UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-16852
KOMAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-2914864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1704 Automation Parkway, San Jose, California 95131
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (408) 576-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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[Cover page 1 of 2 pages]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 20, 1998 was approximately $722,784,028 (based
upon the closing sale price for shares of the Registrant's Common Stock as
reported by the Nasdaq National Market for the last trading date prior to that
date). Shares of Common Stock held by each officer, director and holder of 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On February 20, 1998 approximately 52,806,139 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.
Documents Incorporated by Reference
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated:
Komag, Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1998, Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Komag, Incorporated ("Komag" or the "Company") designs,
manufactures and markets thin-film media ("disks"), the primary
storage medium for digital data used in computer hard disk drives.
Komag believes it is the world's largest independent manufacturer of
thin-film media and is well positioned as a broad-based strategic
supplier of choice for the industry's leading disk drive manufacturers.
The Company's business strategy relies on the combination of advanced
technology and high-volume manufacturing. Komag's products address the
high-end desktop and the high-capacity/high-performance enterprise
segments of the disk drive market and are used in products such as
personal computers, disk arrays, network file servers and engineering
workstations. The Company manufactures leading-edge disk products
primarily for 3 1/2-inch and 5 1/4-inch form factor hard disk drives.
The Company was organized in 1983 and is incorporated in the State of
Delaware.
The Company's business is subject to risks and uncertainties, a
number of which are discussed under "Risk Factors."
Increasing demand for digital storage and low-cost, high-performance
hard disk drives has resulted in strong unit demand for these products.
International Data Corporation ("IDC") forecasts that worldwide disk
drive unit shipments in 1998 through 2001 will grow at a 17% compound
annual growth rate. Greater processing power, more sophisticated
operating systems and application software, high-resolution graphics and
larger data bases are among the developments that have required ever
higher performance from disk drives. For example, the first 5 1/4-inch
hard disk drive, introduced in 1980, offered a capacity of five
megabytes (one million bytes is a megabyte or "MB") with a storage
density of less than two megabits (one million bits is a megabit; eight
bits is one byte) per square inch. Current-generation 3 1/2-inch drives
typically have capacities of one to nine gigabytes (one billion bytes is
a gigabyte or "GB") with densities of approximately 1.0 to 1.5
gigabits (one billion bits is a gigabit) per square inch. Advances in
component technology have been critical to improving the performance and
storage capacity of disk drives and lowering the cost per bit stored.
The Company has capitalized on its technological strength in thin-
film processes and its manufacturing capabilities to achieve and
maintain its position as the leading independent supplier to the thin-
film media market. The Company's technological strength stems from the
depth of its understanding of materials science and the interplay
between disks, heads and other drive components. Komag's manufacturing
expertise in thin-film media is evidenced by its history of delivering
reliable products in high volume. Current manufacturing operations are
conducted by the Company in the U.S. and Malaysia as well as through
Asahi Komag Co., Ltd. ("AKCL"), a joint venture with Asahi Glass Co.,
Ltd. ("Asahi Glass") and Vacuum Metallurgical Company, which
manufactures thin-film media in Japan and Thailand. The Company
manufactures disk substrates for internal use through its subsidiary,
Komag Material Technology, Inc. ("KMT") located in Santa Rosa,
California. A 20% minority interest in KMT is held by Kobe Steel USA
Holdings Inc. ("Kobe USA"), together with Kobe Steel, Ltd. ("Kobe")
and other affiliated companies.
Technology
Komag manufactures and sells thin-film magnetic media on rigid disk
platters for use in hard disk drives. These drives are used in computer
systems to record, store and retrieve digital information. Inside a
disk drive, the media or disk rotates at speeds of up to 10,000 rpm.
The head scans across the disk as it spins, magnetically recording or
reading information. The domains where each bit of magnetic code is
stored are extremely small and precisely placed. The tolerances of the
disks and recording heads are extremely demanding and the interaction
between these components is one of the most critical design aspects in
an advanced disk drive.
The primary factors governing the density of storage achievable on a
disk's surface are (1) the minimum distance at which read/write heads
can reliably pass over the surface of the disk to detect a change in
magnetic polarity when reading from the disk, defined as glide height
(measured in microinches or millionths of an inch); (2) the strength of
the magnetic field required to change the polarity of a bit of data on
the magnetic layer of a disk when writing, defined as coercivity
(measured in oersteds-"Oe"), and (3) the ability of the head to
discriminate a signal from background media noise (signal-to-noise
ratio). As glide height is reduced, smaller bits can be read. The
higher the coercivity of the media, the smaller the width of the bit
that can be stored. The signal-to-noise ratio is determined by the
choice of magnetic materials and the method for depositing those
materials on the disk's surface. The Company's plating, polishing and
texturing processes result in a uniform surface with relatively few
defects, which permits the read/write heads to fly over the disk surface
at glide heights of 0.8 to 1.0 microinches. The magnetic alloys
deposited on the surfaces of Komag's disks have high coercivity, low
noise and other desirable magnetic characteristics. The combination of
these factors results in more data stored in a given area on the disk
surface.
The Company currently manufactures inductive and magnetoresistive
("MR") media. Inductive media is designed for use in conjunction with
a conventional head that uses a single electromagnet to read and write
data. The most advanced versions of inductive media are termed
proximity media, describing the extremely low glide height necessary to
achieve high recording density. An MR disk is optimized for use with MR
heads that use separate read and write elements. The write element is
made from conventional inductive materials, but the read element is made
of a material whose electrical resistance changes when subjected to
changes in a magnetic field. MR heads are more sensitive to magnetic
fields enabling them to read more densely-packed, smaller-sized bits.
The Company believes that MR disks will be the predominant media for
disk drives in 1998. In 1997, MR media accounted for nearly half of the
Company's net revenue.
