for subsequent option grant under the Plan.
V. EXTENSION OF EXERCISE PERIOD
The Plan Administrator shall have full power and authority,
exercisable from time to time in its sole discretion, to extend, either at the
time the option is granted or at any time while such option remains outstanding,
the period of time for which the option is to remain exercisable following the
optionee's cessation of Service or death from the twelve (12)-month or shorter
period set forth in the option agreement to such greater period of
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time as the Plan Administrator shall deem appropriate; provided, however, that
in no event shall such option be exercisable after the specified expiration date
of the option term.
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ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
The individuals eligible to receive automatic option grants
pursuant to the provisions of this Article Three shall be limited to the
following:
(i) each individual serving as a non-employee
member of the Board on January 24, 1995, the effective date of this
Automatic Option Grant Program (the "Effective Date"); and
(ii) each individual who is first appointed or
elected as a non-employee Board member at any time after the Effective
Date.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants will be made under this Article
Three on the dates specified below:
(i) Each individual who first becomes a
non-employee Board member at any time after the Effective Date, whether
through election at an Annual Stockholders Meeting or through
appointment by the Board, shall automatically be granted, at the time
of such initial election or appointment, a Non-Statutory Option to
purchase 30,000 shares of Common Stock upon the terms and conditions of
this Article Three. The size of such grant has been adjusted to reflect
the two-for-one split of the Common Stock which occurred in December
1995, but then reduced by twenty-five percent (25%) to effect a net
adjustment on a 1.5-for-one basis.
(ii) On the date of each Annual Stockholders
Meeting, beginning with the 1995 Annual Stockholders Meeting, each
individual who is at the time elected or reelected as a non-employee
member of the Board shall receive an additional grant of a
Non-Statutory Option under the Plan to purchase 7,500 shares of the
Common Stock, provided such individual has been a member of the Board
for at least six (6) months. The size of such grant has been adjusted
to reflect the two-for-one split of the Common Stock which occurred in
December 1995, but then reduced by twenty-five percent (25%) to effect
a net adjustment on a 1.5-for-one basis.
The applicable 30,000-share and 7,500-share limitations on the
automatic option grants to be made to non-employee Board members under this
Article Three shall
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be subject to periodic adjustment pursuant to the applicable provisions of
paragraph V.C of Article One.
B. Exercise Price. The exercise price per share shall be equal
to one hundred percent (100%) of the fair market value per share of Common Stock
on the automatic grant date.
C. Payment.
The exercise price shall be payable in one of the
alternative forms specified below:
(i) full payment in cash or check made payable
to the Corporation's order;
(ii) full payment in shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Corporation's reported earnings and valued at fair market value on the
Exercise Date (as such term is defined below); or
(iii) full payment in a combination of shares
of Common Stock held for the requisite period necessary to avoid a
charge to the Corporation's reported earnings and valued at fair market
value on the Exercise Date and cash or check payable to the
Corporation's order.
(iv) the option price may also be paid through
a broker-dealer sale and remittance procedure pursuant to which the
optionee shall provide irrevocable instructions to (I) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, an amount equal to the
aggregate option price payable for the purchased shares plus all
applicable Federal and State income and employment taxes required to be
withheld by the Corporation by reason of such purchase and (II) the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm.
For purposes of this subparagraph, the Exercise Date shall be
the date on which notice of the option exercise is delivered to the Corporation,
and the fair market value per share of Common Stock on any relevant date shall
be determined in accordance with the provisions of paragraph I.A.3 of Article
Two. Except to the extent the sale and remittance procedure specified above is
utilized for the exercise of the option, payment of the exercise price for the
purchased shares must accompany such notice.
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D. Option Term. Each automatic grant under this Article Three
shall have a maximum term of ten (10) years measured from the automatic grant
date.
E. Exercisability. The initial 30,000-share automatic grant
made to each newly-elected or newly-appointed non-employee Board member shall
become exercisable for the option shares in four (4) installments as follows:
(i) The option shall become exercisable for
twenty- five percent (25%) of the option shares upon the completion of
twelve (12) months of Board service measured from the automatic grant
date.
(ii) The option shall become exercisable for
an additional twenty-five percent (25%) of the option shares upon the
completion of twenty-four (24) months of Board service measured from
the automatic grant date.
(iii) The option shall become exercisable for
an additional twenty-five percent (25%) of the option shares upon the
completion of thirty-six (36) months of Board service measured from the
automatic grant date.
(iv) The option shall become exercisable for
the final twenty-five percent (25%) of the option shares upon the
completion of forty-eight (48) months of Board service measured from
the automatic grant date.
The annual 7,500-share option grant made to each
re-elected non- employee Board member shall become exercisable for all the
option shares upon the optionee's completion of twelve (12) months of Board
service measured from the automatic grant date.
As the option becomes exercisable for one or more
installments of the option shares, those installments shall accumulate, and the
option shall remain exercisable for the accumulated installments until the
expiration or sooner termination of the option term. The option, however, shall
not become exercisable for any additional option shares following the optionee's
cessation of Board service, except to the extent the option is otherwise to
become exercisable in accordance with the provisions of paragraph III of this
Article Three.