Products, Customers and Marketing
Komag's thin-film disk products generally can be classified by size
and type of media. The diameter of the disk corresponds roughly with
the width of the disk drive. The Company sells primarily 95-mm and 130-
mm disks for 3 1/2-inch and 5 1/4-inch drives, respectively. The
Company currently sells inductive (including proximity) and MR media.
Within each of these sizes and types of media, Komag offers a range of
coercivities, glide height capabilities and other parameters to meet
specific customer requirements.
Komag primarily sells its media products to independent OEM disk
drive manufacturers for incorporation into hard disk drives that are
marketed under the manufacturers' own labels. The Company also
currently sells its disks to computer system manufacturers who make disk
drives for their own use or for sale in the open market. The Company
works closely with customers as they design new high-performance disk
drives and generally customizes its products according to customer
specifications.
Five customers accounted for approximately 96% of the Company's net
sales in 1997. Net sales to major customers were as follows: Western
Digital Corporation ("Western Digital")-38%; Maxtor Corporation, a
subsidiary of Hyundai Electronics America, ("Maxtor")-19%; Quantum
Corporation ("Quantum"), including its Japanese manufacturing partner,
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE")-15%; Seagate
Technology, Inc. ("Seagate")-14%; and International Business Machines
("IBM")-10%. Sales are generally concentrated in a small number of
customers due to the high volume requirements of the dominant disk drive
manufacturers and their tendency to rely on a few suppliers because of
the close interrelationship between media and other disk drive
components. Further, industry consolidation continued among the
Company's disk drive customers in 1997 with the bankruptcy and shutdown
of Micropolis in November. Given the relatively small number of high-
performance disk drive manufacturers, the Company expects that it will
continue its dependence on a limited number of customers.
Sales are made directly to disk drive manufacturers worldwide (except
media sales into Japan) from the Company's U.S. and Malaysian
operations. Sales of media for assembly into disk drives within Japan
are made solely through AKCL. On a selective basis, the Company has
used AKCL to distribute its products to Japanese drive manufacturers for
assembly outside of Japan. During 1997, the Company sold product to MKE
in Japan and to MKE's Singapore manufacturing facility through AKCL.
Media sales to the Far East from the Company's U.S. and Malaysian
operations represented 96%, 88% and 62% of Komag's net sales in 1997,
1996 and 1995, respectively. The Company's customers assemble a
substantial portion of their disk drives in the Far East and
subsequently sell these products throughout the world. Therefore, the
Company's high concentration of Far East sales does not accurately
reflect the eventual point of consumption of the assembled disk drives.
All foreign sales are subject to certain risks common to all export
activities, such as government regulation and the risk of imposition of
tariffs or other trade barriers. Foreign sales must also be licensed by
the Office of Export Administration of the U.S. Department of Commerce.
The Company's sales are generally made pursuant to purchase orders
rather than long-term contracts. At December 28, 1997, the Company's
backlog of purchase orders scheduled for delivery within 90 days totaled
approximately $23.7 million compared to $113.0 million at December 29,
1996. These purchase orders may be changed or canceled by customers on
short notice without significant penalty. Accordingly, the backlog
should not be relied upon as indicative of sales for any future period.
Manufacturing
Komag's manufacturing expertise in thin-film media is evidenced by
its history of delivering reliable products in high volume. Through the
utilization of proprietary processes and techniques, the Company has the
capability to produce advanced disk products that generally exhibit
uniform performance characteristics. Such uniform performance
characteristics enhance the reliability of the drive products
manufactured by the Company's customers. In addition, these
characteristics raise production yields on the customers' manufacturing
lines, which is an important cost consideration especially in high-
performance disk drives with large component counts. Manufacturing costs
are highly dependent upon the Company's ability to effectively utilize
its installed physical capacity to produce large volumes of products at
acceptable yields. To improve yields and capacity utilization, Komag has
adopted formal continuous improvement programs at all of its worldwide
operations. The process technologies employed by the Company require
substantial capital investment. In addition, long lead times to install
new increments of physical capacity complicate capacity planning.
The manufacture of the Company's thin-film sputtered disks is a
complex, multistep process that converts aluminum substrates into
finished data storage media ready for use in a hard disk drive. The
process requires the deposition of extremely thin, uniform layers of
metallic film onto a disk substrate. To achieve this end, the Company
uses a vacuum deposition, or sputtering, method similar to that used to
coat semiconductor wafers. The basic process consists of many
interrelated steps that can be grouped into five major categories:
1. Sizing and Grinding of the Substrate: A raw aluminum blank
substrate is sized by precisely cutting the inner and outer diameter of
the blank. A mechanical grinding process is then utilized to provide a
relatively flat surface on the substrate prior to nickel alloy plating.
2. Nickel Alloy Plating and Polishing of the Substrate: Through a
series of chemical baths aluminum substrates are plated with a uniform
nickel phosphorus layer in order to provide support for the magnetic
layer. Next, this layer is polished to achieve the required flatness.
3. Fine Polishing, Texturing and Cleaning: During these process
steps, disks are smoothed and cleaned to remove surface defects to allow
the read/write heads of the disk drives to fly at low and constant
levels over the disks.
4. Sputtering and Lube: By a technically demanding vacuum deposition
process, magnetic layers are successively deposited on the disk and a
hard protective overcoat is applied. After sputtering, a microscopic
layer of lubrication is applied to the disk's surfaces to improve
durability and reduce surface friction.
5. Glide Test and Certification: In robotically controlled test
cells, disks are first tested for a specified glide height and then
certified for magnetic properties. Based on these test results, disks
are graded against customers' specific performance requirements.
Most of the critical process steps are conducted in Class 100 or
better environments. Throughout the process, disks are generally handled
by custom-designed and, in many cases, Company-built automated equipment
to reduce contamination and enhance process precision. Minute impurities
in materials used, particulate contamination or other production
problems can reduce production yields and, in extreme cases, result in
the prolonged suspension of production. Although no contamination
problems have required prolonged suspension of the Company's production
to date, no assurance can be given that the Company will not experience
manufacturing problems from contamination or other causes in the future.
To address increased areal density requirements of disk products that
will be introduced in mid-1998 and beyond, the Company has decided to
make certain modifications to its current production processes during
1998. While the major processing steps remain the same, the
implementation of various steps will be different. For a discussion of
the process changes and the risks associated with these changes, see
"Risk Factors-Rapid Technology Change."
Facilities and Production Capacity
Due to a recent slowdown in the growth of demand for media,
improvements in the capabilities of the Company's competitors (both
captive and noncaptive) and deployment of significant amounts of new
media manufacturing capacity by many media suppliers including Komag,
the Company's capacity is materially underutilized for the first time
since 1989. The Company is in the process of executing a restructuring
plan to reduce its manufacturing floorspace in response to these current
conditions. At December 28, 1997, the Company and its joint venture,
AKCL, had facilities in the U.S., Japan, Malaysia and Thailand.
The Company occupied four production factories in the U.S. comprising
approximately 468,000 square feet of floorspace, an R&D facility of
approximately 188,000 square feet and warehouse and administrative
facilities with approximately 130,000 square feet. One factory, subject
to closure under the Company's restructuring plan, and a warehouse are
located in Milpitas, California. Two factories are located in San Jose,
California. The fourth factory, the Company's majority-owned subsidiary
(KMT), is located in Santa Rosa, California. The factories in Milpitas
and San Jose primarily perform the process steps from fine polishing
through test whereas the KMT facility manufactures aluminum substrates.
At the end of the third quarter of 1997, the Company closed the first of
the two Milpitas factories in accordance with the restructuring plan.
This space has been subleased. Subsequent to year-end, the Company
closed the second Milpitas factory.
The Company owns three production facilities in Malaysia, two in
Penang totaling approximately 615,000 square feet and one in Sarawak of
approximately 275,000 square feet. One of the Penang factories performs
all of the Company's process steps except aluminum substrate preparation
and the other is equipped to perform the fine polish through test steps.
The Sarawak factory is primarily dedicated to plating and polishing and
has limited capacity to manufacture aluminum substrates. The Company has
strategically located a large portion of its total worldwide front end
and back end manufacturing capacity in Malaysia. These facilities are
closer to the customers' disk drive assembly plants in Southeast Asia
and enjoy certain cost and tax advantages.
AKCL occupies approximately 495,000 square feet of building space.
AKCL's Japanese facilities are primarily dedicated to fine polish
through test and its Thailand facility is designed for plating and
polishing.
The Company expects to have installed equipment capacity at its U.S.
and Malaysian facilities capable of producing 20 million units per
quarter by the end of 1998, assuming full utilization with proper labor
staffing and adequate yields. These facilities when fully equipped and
staffed are expected to be capable of producing in excess of 25 million
units per quarter. AKCL anticipates exiting 1998 with a quarterly
capacity of approximately 7 million units. Beginning in 1998, the
Company and AKCL will use a combination of in-line and static sputtering
machines to manufacture their disk products. See "Risk Factors-Rapid
Technology Change".
Research, Development and Engineering
Since its founding, Komag has focused on the development of advanced
thin-film disk designs as well as the process technologies necessary to
produce these designs. The Company's spending and capital investment for
R&D are aimed at the investigation, design, development and testing of
new products and processes as well as the development of more efficient
processes that can be integrated into manufacturing in a commercially
viable manner. Historically, the Company has utilized a full-scale in-
line sputtering line for both development and pilot production. The new
R&D facility is equipped with two in-line sputtering lines and two
static sputtering systems. The Company believes this additional capacity
will allow more rapid development of new products as well as expanded
prototype and pilot production capability.
In 1998, the Company plans to spend approximately $50 million for
R&D, comparable to the amount spent in 1997. The Company's R&D team will
focus on introduction of new product generations, on process changes to
manufacture such products, and on improvements to increase yields of
products currently in volume production. As areal density increases,
recording heads are required to read and write smaller data bits packed
more tightly together on the surface of a disk. To accomplish this, the
read/write head must fly closer to the disks' surfaces and be able to
discriminate smaller, weaker magnetic signals. Disk substrates must be
smoother and flatter, with fewer, smaller defects. In addition, more
uniform crystal growth and improved magnetic orientation on the surface
of the disk is needed to facilitate increased density. The Company plans
to migrate its sputtering process from the deposition of a magnetic
layer over an amorphous underlayer to epitaxial deposition of the active
magnetic layer upon a crystalline underlayer, to achieve these desired
magnetic characteristics. Since epitaxial deposition requires higher
temperatures and dryer process chambers than current processes, a number
of changes must be made during 1998. First, the processes related to
producing substrates, prior to sputtering, must be changed by adding new
annealing steps to accommodate higher process temperatures. Next, to
make substrates smoother and reduce defects a new polish step will be
added. Further, the Company plans to upgrade its existing in-line
sputtering lines to increase process temperatures and provide higher
vacuum capability. While the Company believes the relatively slow
deposition rate achieved in its in-line sputtering machines will provide
a competitive advantage over time, the Company and AKCL will also
purchase and use static sputtering lines. This will allow the Company to
gain experience using static sputtering equipment, which runs at higher
deposition rates and temperatures than the Company's in-line sputtering
systems. Finally, the Company will have to continue reducing and
eliminating sources of contamination throughout its process to reduce
small surface defects on its disk products. See "Risk Factors-Rapid
Technology Change."