F. Limited Transferability of Options. During the lifetime of
the optionee, the option shall only be exercisable by the optionee and shall not
be assignable or transferable by the optionee otherwise than by will or the by
the laws of descent and distribution following the optionee's death. However,
each option granted under this Automatic Option Grant Program on or after the
date of the 1997 Annual Stockholders Meeting shall be assignable in whole or in
part by the optionee during his or her lifetime,
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but only to the extent such assignment is made in connection with the optionee's
estate plan to one or more members of the optionee's immediate family or to a
trust established exclusively for one or more such family members. The assigned
portion may only be exercised by the person or persons who acquire a proprietary
interest in the option pursuant to the assignment. The terms applicable to the
assigned portion shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
G. Effect of Termination of Board Membership.
1. Should the optionee cease to be a Board member for
any reason (other than death) while holding an automatic option grant under this
Article Three, then such optionee shall have a six (6)-month period following
the date of such cessation of Board membership in which to exercise such option
for any or all of the shares of Common Stock for which the option is exercisable
at the time the optionee ceases service as a Board member.
2. Should the optionee die while serving as a Board
member or during the six (6)-month period following his or her cessation of
Board service, then the option may subsequently be exercised, for any or all of
the shares of Common Stock for which the option is exercisable at the time of
the optionee's cessation of Board membership, by the personal representative of
the optionee's estate or by the person or persons to whom the option is
transferred pursuant to the optionee's will or in accordance with the laws of
descent and distribution. Any such exercise must, however, occur within twelve
(12) months after the date of the optionee's death.
3. In no event shall any automatic grant under this
Article Three remain exercisable after the specified expiration date of the ten
(10)-year option term. Upon the expiration of the applicable exercise period in
accordance with subparagraphs 1 and 2 above or (if earlier) upon the expiration
of the ten (10)-year option term, the automatic grant shall terminate and cease
to be exercisable.
H. Stockholder Rights. The holder of an automatic option grant
under this Article Three shall have no stockholder rights with respect to any
shares covered by such option until such individual shall have exercised the
option, paid the exercise price for the purchased shares and been issued a stock
certificate for such shares.
I. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the prototype Non-statutory
Stock Option Agreement attached as Exhibit A to the Plan.
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III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER
A. In connection with any Corporate Transaction (as such term
is defined in paragraph III of Article Two, above), the exercisability of each
automatic option grant outstanding under this Article Three shall automatically
accelerate so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares. Upon the
consummation of the Corporate Transaction, all automatic option grants under
this Article Three shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control of the
Corporation, the exercisability of each automatic option grant at the time
outstanding under this Article Three shall automatically accelerate so that each
such option shall, immediately prior to the specified effective date for the
Change in Control, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for all or any portion of such shares. For purposes of this Article Three, a
Change in Control shall be deemed to occur in the event:
(i) any person or related group of persons
(other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Corporation) directly or indirectly acquires beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer; or
(ii) there is a change in the composition of
the Board over a period of twenty-four (24) consecutive months or less
such that a majority of the Board members ceases, by reason of one or
more proxy contests for the election of Board members, to be comprised
of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at least
two-thirds of the Board members described in clause (A) who were still
in office at the time such election or nomination was approved by the
Board.
C. Upon the occurrence of a Hostile Take-Over, each automatic
option grant which has been outstanding under this Article Three shall
automatically be cancelled in return for a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
shares of Common Stock at the time subject to the cancelled option (whether or
not the option is otherwise at the time exercisable for such shares) over
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(ii) the aggregate exercise price payable for such shares. The cash distribution
payable upon such cancellation shall be made within five (5) days following the
consummation of the Hostile Take-Over. Stockholder approval of this 1997
restatement of the Plan shall constitute pre-approval of each option
subsequently granted with such an automatic cancellation provision and the
subsequent cancellation of that option in accordance with the terms and
provisions of this paragraph III.C. No additional approval of the Plan
Administrator or the Board shall be required at the time of the actual option
cancellation and cash distribution.
D. For purposes of this Article Three, Hostile Take-Over shall
have the meaning assigned to such term in paragraph V.B of Article Two. The
Take-Over Price per share shall be deemed to be equal to the greater of (a) the
fair market value per share on the date of cancellation, as determined pursuant
to the valuation provisions of paragraph I.A.3 of Article Two, or (b) the
highest reported price per share paid in effecting such Hostile Take-Over.
E. The shares of Common Stock subject to each option cancelled
in connection with the Hostile Take-Over shall not be available for subsequent
issuance under this Plan.
F. The automatic option grants outstanding under this Article
Three shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
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ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects whatsoever.
However, no such amendment or modification shall, without the consent of the
holders, adversely affect rights and obligations with respect to options at the
time outstanding under the Plan. In addition, certain amendments may require
stockholder approval pursuant to applicable laws or regulations.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Corporation's 1983 Stock Option Plan was initially
adopted by the Board of Directors in October 1983 and approved by the
Corporation's stockholders in November 1983. In January 1987, the Plan was
renamed the Komag, Incorporated 1987 Stock Option Plan. The Board then amended
the Plan in May 1987 and such amendment was approved by the stockholders at the
Annual Meeting held in May 1987. The Plan was subsequently amended and restated
by the Board in December 1987 and January 1988, respectively, and such
restatement and amendments were approved by the stockholders at the Annual
Meeting held in June of 1988. The Plan was further amended by the Board in
January 1991 and the amendment was approved by the stockholders in May 1991. The
January 23, 1992 restatement of the Plan, together with the 1,000,000 share
increase, was approved by the Board on January 23, 1992 and became effective on
such date. The stockholders approved the January 23, 1992 restatement on May 21,
1992. On January 27, 1994, the Board adopted an amendment which increased the
number of shares of Common Stock issuable under the Plan by an additional
1,000,000 shares. The increase was approved by the stockholders at the 1994
Annual Meeting.