The Company's expenditures (and percentage of sales) on research,
development and engineering, were $51.4 million (8.1%) in fiscal 1997,
$29.4 million (5.1%) in fiscal 1996 and $23.8 million (4.6%) in fiscal
1995.
Strategic Alliances
The Company has established joint ventures with Asahi Glass and Kobe.
Komag believes these alliances have enhanced the Company's competitive
position by providing research, development, engineering and
manufacturing expertise that reduce costs and technical risks and
shorten product development cycles.
Asahi Komag Co., Ltd. ("AKCL")
In 1987, the Company formed a partnership (Komag Technology Partners)
with the U.S. subsidiaries of two Japanese companies, Asahi Glass and
Vacuum Metallurgical Company. The partners simultaneously formed a
wholly owned subsidiary, AKCL, to manufacture and distribute thin-film
disks in Yonezawa, Japan. Under the joint venture agreement, the Company
contributed technology developed prior to January 1987 and licensed
technology developed after January 1987, to the extent such technology
relates to sputtered thin-film hard disk media, for a 50% interest in
the partnership. The Japanese partners contributed equity capital
aggregating 1.5 billion yen (equivalent to approximately $11 million at
that time). AKCL began commercial production in 1988.
The terms of the joint venture agreement provide that AKCL may only
sell disks for incorporation into disk drives that are assembled in
Japan, with no limitation on the territory in which AKCL's customers can
sell such assembled disk drive products. During the term of the joint
venture agreement and for five years thereafter, the Japanese partners
and their affiliates have agreed not to develop, manufacture or sell
sputtered media anywhere in the world other than through the joint
venture, and the Company and its affiliates have agreed not to develop,
manufacture or sell such media in Japan except through the joint
venture. The Company has, however, periodically granted AKCL a limited
right to sell its disks outside of Japan and has received royalties on
such sales. Upon the occurrence of certain terminating events and the
subsequent acquisition of AKCL by one or more of the joint venture
partners, the restrictions related to activities of the acquiring joint
venture partner(s) within Japan may lapse.
Disk sales to AKCL represented 14% of the Company's net sales in 1997
compared to 6% in 1996 and less than 1% in 1995. Disk sales by the
Company to AKCL for distribution are expected to decline in 1998. The
Company purchased 11% of AKCL's unit output during 1997 compared to
approximately 3% and 1% in 1996 and 1995, respectively. The Company
anticipates that distribution sales of AKCL-produced disks to U.S.
customers in 1998 will remain a relatively small percentage of the
Company's net sales.
As a result of product transition and qualification issues, AKCL
operated substantially under capacity for the majority of 1997. While
AKCL has obtained qualification on new product offerings, the Company
anticipates that AKCL will continue to underutilize its capacity through
at least the second quarter of 1998. In February 1998, AKCL decided to
replace certain manufacturing equipment. The capacity underutilization,
coupled with the equipment write-off, will most likely generate
substantial quarterly losses at AKCL for at least the first half of
1998.
AKCL plans to use a combination of static and in-line sputtering
machines to manufacture its disk products. AKCL believes that the
products produced by a static sputtering process will be technically
similar to those produced by other Japanese media suppliers, thus
improving AKCL's ability to meet specific requirements of certain
Japanese customers on a timely basis. AKCL also plans to implement the
new epitaxial process on certain in-line sputtering equipment. The
successful implementation of the epitaxial process on AKCL's in-line
sputtering equipment, and the Japanese market acceptance of products
produced using in-line equipment, will determine AKCL's relative mix of
in-line and static machines.
Komag Material Technology, Inc. ("KMT")
In 1988, Komag formed a wholly owned subsidiary, KMT, to secure an
additional stable supply of aluminum substrates of satisfactory quality
for the Company's products. In 1989, Kobe, a leading worldwide supplier
of blank aluminum substrates, purchased a 45% interest in KMT for $1.4
million. In December 1995, the Company reacquired 25% of the outstanding
Common Stock of KMT by purchasing shares from Kobe for $6.75 million.
The Company's purchase raised its total ownership percentage of KMT to
80%. Under the recent stock purchase and related agreements, Kobe
retained one seat on KMT's Board of Directors.
Under these agreements, Kobe will continue to supply substrate blanks
to KMT while the Company will continue to purchase KMT's entire output
of finished substrates. Further, the Company has indicated its intention
to purchase a substantial proportion of its future substrate
requirements from Kobe, a continuation of a past procurement practice.
In combination, KMT, Kobe, and the Company's Sarawak facility supply
substantially all of the Company's substrate requirements. The
Company's Sarawak facility began substrate production in 1997.
Equity Positions Held by Asahi Glass and Kobe in Komag
Asahi Glass and Kobe each purchased two million shares of newly
issued Common Stock from the Company for $20 million in January 1989 and
March 1990, respectively. In 1992, Asahi Glass transferred ownership of
its shares to a U.S. subsidiary of Asahi Glass. Under their respective
stock purchase agreements, Asahi Glass and Kobe each have the right to
purchase additional shares of the Company's Common Stock on the open
market to increase their respective equity interests in the Company to
20%, to maintain their percentage interest in the Company by purchasing
their pro rata shares of any new equity issuance by the Company and to
require the Company to register their shares for resale, either on a
demand basis or concurrent with an offering by the Company. Each stock
purchase agreement further provides that the Company shall use its best
efforts to elect a representative of each investor to the Company's
Board of Directors and to include such representatives on the Nominating
Committee of the Board. There were no purchases or sales of the
Company's stock by Asahi Glass or Kobe in 1997 and according to the
Company's stock records at February 20, 1998, Asahi America and Kobe
held 2,000,000 and 2,000,002 shares of Common Stock, respectively. Sales
of significant amounts of the security holdings of Asahi Glass and/or
Kobe in the future could adversely affect the market price of the
Company's Common Stock. Any sales by either party, however, would
relieve the Company of its obligation to nominate that party's
representative for election to the Board of Directors.
Competition
Current thin-film disk competitors fall into three groups: U.S.
noncaptive manufacturers, U.S. captive manufacturers, and Japanese/Asian
manufacturers. Historically, each of these groups has supplied
approximately 30% to 40% of the worldwide thin-film disk unit output.
Based upon research conducted by an independent market research firm,
the Company believes it is the leading independent supplier of thin-film
disks. The Company's 1997 net sales were more than 90% greater than the
next largest U.S. noncaptive manufacturer during the same period. U.S.
noncaptive thin-film disk competitors include HMT Technology Corporation
and StorMedia Inc. (including the former Akashic Memories Corporation,
which was purchased by StorMedia as of December 31, 1997). Japan-based
thin-film disk competitors include Fuji Electric Company, Ltd.;
Mitsubishi Kasei Corp.; Showa Denko K.K.; and HOYA Corporation. The U.S.
captive manufacturers include IBM and OEM disk drive manufacturers, such
as Maxtor, Seagate and Western Digital, which manufacture disks as a
part of their vertical integration programs. To date, IBM and these OEM
disk drive manufacturers have sold nominal quantities of disks in the
open market. Captive media suppliers, in particular Seagate, added
significant capacity in 1997 and gained market share. The captive
manufacturers supplied in the low-40% range of the disk drive industry's
media requirements for 1997 and exited the year with a market share in
the mid- to high-40% range. Continued success by the captive suppliers
could heighten competition among the noncaptive media suppliers for the
remaining available market. Such competition could adversely affect the
financial results of noncaptive suppliers, such as Komag. See "Risk
Factors-Competition."
Environmental Regulation
The Company is subject to a variety of regulations in connection with
its operations and believes that it has obtained all necessary permits
for its operations. The Company uses various industrial hazardous
materials, including metal plating solutions, in its manufacturing
processes. Wastes from the Company's manufacturing processes are either
stored in areas with secondary containment before removal to a disposal
site or processed on site and discharged to the industrial sewer system.
The Company has made investments in upgrading its waste-water
treatment facilities to improve the performance and consistency of its
waste-water processing. Nonetheless, industrial waste-water discharges
from the Company may, in the future, be subject to more stringent
regulations. Failure to comply with present or future regulations could
result in the suspension or cessation of part or all of the Company's
operations. Such regulations could restrict the Company's ability to
expand at its present locations or could require the Company to acquire
costly equipment or incur other significant expenses.
Patents and Proprietary Information
Komag holds and has applied for U.S. and foreign patents and has
entered into cross-licenses with certain of its customers. While
possession of patents could present obstacles to the introduction of new
products by competitors and possibly result in royalty-bearing licenses
from third parties, the Company believes that its success does not
depend on the ownership of intellectual property rights but rather on
its innovative skills, technical competence and marketing abilities.
Accordingly, the patents held and applied for will not constitute any
assurance of the Company's future success.
The Company regards elements of its equipment designs and processes
as proprietary and confidential and relies upon employee and vendor
nondisclosure agreements and a system of internal safeguards for
protection. Despite these steps for protecting proprietary and
confidential information, there is a risk that competitors may obtain
and use such information. Furthermore, the laws of certain foreign
countries in which the Company does business may provide a lesser degree
of protection to the Company's proprietary and confidential information
than provided by the laws of the U.S. In addition, the Company from time
to time receives proprietary and confidential information from vendors,
customers and partners, the use and disclosure of which are governed by
nondisclosure agreements. Through internal communication and the
monitoring of use and disclosure of such information, the Company
complies with its obligations regarding use and nondisclosure. However,
despite these efforts, there is a risk that such information may be used
or disclosed in violation of the Company's obligations of nondisclosure.
The Company has occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual
rights alleged to cover certain of the Company's products or
manufacturing processes or equipment. In such cases, the Company
evaluates whether it would be necessary to defend against the claims or
to seek licenses to the rights referred to in such communications.
However, no assurance can be given that the Company will be able to
negotiate necessary licenses on terms that would not have a material
adverse effect on the Company, or at all, or that any litigation
resulting from such claims would not have a material adverse effect on
the Company's business and financial results.
Employees
As of December 28, 1997, the Company and its consolidated
subsidiaries had 4,738 employees (4,689 of which are regular employees
and 49 of which were employed on a temporary basis), including 4,233 in
manufacturing, 330 in research, development and engineering and 175 in
sales, administrative and management positions. Of the total, 2,930 are
employed at offshore facilities.
The Company believes that its future success will depend in large
part upon its ability to continue to attract, retain and motivate highly
skilled and dedicated employees. None of the Company's employees is
represented by a labor union and the Company has never experienced a
work stoppage.