B. On January 24, 1995, the Board approved an amendment to the
Plan to effect the following changes to the Automatic Option Grant Program: (i)
increase the number of shares subject to the initial automatic option grant made
to newly-elected or newly-appointed non-employee Board members from 3,500 shares
to 20,000 shares per individual; (ii) increase the number of shares subject to
the annual automatic option grant made to each re-elected non-employee Board
member from 3,500 shares to 5,000 shares; and (iii) adjust the vesting schedule
in effect for each such annual 5,000-share grant to provide for full vesting
upon completion of one (1) year of Board service rather than annual vesting over
a four (4)-year period. The amendments to the Automatic Option Grant Program
were approved by the stockholders at the 1995 Annual Meeting.
C. In January 1996 the Board approved an amendment to the Plan
to (i) eliminate the discretion of the Plan Administrator to grant options under
the Discretionary Option Grant Program with an exercise price per share less
than 100% of the fair market
20.
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value per share of Common Stock on the grant date, (ii) eliminate the loan
provisions of the Plan pursuant to which one or more holders of options under
the Discretionary Option Grant Program would have otherwise had the opportunity
to finance the exercise of those options through the delivery of full-recourse
promissory notes, (iii) increase the number of shares of Common Stock reserved
for issuance over the term of the Plan by an additional 3,000,000 shares and
(iv) adjust the number of shares granted to non-employee Board members. The
clause (iii) and (iv) amendments were approved by the stockholders at the 1996
Annual Meeting.
D. In March 1997 the Board amended and restated the Plan to
effect the following revisions: (i) increase the number of shares of Common
Stock reserved for issuance over the term of the Plan by an additional 2,500,000
shares, (ii) render the non-employee Board members eligible to receive option
grants under the Discretionary Option Grant Program, (iii) allow unvested shares
issued under the Plan and subsequently repurchased by the Corporation at the
option exercise price or issue price paid per share to be reissued under the
Plan, (iv) remove certain restrictions on the eligibility of non-employee Board
members to serve as Plan Administrator and (v) effect a series of additional
changes to the provisions of the Plan (including the stockholder approval
requirements) in order to take advantage of the recent amendments to Rule 16b-3
of the Securities Exchange Act of 1934, as amended, which exempts certain
officer and director transactions under the Plan from the short-swing liability
provisions of the federal securities laws. The 1997 restatement of the Plan is
subject to stockholder approval at the 1997 Annual Meeting.
E. The special sale and remittance procedure for the exercise
of outstanding options under the Plan, which was approved by the Board in
January 1991, shall be in effect for all options outstanding as of January 24,
1991 which already include such procedure as a method of exercise and for all
options granted after January 24, 1991. In addition, such procedure shall be
available for all non-qualified options currently held by officers and directors
which do not otherwise include such procedure and for any disqualifying
dispositions of Incentive Option shares effected after January 24, 1991.
F. The provisions of each restatement and amendment of the
Plan apply only to stock options and stock appreciation rights granted under the
Plan from and after the effective date of such restatement or amendment. All
stock options and stock appreciation rights issued and outstanding under the
Plan immediately prior to such effective date shall continue to be governed by
the terms and conditions of the Plan (and the respective instruments evidencing
each such option or stock appreciation right) as in effect on the date each such
option or stock appreciation right was previously granted, and nothing in any
such restatement or amendment shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such options or stock appreciation
rights with respect to their acquisition of shares of Common Stock under such
options or their exercise of such stock appreciation rights.
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G. Unless sooner terminated in accordance with paragraph III
of Articles Two and Three, the Plan shall terminate upon the earlier of (i)
January 22, 2002 or (ii) the date on which all shares available for issuance
under the Plan shall have been issued or cancelled pursuant to the exercise or
surrender of options granted hereunder. If the date of termination is determined
under clause (i) above, then options outstanding on such date shall not be
affected by the termination of the Plan and shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
H. Options may be granted under this Plan to purchase shares
of Common Stock in excess of the number of shares then available for issuance
under the Plan, provided (i) an amendment to increase the maximum number of
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such option and is thereafter submitted to the Corporation's
stockholders for approval and (ii) each option so granted is not to become
exercisable, in whole or in part, at any time prior to the obtaining of such
stockholder approval.
III. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to options granted under the Plan shall be used for general
corporate purposes.
IV. TAX WITHHOLDING
The Corporation's obligation to deliver shares or cash upon
the exercise or surrender of any option granted under the Discretionary Option
Grant Program shall be subject to the satisfaction of all applicable federal,
state and local income and employment tax withholding requirements.
V. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing or
restating the Plan, nor any action taken by the Plan Administrator hereunder,
nor any provision of the restated Plan shall be construed so as to grant any
individual the right to remain in the employ or service of the Corporation (or
any parent or subsidiary corporation) for any period of specific duration, and
the Corporation (or any parent or subsidiary corporation retaining the services
of such individual) may terminate such individual's employment or service at any
time and for any reason, with or without cause.