Risks Factors
The Company's business is subject to a number of risks and
uncertainties. While this discussion represents the Company's current
judgment on the risks and future direction of the business, such risks
and uncertainties could cause actual results to differ materially from
any future performance suggested herein. The discussion contained in
Item 1-"Business" and Item 7-"Management's Discussion and Analysis
of Financial Condition and Results of Operations" contains predictions,
estimates and other forward-looking statements that involve a number of
risks and uncertainties. Among the factors that could cause actual
results to differ are the following. The Company sells a single product
into a market characterized by rapid technological change and sudden
shifts in the balance between supply and demand. Further, the Company is
dependent on a limited number of customers, some of whom also
manufacture some or most of their own disks internally. Competition in
the market, defined by both technology offerings and pricing, can be
fierce, especially during times of excess available capacity. The
Company has a high fixed-cost structure that can cause operating results
to vary dramatically with changes in the yield, productivity and
utilization of its factories. In addition, the business requires
substantial investments for research and development activities and for
physical assets such as equipment and facilities, that are dependent on
the Company's access to financial resources. These and other risks are
discussed more fully below. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Rapid Technology Change
The thin-film disk industry has been characterized by rapid
technological developments, increasingly shorter product life cycles and
price erosion. The Company believes that its future success depends, in
large measure, on its ability to develop and implement new process
technologies in a timely manner and to continually improve these
technologies. Such technologies must support cost-effective, high-volume
production of thin-film disks that meet the ever-advancing customer
requirements for enhanced magnetic recording performance.
Although the Company has a significant, ongoing research and
development effort to advance its process technologies and the resulting
products, there can be no assurance that the Company will be able to
develop and implement such technologies in a timely manner in order to
compete effectively against competitors' products and/or entirely new
data storage technologies. The Company's results of operations would be
materially adversely affected if the Company's efforts to advance its
process technologies were not successful or if the technologies that the
Company had chosen not to develop were proven to be viable competitive
alternatives.
As areal density increases, recording heads are required to write and
read smaller data bits packed more tightly together on the surface of
the disk. To accomplish this, the read/write head must fly closer to the
disks' surfaces and be able to discriminate smaller, weaker magnetic
signals. Disk substrates must be smoother and flatter, with fewer,
smaller defects. In addition, more uniform crystal growth and improved
magnetic orientation on the disk surface is needed to facilitate
increased density. The Company plans to migrate its sputtering process
from the deposition of a magnetic layer over an amorphous underlayer to
epitaxial deposition of the active magnetic layer upon a crystalline
underlayer to achieve these desired magnetic characteristics. Since
epitaxial deposition requires higher temperatures and dryer process
chambers than current processes, a number of changes must be made during
1998. First, the processes related to producing substrates, prior to
sputtering, must be changed by adding new annealing steps to accommodate
higher process temperatures. Next, to make substrates smoother and
reduce defects a new polish step will be added. Further, the Company
plans to upgrade its existing in-line sputtering lines to increase
process temperatures and provide higher vacuum capability. While the
Company believes the relatively slow deposition rate achieved in its in-
line sputtering machines will provide a competitive advantage over time,
the Company and AKCL will also purchase and use static sputtering lines.
This will allow the Company to gain experience using static sputtering
equipment, which runs at higher deposition rates and temperatures than
the Company's in-line sputtering systems. Finally, the Company will
have to continue reducing and eliminating sources of contamination
throughout its process to reduce small defects on the disks' surfaces.
There can be no assurance that the Company and AKCL will succeed in
modifying equipment or deploying these new processes into manufacturing
in a timely or cost-effective manner. Failure to execute these process
changes, or to execute them on time, or the inability to achieve
expected improvements through these planned changes could result in
products that would not meet industry needs. This would in turn lead to
delay in, or failure of, new product qualification and resulting lower
sales, which could have a material adverse effect on the Company's
results of operations.
Dependence on Hard Disk Drive Industry; Limited Number of Customers
The demand for the Company's high-performance thin-film disks depends
upon the demand for hard disk drives and the Company's ability to
provide technically superior products at competitive prices. The hard
disk drive market is characterized by short product life cycles and
rapid technological change. Failure by the Company to qualify new
products and/or successfully achieve volume production of new customer
products could adversely affect the Company's results of operations. The
market is also characterized by changes in the balance between supply
and demand. During periods of excess supply, prices can drop rapidly,
causing abrupt changes in the Company's financial performance. Prior to
1997, the Company's financial performance was partially insulated from
this effect due to its focus on sales of enterprise-class disk products.
The enterprise disk drive market segment experienced increased
competitive pressures and an excess supply of disk drives in 1997 as new
entrants vied for market share in this historically higher-margin
segment. Additionally, the captive media operations of various disk
drive manufacturers became stronger technically and supplied enterprise-
class disks in volume during 1997. As a result, the Company's exposure
to the more price-competitive desktop market increased significantly
while the Company's sales volume and pricing of enterprise-class disk
products declined sharply.
In June 1997, a major customer made a sudden and material cut in the
Company's orders due to the increased competition and oversupply in the
enterprise segment of the data storage business. This customer reduced
its disk drive production, utilized its own captive media operations and
purchased limited quantities of disks from noncaptive suppliers,
including Komag. Since June, the production of disk drives for the
enterprise market segment has remained at low levels as excess
inventories of enterprise-class disk drives were gradually reduced, thus
limiting the Company's sales of enterprise disk products. The $45
million drop in sales from the second quarter of 1997 to the third
quarter of 1997 was primarily attributable to reductions in enterprise
disk sales to two major customers. These two customers comprised 43% of
sales in the first half of 1997 compared to only 12% of sales in the
second half of the year. In late December 1997, the Company experienced
another unexpected and material reduction in disk orders for high-end
desktop drives due to deteriorating conditions within this market
segment. The weak market condition in both the enterprise and desktop
market segments will adversely affect the Company's financial
performance for at least the first half of 1998. Furthermore, the
Company's sales are generally made pursuant to purchase orders that are
subject to cancellation, modification or rescheduling without
significant penalties. There can be no assurance that the Company's
current customers will continue to place orders with the Company, that
orders by existing customers will recover to the levels of earlier
periods or that the Company will be able to obtain orders from new
customers.
In general, the Company's customers are moving towards fewer larger-
volume programs, characterized by shorter product life cycles.