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VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option
hereunder, and the issuance of stock upon the exercise or surrender of any such
option shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it and the stock issued pursuant to it.
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EXHIBIT A
Non-Employee Director
Non-Statutory Stock Option Agreement
<PAGE>
EXHIBIT A
KOMAG, INCORPORATED
NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT
INITIAL OPTION GRANT
RECITALS
A. The Corporation has approved an automatic option grant
program under the Restated 1987 Stock Option Plan (the "Plan") pursuant to which
the non-employee members of the Corporation's Board of Directors (the "Board")
will automatically receive periodic option grants designed to reward them for
services they have rendered to the Corporation and to encourage them to continue
in the service of the Corporation.
B. Optionee is a non-employee member of the Board, and this
Agreement is executed pursuant to, and is intended to carry out the purposes of,
the Plan in connection with the automatic grant on this day of a stock option to
purchase shares of the Corporation's common stock, $0.01 par value ("Common
Stock"), under the Plan.
C. The granted option is intended to be a non-statutory option
which does not meet the requirements of Section 422 of the Internal Revenue
Code.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. Subject to and upon the terms and
conditions set forth in this Agreement and in the notice of grant accompanying
this Agreement ("Notice of Grant"), there is hereby automatically granted to
Optionee, as of the date of grant specified in the Notice of Grant (the "Grant
Date"), a stock option to purchase up to the number of shares of the
Corporation's Common Stock (the "Option Shares") as is specified in the Notice
of Grant at the price per share (the "Option Price") specified in the Notice of
Grant which is one hundred percent (100%) of the fair market value of the
Corporation's Common Stock on the grant date.
2. Option Term. The automatic option grant shall have a term
of ten (10) years measured from the automatic grant date and shall accordingly
expire at the close of business on the Expiration Date specified in the Notice
of Grant, unless sooner terminated in accordance with Paragraph 5 or 7.
3. Limited Transferability. This option may, in connection
with optionee's estate plan, be assigned in whole or in part during the
optionee's lifetime to one or more members of the optionee's immediate family or
to a trust established exclusively for one or more such family members. The
assigned portion may only be exercised by the person or
<PAGE>
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the administrator of the
Plan may deem appropriate.
4. Dates of Exercise. This option shall become exercisable for
the Option Shares in a series of four (4) successive annual installments as
follows:
(i) The option shall become exercisable for
twenty- five percent (25%) of the Option Shares upon the completion of
twelve (12) months of Board service measured from the automatic grant
date.
(ii) The option shall become exercisable for
an additional twenty-five percent (25%) of the Option Shares upon the
completion of twenty-four (24) months of Board service measured from
the automatic grant date.
(iii) The option shall become exercisable for
an additional twenty-five percent (25%) of the Option Shares upon the
completion of thirty-six (36) months of Board service measured from the
automatic grant date.
(iv) The option shall become exercisable for
the final twenty-five percent (25%) of the Option Shares upon the
completion of forty-eight (48) months of Board service measured from
the automatic grant date.
As the option becomes exercisable for one or more
installments of the Option Shares, those installments shall accumulate, and the
option shall remain exercisable for the accumulated installments until the
expiration or sooner termination of the option term.
5. Termination of Board Membership. Should the Optionee's
service as a Board member cease while this option remains outstanding, then the
option term specified in Paragraph 2 shall terminate (and this option shall
cease to remain outstanding) prior to the Expiration Date in accordance with the
following provisions:
(i) Should Optionee cease to be a Board member
for any reason other than death while holding this option, then the
period for exercising this option shall be reduced to a six (6)-month
period commencing with the date of such cessation of Board membership,
but in no event shall this option be exercisable at any time after the
Expiration Date. During such limited period of exercisability, this
option may not be exercised in the aggregate for more than the number
of Option Shares (if any) for which it is exercisable on the date the
Optionee ceased service as a Board member.
2.
<PAGE>
Upon the expiration of such six (6)-month period or (if earlier) upon
the specified Expiration Date of the option term, the option shall
terminate and cease to be exercisable.
(ii) Should Optionee die while serving as a
Board member or during the six (6)-month period following his or her
cessation of Board service, then the personal representative of the
Optionee's estate or the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution shall have the right to exercise this
option for any or all of the Option Shares for which the option is at
the time exercisable. Such right of exercise shall terminate, and this
option shall accordingly cease to be outstanding, upon the earlier of
(A) the expiration of the twelve (12)-month period measured from the
date of Optionee's death or (B) the specified Expiration Date of the
option term.
6. Adjustment in Option Shares.
A. In the event any change is made to the Common Stock
issuable under the Plan (whether by reason of (i) merger, consolidation or
reorganization or (ii) recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other similar change affecting the
outstanding Common Stock as a class without receipt of consideration), then,
unless such change results in the termination of all outstanding options
pursuant to the provisions of paragraph III of Articles Two and Three of the
Plan, the number and class of securities purchasable under this option and the
Option Price payable per share shall be appropriately adjusted to prevent the
dilution or enlargement of the Optionee's rights and benefits hereunder.
B. If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Option Price,
provided the aggregate Option Price shall remain the same.