Competition for this limited number of programs is increasing due to
media capacity additions during 1997. Additionally, customer
expectations of media suppliers are growing more demanding. Media must
be more customized to each disk drive program and supply chain
management, including just-in-time delivery, has assumed greater
importance. Timely development of new products and technologies that
assist customers in reducing their time-to-market performance and
operational excellence that supports high-volume manufacturing ramps and
tight inventory management throughout the supply chain will be keys to
both the Company's profitability and the maintenance of constructive
customer relationships. There can be no assurance that the Company will
respond to this rapidly changing environment in a manner that will
maximize utilization of its production facilities and minimize its
inventory losses.
Furthermore, the Company's sales are concentrated in a small number
of customers due to the high-volume requirements of the dominant disk
drive manufacturers and their tendency to rely on a few suppliers
because of the close interrelationship between media performance and
disk drive performance and the complexity of integrating components from
a variety of suppliers. Net sales to major customers in 1997 were as
follows: Western Digital Corporation ("Western Digital")-38%; Maxtor
Corporation, a subsidiary of Hyundai Electronics America, ("Maxtor")-
19%; Quantum Corporation ("Quantum") including its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd.
("MKE")-15%; Seagate Technology, Inc. ("Seagate")-14%; and
International Business Machines ("IBM")-10%. Consolidation continued
among the Company's disk drive customers in 1997 with the bankruptcy and
shutdown of Micropolis in November 1997. Given the relatively small
number of disk drive manufacturers, the Company expects that it will
continue its dependence on a very limited number of customers.
AKCL, the Company's Japanese joint venture, despite a long-
established working relationship with MKE, suffered a dramatic drop in
sales of AKCL-produced media to MKE due to difficulties with new product
qualifications. Like the Company, AKCL is converting its processes to
epitaxial deposition in order to improve its competitive position in the
future. During 1997, all of the Company's product sales to MKE in Japan
and to MKE's Singapore manufacturing facility were through AKCL.
Competition
The Company's thin-film disk products primarily serve the 3 1/2-inch
and 5 1/4-inch hard disk drive market, where product performance,
consistent quality and availability, taken together, are of great
competitive importance. To succeed in an industry characterized by rapid
technological developments, the Company must continuously advance its
thin-film technology at a pace consistent with or faster than its
competitors. However, if the Company is not able to keep pace with rapid
advances, the Company may lose market share and face increased price
competition from other manufacturers. Such competition could materially
adversely affect its results of operations.
Worldwide disk drive shipments grew approximately 23% in 1997 over
1996 and are projected to grow at a 17% compound annual growth rate in
1998 through 2001 according to International Data Corporation ("IDC").
In response to these historical and projected growth rates for the disk
drive market, the Company and a majority of the Company's competitors
(both independent disk manufacturers and captive disk manufacturers
owned by vertically integrated disk drive customers) have substantially
increased their disk manufacturing capacity to satisfy the anticipated
demand for disk products. The Company believes that its manufacturing
operations in Penang and Sarawak, Malaysia can provide a competitive
cost advantage relative to most other thin-film disk manufacturers that
operate exclusively in the U.S. and Japan. However, in order to remain
cost competitive, many of the U.S.- and Japan-based competitors,
including captive manufacturers, have or are currently expanding into
lower-cost regions in the world such as Southeast Asia. These
significant investments in capable new disk production capacity,
combined with the recent slowdown in demand, have resulted in an
oversupply of disk media and increased price competition in the media
market. These supply-demand conditions have increased competition for
the remaining market and have led to higher than historical price
erosion and lower factory utilization. These conditions are expected to
adversely affect the Company's results of operations for the first half
of 1998, particularly in the first quarter. Such conditions, should
they continue beyond the first half of 1998, would continue to adversely
affect the Company's results of operations.
Of the Company's U.S.-based customers, IBM, Seagate and Western
Digital produce significant portions of their media demand internally.
During 1997 IBM and Seagate produced in excess of 75% of their media
demand internally. Western Digital produced approximately one-third of
its media requirement. For the longer term, IBM and Seagate are
expected to maintain a similarly high proportion while Western Digital
has announced its intention to produce more of its media needs
internally. Another customer, Maxtor, recently commenced internal media
production. Other customers and potential customers could adopt similar
vertical-integration strategies. Depending on the overall growth in
market demand for disk products, such actions could result in the
reduction or cessation of purchases from the Company, thus materially
adversely affecting the Company's results of operations.
Fluctuation in Operating Results
The Company believes that its future operating results will continue
to be subject to quarterly variations based upon a wide variety of
factors, including the cyclical nature of the hard disk drive industry;
the ability to develop and implement new manufacturing process
technologies; the ability to introduce new products and to achieve cost-
effective, high-volume production in a timely manner; changes in product
mix and average selling prices; the availability and the extent of
utilization of the Company's production capacity; manufacturing yields;
prolonged disruptions of operations at any of the Company's facilities
for any reason; changes in the cost of or limitations on availability of
labor; and increases in production and engineering costs associated with
initial design and production of new product programs.
Because thin-film disk manufacturing requires a high level of fixed
costs, gross margins are also extremely sensitive to changes in volume.
At constant average selling prices, reductions in manufacturing
efficiency cause declines in gross margins. Additionally, decreasing
market demand for the Company's products generally results in reduced
average selling prices and/or low capacity utilization that, in turn,
adversely affect gross margins and operating results. The Company's
ability to maintain average selling prices is dependent on its ability
to produce, in volume, products that are differentiated on the basis of
technological superiority. During 1997, competitive technology had
advanced to the point that the Company's current products did not
provide a sufficient advantage, increasing the downward pressure on
pricing.