7. Corporate Transaction. In the event of any of the following
stockholder-approved transactions (a "Corporate Transaction"):
(i) a merger or acquisition in which the
Corporation is not the surviving entity, except for a transaction the
principal purpose of which is to change the State of the Corporation's
incorporation,
(ii) the sale, transfer or other disposition
of all or substantially all of the assets of the Corporation, or
3.
<PAGE>
(iii) any reverse merger in which the
Corporation is the surviving entity,
this option, to the extent outstanding at the time,
shall automatically accelerate so that such option shall, immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable for all of the Option Shares at the time subject to the option and
may be exercised for any or all of those Option Shares as fullyvested shares.
Immediately following the consummation of the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
8. Change In Control/Hostile Takeover.
A. Immediately prior to the occurrence of a Change in Control
as defined below, this option, to the extent outstanding at the time, shall
automatically accelerate and become immediately exercisable for all of the
Option Shares at the time subject to the option and may be exercised for any or
all of those Option Shares as fully-vested shares. The option shall remain
exercisable for such fully-vested shares until the earlier of (i) the specified
Expiration Date of the option term or (ii) the termination of the option
pursuant to the provisions of Paragraph 5.
B. Upon the occurrence of a Hostile Takeover (as defined
below), this option shall be automatically cancelled in exchange for a cash
payment from the Corporation in an amount equal to the excess of (I) the
Take-Over Price of all the Option Shares at the time subject to the cancelled
option over (II) the aggregate Option Price payable for such shares. The cash
payment shall be made within five (5) days following the consummation of the
Hostile Take-Over.
C. For purposes of this Paragraph 8, the following definitions
shall be in effect:
A Change in Control shall be deemed to occur
in the event:
(i) any person or related group of persons
(other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Corporation) directly or indirectly acquires beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer; or
4.
<PAGE>
(ii) there is a change in the composition of
the Board over a period of twenty-four (24) consecutive months or less
such that a majority of the Board members ceases, by reason of one or
more proxy contests for the election of Board members, to be comprised
of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at least
two-thirds of the Board members described in clause (A) who were still
in office at the time such election or nomination was approved by the
Board.
A Hostile Take-Over shall be deemed to occur
in the event any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934) of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer which the Board does not
recommend the Corporation's stockholders to accept.
The Take-Over Price per share shall be deemed
to be equal to the greater of (a) the Fair Market Value per share on
the date of the option cancellation or (b) the highest reported price
per share paid in effecting such Hostile Take-Over.
9. Manner of Exercising Option.
A. In order to exercise this option for all or any part of the
Option Shares, Optionee (or in the case of exercise after Optionee's death, the
Optionee's executor, administrator, heir or legatee, as the case may be) must
take the following actions:
(i) Either provide the Stock Administrator of
the Corporation (or his/her designee) with written notice of the
exercise in which there is specified the number of Option Shares for
which the option is being exercised or initiate the exercise through
the interactive response system established with a
Corporation-designated brokerage firm.
(ii) Pay the aggregate Option Price for the
purchased shares in one or more of the following alternative forms:
1. full payment in cash or check drawn to the
Corporation's order; or
5.
<PAGE>
2. full payment in shares of Common Stock held
by the Optionee for the requisite period necessary to avoid a charge to
the Corporation's reported earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date; or
3. full payment through a combination of
shares of Common Stock held by the Optionee for the requisite period
necessary to avoid a charge to the Corporation's reported earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date and cash or check, equal to the aggregate of the Option
Price; or
4. payment effected through a broker-dealer
sale and remittance procedure pursuant to which the Optionee shall
provide irrevocable instructions to (I) a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the
settlement date, an amount equal to the aggregate option price payable
for the purchased shares plus all applicable Federal and State income
and employment taxes required to be withheld by the Corporation by
reason of such purchase and (II) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option, if
other than Optionee, have the right to exercise this option.
B. For purposes of subparagraph A above and for all other
valuation purposes under this Agreement, the Fair Market Value per share of
Common Stock on any relevant date shall be determined in accordance with the
following provisions:
(i) If the Common Stock is at the time traded
on the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
6.
<PAGE>
(ii) If the Common Stock is at the time listed
on either the New York Stock Exchange or the American Stock Exchange,
then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question on such exchange, as such price
is officially quoted in the composite tape of transactions on that
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
C. The Exercise Date shall be the first date on which there is
compliance with all the terms and conditions of subparagraphs A and B above
applicable to such exercise.
D. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of the Optionee (or any other person or
persons exercising this option) a certificate or certificates representing the
Option Shares purchased and paid for in accordance herewith.
E. In no event may this option be exercised for any fractional
share.
10. Stockholder Rights. The holder of this option shall not
have any of the rights of a stockholder with respect to the Option Shares until
such individual shall have exercised this option, paid the Option Price for the
purchased shares and been issued one or more certificates for the purchased
shares.
11. No Impairment of Rights. This Agreement shall not in any
way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. Nor shall this Agreement in any way be construed or
interpreted so as to affect adversely or otherwise impair the Corporation's
right to remove the Optionee from the Board at any time in accordance with the
provisions of applicable law.
12. Compliance with Laws and Regulations. The exercise of this
option and the issuance of the Option Shares upon such exercise shall be subject
to compliance by the Corporation and the Optionee with all applicable
requirements of law relating thereto and with all applicable regulations of any
stock exchange (or the Nasdaq National Market, if applicable) on which shares of
the Corporation's Common Stock are at the time listed for trading.
13. Successors and Assigns. Except to the extent otherwise
provided in Paragraph 3 or 7, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the successors, administrators, heirs,
legal representatives and assigns of Optionee and the successors and assigns of
the Corporation.
7.
<PAGE>
14. Discharge of Liability. The inability of the Corporation
to obtain approval from any regulatory body having authority deemed by the
Corporation to be necessary to the lawful issuance and sale of any Common Stock
pursuant to this option shall relieve the Corporation of any liability with
respect to the non-issuance or sale of the Common Stock as to which such
approval shall not have been obtained. However, the Corporation shall use its
best efforts to obtain all such applicable approvals.
15. Notices. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation in care of the Stock Administrator at the Corporate
Offices at 1704 Automation Parkway, San Jose, California 95131. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Notice of Grant. All notices shall be deemed to have been given or delivered
upon personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.
16. Construction/Governing Law. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the express terms and provisions of the Plan.
The interpretation, performance, and enforcement of this Agreement shall be
governed by the laws of the State of California.
8.
<PAGE>
KOMAG, INCORPORATED
1988 EMPLOYEE STOCK PURCHASE PLAN
PLAN AMENDMENT
The Komag, Incorporated 1988 Employee Stock Purchase Plan, as
restated June 29, 1992 and amended as of June 28, 1996 (the "Purchase Plan"), is
hereby amended, effective as of January 22, 1997, as follows:
1. Paragraph (a) of Article VI is hereby amended to read as
follows:
(a) The Stock purchasable by Participants under the
Plan shall, solely in the Board's discretion, be made available from
either authorized but unissued Stock or from reacquired Stock,
including shares of Stock purchased on the open market. The total
number of shares of Stock which may be issued under the Plan shall not
exceed 2,150,000 shares(1) (subject to adjustment under Section VI(b)).
2. Paragraph (c) of Article XI is hereby amended to read as
follows:
(c) The Plan shall terminate upon the earlier of (i)
December 31, 2001(2) or (ii) the date on which all shares available for
issuance under the Plan shall have been sold pursuant to purchase
rights exercised under the Plan.
3. Except as modified by this Plan Amendment, all the terms
and provisions of the Plan (as previously restated and amended) shall continue
in full force and effect.
IN WITNESS WHEREOF, KOMAG, INCORPORATED has caused this Plan
Amendment to be executed on its behalf by its duly-authorized officer as of the
22nd day of January, 1997.
KOMAG, INCORPORATED
By: WILLIAM L. POTTS, JR.
-------------------------------------
Title: SENIOR VICE-PRESIDENT & C.F.O.
-------------------------------------
- ----------
1 Includes a 750,000-share increase authorized by the Board on January 22,
1997, subject to stockholder approval at the 1997 Annual Meeting. No shares
shall be issued on the basis of such increase unless such stockholder
approval is obtained.
2 The three-year extension of the term of the Purchase Plan was authorized by
the Board on January 22, 1997, subject to stockholder approval at the 1997
Annual Meeting.
<PAGE>
KOMAG, INCORPORATED
MANAGEMENT BONUS PLAN
AS AMENDED AND RESTATED JANUARY 22, 1997
I. PURPOSES OF THE PLAN
1.01 The Komag, Incorporated ("Company") Management Bonus Plan
("Plan") is established to promote the interests of the Company by creating an
incentive program to (i) attract and retain employees who will strive for
excellence, and (ii) motivate those individuals to set and achieve above-average
objectives by providing them with rewards for contributions to the operating
profits and earning power of the Company.
II. ADMINISTRATION OF THE PLAN
2.01 The Plan was adopted by the Company's Board of Directors
(the "Board") and approved at the Company's stockholders at the 1996 Annual
Stockholders Meeting. The Plan shall be administered by the Compensation
Committee ("Committee") of the Board. The members of the Committee shall at all
times satisfy the requirements established for outside directors under Internal
Revenue Code Section 162(m) and the applicable Treasury Regulations.
2.02 The interpretation and construction of the Plan and the
adoption of rules and regulations for administering the Plan shall be made by
the Committee. Decisions of the Committee shall be final and binding on all
parties who have an interest in the Plan.
2.03 Within 90 days after the start of each of the Company's
fiscal years, the Committee will determine which of the Company's subsidiaries,
if any, will participate in the Plan for such fiscal year.
III. DETERMINATION OF PARTICIPANTS
3.01 An individual shall be eligible to participate in the
Plan if employed by the Company or any of its participating subsidiaries for a
period of not less than six (6) consecutive months at the time the bonus is
earned under Article IV, is in job grade E06 or above, and remains eligible for
a bonus award under the terms of Section 4.01 or 4.03. An individual who is on a
leave of absence or whose employment terminates and is then re-hired in the same
fiscal year shall remain eligible, but his or her bonus award shall be adjusted,
as provided in Article IV below.
<PAGE>
3.02 For purposes of the Plan:
A. Except as set forth in Section 3.01, an
individual shall be considered an employee for so long as such individual
remains employed by the Company or one or more subsidiary corporations.
B. Each corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company shall be
considered to be a subsidiary of the Company, provided each such corporation
(other than the last corporation in the unbroken chain) owns, at the time of
determination, stock possessing more than fifty percent of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
IV. BONUS AWARDS
4.01 No eligible employee shall earn any portion of a bonus
award made hereunder for any fiscal year until the last day of that fiscal year,
and then only if there has been an allocation of a portion of the bonus pool for
such fiscal year to that employee in accordance with the procedures set forth in
Section 4.03. If an eligible employee receives no allocation under Section 4.03,
then that employee shall not earn, and shall not otherwise be entitled to, any
bonus under the Plan for that fiscal year. In no event shall any employee
receive an allocation under Section 4.03 for a fiscal year if that employee
ceases to be employed by either the Company or one or more of its participating
subsidiary corporations for any reason, other than retirement after the age of
65, permanent disability or death, on or before the date the allocation of the
bonus pool for that fiscal year is made under section 4.03. Notwithstanding the
foregoing, if an employee is employed during part of the fiscal year by the
Company or any other participating subsidiary in the Plan and for all or part of
the remainder of that fiscal year by a subsidiary that is not covered under the
Plan, then any bonus to which that employee would otherwise be entitled for such
fiscal year had he/she continued in the employ of the Company or participating
subsidiary shall be reduced by the proportion of such fiscal year during which
the employee was employed by the non-participating subsidiary.
4.02 The Committee shall calculate the aggregate bonus pool to
be paid under the Plan for each fiscal year. The specific percentage in effect
for the fiscal year shall be determined in accordance with the Company's level
of success in achieving the budgeted operating income specified for that fiscal
year in the annual Financial Plan ("Budgeted Operating Income") which is
approved by the Board and ratified for purposes of the Plan by the Committee not
later than 90 days after the start of the fiscal year, as follows:
X = The percentage of the Operating Income of
the Company and its subsidiaries covered by the Plan that comprises the
bonus pool.
2.
<PAGE>
Y = Actual Operating Income for the fiscal
year divided by Budgeted Operating Income.
If Y is 0.6667 or greater, then X = 9(Y)-4
If Y is less than 0.6667, then X = 3Y
No amount shall be paid if Y is zero (0) or
less.
The maximum value for X shall be limited to
seven percent (7%), and in no event shall X exceed eight percent (8%) of the
Company's Consolidated Operating Income.
For purposes of this Section 4.02 bonus
formula, the following definitions shall be in effect:
"Operating Income" means the Company's
operating income for the fiscal year attributable to the Company and
the participating subsidiaries for that year.
"Consolidated Operating Income" means the
Company's consolidated operating income for the fiscal year
attributable to the Company and all its subsidiaries.
In each case, the calculations of Operating
Income and Consolidated Operating Income shall be in accordance with generally
accepted accounting principles, adjusted to exclude the following: (i) any
amounts accrued by the Company or its subsidiaries pursuant to Management Bonus
Plans or Cash Profit Sharing Plans and related employer payroll taxes for such
fiscal year, (ii) any Discretionary or Matching Contributions made to the
Savings and Deferred Profit-Sharing Plan or to the Non-Qualified Deferred
Compensation Plan for such fiscal year, (iii) all items of gain, loss or expense
for such fiscal year determined to be extraordinary or unusual in nature or
infrequent in occurrence, or related to the disposal of a segment of a business,
all as determined in accordance with the standards established by Opinion No. 30
of the Accounting Principles Board (APB No. 30), (iv) any adjustments to
earnings, gain, loss or expense attributable to a change in accounting
principles or standards, (v) all items of gain, loss or expense for such fiscal
year related to restructuring charges of subsidiaries whose operations are not
included in Operating Income for such fiscal year, (vi) all items of gain, loss
or expense for such fiscal year related to discontinued operations which do not
qualify as a segment of a business as defined under APB No. 30 and (vii) any
profit or loss attributable to the business operations of any entity acquired by
the Company during such fiscal year. Operating Income shall not be adjusted for
a minority interest holder's share of a consolidated subsidiary's operating
income or loss.
3.
<PAGE>
4.03 The aggregate bonus pool calculated in the manner
provided in Section 4.02 shall be allocated among the eligible employees in
accordance with this Section 4.03.
A. Each of the Company's executive officers
(salary grades E11 and above) will be assigned an index which is the product of
his or her base salary, measured as of the close of the fiscal year for which
the bonus allocation is made, times a multiplier. The multiplier for the
President and Chief Executive Officer and the Chairman of the Board will be two
(2). For each Senior Vice President (E12), the multiplier will be one-point-five
(1.5), and for every other Vice President (E11) the multiplier will be one (1).
B. Bonuses will be awarded to each executive
officer by multiplying the aggregate bonus pool for the fiscal year by a
fraction the numerator of which will be the individual officer's index and the
denominator of which will be the sum of the indices for all executive officers.
C. The Committee may, in its sole judgment and
discretion, reduce the bonus allocation to any or all of the executive officers.
D. The sum of all amounts not paid to
executive officers pursuant to Section 4.03C shall serve as a separate bonus
pool for the fiscal year which may be allocated in whole or in part to other
officers and exempt employees grade E06 and above. One or more executive
officers of the Company may make recommendations to the Chairman and the
President with respect to the non-executive-officer employees who should share
in such bonus pool and the portion of such pool to be allocated to each such
individual. The Chairman and the President shall review such recommendations and
shall, in their discretion, submit one or more of such recommendations (with
such adjustments as they deem appropriate) to the Committee for consideration.
On the basis of such recommendations, the Committee shall select one or more
such non-executive-officer employees to share in such bonus pool and determine
the amount of such pool to be allocated to each selected individual. The
determinations of the Committee shall be final.
E. The bonus award made under this Plan to any
participant for any fiscal year shall not exceed $5 million.
4.04 Following completion of the bonus calculation and
allocation referenced above, the Committee shall issue a written report
containing the final calculation and allocation.
V. PAYMENT OF BONUS AWARDS
5.01 The individual bonus award allocated to each employee
pursuant to Section 4.03 shall be paid to such employee within thirty (30) days
after completion of the annual audit of the Company's financial statements by
its independent auditors.
4.
<PAGE>
VI. GENERAL PROVISIONS
6.01 The Plan shall become effective when adopted by the Board
and the Company's stockholders. The Board may at any time amend, suspend or
terminate the Plan, provided such action is effected by written resolution and
does not adversely affect rights and interests of Plan participants to
individual bonuses allocated to them prior to such amendment, suspension or
termination. All material amendments to the Plan shall require stockholder
approval.
6.02 On January 22, 1997, the Board adopted an amendment to
the Plan that changed the bonus formula under Section 4.02 effective for all
fiscal years following the 1996 fiscal year ended December 27, 1996 (the "1997
Amendment"). The 1997 Amendment is subject to stockholder approval at the 1997
Annual Meeting. If the stockholders do not approve the 1997 Amendment, then the
bonus formula in effect under Section 4.02 immediately prior to the 1997
Amendment shall automatically be reinstated, and the bonus pool shall continue
to be calculated in accordance with the reinstated formula.
6.03 No amounts awarded or accrued under this Plan shall
actually be funded, set aside or otherwise segregated prior to payment. The
obligation to pay the bonuses awarded hereunder shall at all times be an
un-funded and unsecured obligation of the Company. Plan participants shall have
the status of general creditors and shall look solely to the general assets of
the Company for the payment of their bonus awards.
6.04 No Plan participant shall have the right to alienate,
pledge or encumber his/her interest in this Plan, and such interest shall not
(to the extent permitted by law) be subject in any way to the claims of the
employee's creditors or to attachment, execution or other process of law.
6.05 Neither the action of the Company in establishing the
Plan, nor any action taken under the Plan by the Committee, nor any provision of
the Plan, nor shareholder approval of the Plan itself shall be construed so as
to grant any person the right to remain in the employ of the Company or its
subsidiaries for any period of specific duration. Rather, each employee will be
employed "at-will," which means that either such employee or the Company may
terminate the employment relationship at any time for any reason, with or
without cause.
6.06 This is the full and complete agreement between the
eligible employees and the Company on the terms described herein.
5.
<PAGE>
APPENDIX A
PROXY THIS PROXY IS SOLICITED ON BEHALF OF PROXY
THE BOARD OF DIRECTORS OF KOMAG, INCORPORATED
The undersigned hereby appoints STEPHEN C. JOHNSON and TU CHEN, or either of
them, as lawful agents and proxies of the undersigned (with all powers the
undersigned would possess if personally present, including full power of
substitution) to represent and to vote all shares of the Company's capital stock
which the undersigned is entitled to vote at the Company's Annual Meeting of
Stockholders on May 14, 1997, and any adjournment or postponements thereof as
follows:
(Continued and to be signed on the other side)
1
<PAGE>
[X] Please mark
your votes
as this
This Proxy will be voted as directed, or if no direction is indicated, will be
voted FOR each of the proposals below and, at the direction of the persons named
as proxies upon such other matters as may properly come before the meeting. This
proxy may be revoked at any time before it is voted.
The Board of Directors recommends a vote FOR items 1, 2, 3, 4 and 5.
Item 1. ELECTION OF DIRECTORS
INSTRUCTION: IF YOU WISH TO WITHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW:
WITHHOLD
FOR* FOR ALL
[ ] [ ]
Tu Chen, George A. Neil, Stephen C. Johnson, Max Palevsky, Craig R. Barrett,
Anthony Sun, Chris A. Eyre, Masayoshi Takebayashi
I PLAN TO ATTEND THE MEETING [ ]
Item 2. APPROVAL OF AMENDMENTS TO THE COMPANY'S RESTATED 1987 STOCK OPTION PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 3. APPROVAL OF AMENDMENTS TO THE COMPANY'S 1988 EMPLOYEE STOCK PURCHASE
PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 4. APPROVAL OF AMENDMENTS TO THE COMPANY'S MANAGEMENT BONUS PLAN
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 5. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Receipt is hereby acknowledged to the Notice of Anual Meeting of Shareholders
and Proxy Statement dated April 4, 1997.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.
Signature(s) ____________________________________ Dated _________________, 1997
NOTE: (please sign exactly as shown on your stock certificate and on the
envelope in which this proxy was mailed. When signing as partner, corporate
officer, attorney, executor, administrator, trustee, guardian, or in any other
representative capacity, give full title as such and sign your name as well. If
stock is held jointly, each joint owner should sign.)