During 1997, the Company introduced new products to keep pace with
the industry's 60% improvement in areal density. These products
incorporate many new technologies including smoother substrates, laser
textures and new magnetic alloys. Industry pricing for new products has
typically decreased over a given product life cycle based on the
assumption that as improvements in new product yield and other
manufacturing efficiencies were realized, profit margins would be
maintained. In light of increasingly complex production processes and
shorter product cycles, accurately forecasting yields is a difficult
task. The difficulty in maintaining cost competitiveness through
improving yields will continue to be magnified by ever-increasing
process complexity and by the compression of product life cycles. Lower-
than-planned yields on new products, coupled with continued high usage
of production equipment for product and process development activities,
constrained unit output throughout 1997. In addition, weak demand for
enterprise-class disks in the second half of 1997 resulted in a further
reduction in utilization of the Company's factories. Further, in
December 1997, the desktop segment of the market weakened; several
customers have reduced their order volumes in the first quarter of 1998.
The Company expects that net sales could be as much as 55% lower in the
first quarter of 1998 than in the fourth quarter of 1997. Even with
expected, improved industry conditions in the second quarter, the
Company expects financial results will remain under pressure due to
capacity utilization and pricing issues. In light of the capital-
intensive, fixed-cost nature of the business, low unit output results in
high unit costs and low gross margins. In the event that market demand
does not improve, that yields of new products do not improve at the rate
expected or that the Company is unable to introduce and ramp to volume
production next-generation products in a timely manner, the Company's
operating results would likely continue to be adversely affected.
Financial Resources
The thin-film disk industry is highly capital intensive. The Company
must anticipate customer demand for both production volume and
technological capability. Careful planning is essential since the lead
time for deployment of new capacity and new process capabilities
typically exceeds current product life cycles. The Company must make
major commitments well in advance of anticipated need. The inaccurate
estimation of capacity requirements or the failure to implement the
proper technologies in a timely manner would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company believes that, in order to achieve its long-term growth
objectives and maintain and enhance its competitive position, it will
need significant additional financial resources over the next several
years for capital expenditures, working capital and research and
development. During 1996 and 1997, the Company spent approximately $403
million and $199 million, respectively, on property, plant and
equipment. In 1998, the Company plans to spend $120 million, primarily
to upgrade existing facilities and equipment in order to deploy new
process technologies into manufacturing and to improve yield and
productivity. There can be no assurance that net sales will increase
sufficiently to absorb these additional costs.
The Company borrowed $175 million during 1997 and $15 million
subsequent to year-end, increasing overall debt to $260 million and
leaving a balance of $85 million available for future borrowing under
existing lines of credit. The Company's lines of credit are subject to
certain covenants, including the number and size of consecutive
quarterly losses. In anticipation of a violation of these profitability
tests at the end of the first quarter of 1998, the Company renegotiated
the terms and covenants of its $175 million syndicated loan facility to
provide for continued access to these funds. Current borrowings under
this facility totaled $100 million at December 28, 1997. The Company
will most likely remain in compliance with its other credit facilities
through at least the first half of 1998. There can be no assurance that
these funds will remain available should the Company violate its loan
covenants at any future date or that any available funds will be
sufficient for the Company needs. The Company believes that it will be
able to fund planned 1998 expenditures from a combination of cash flow
from operations, funds available from existing bank lines of credit and
existing cash balances. If the Company is unable to obtain sufficient
capital, it could be required to reduce its capital equipment and
research and development expenditures, which could have a material
adverse affect on the Company's results of operations.
Risk of Foreign Operations / Joint Venture
In 1997, sales to customers in the Far East, including the foreign
subsidiaries of domestic disk drive companies, accounted for
approximately 96% of the Company's net sales from its U.S. and Malaysian
facilities. The Company's customers assemble a substantial portion of
their disk drives in the Far East and subsequently sell these products
throughout the world. Therefore, the Company's high concentration of Far
East sales does not accurately reflect the eventual point of consumption
of the assembled disk drives. The Company anticipates that international
sales will continue to represent the majority of its net sales. All of
the Company's sales are currently priced in U.S. dollars worldwide.
Certain costs at the Company's foreign manufacturing and marketing
operations are incurred in the local currency. The Company also
purchases certain operating supplies and production equipment from
Japanese suppliers in yen-denominated transactions. Accordingly, the
Company's operating results are subject to the risks inherent with
international operations, including, but not limited to, compliance with
or changes in the law and regulatory requirements of foreign
jurisdictions, fluctuations in exchange rates, tariffs or other
barriers, difficulties in staffing and managing foreign operations,
exposure to taxes in multiple jurisdictions and transportation delays
and interruptions.
The Company's Malaysian operations accounted for a significant
portion of the Company's 1997 consolidated net sales and generated
profits that partially offset losses incurred in the U.S. Prolonged
disruption of operations in Malaysia for any reason would cause delays
in shipments of the Company's products, thus materially adversely
affecting the Company's results of operations. Recently, there has been
a substantial devaluation of the Malaysian ringgit, along with other
Southeast Asian currencies. Changes in relative currency values can be
swift and unpredictable. While the effect of the ringgit's devaluation
has been to reduce the U.S. dollar equivalent of the ringgit-based
operating expenses, future fluctuations may have the opposite effect.
Fluctuations in the financial results of AKCL, the Company's
unconsolidated Japanese disk manufacturing joint venture, also impact
the Company's financial performance. Equity in the net loss of AKCL
increased the Company's 1997 consolidated net loss by $4.9 million.
AKCL operated substantially under capacity for the majority of 1997 and
the Company anticipates that AKCL will continue to underutilize its
capacity through at least the first half of 1998. This
underutilization, coupled with the anticipated write-off of certain
unutilized equipment, will most likely generate substantial quarterly
losses at AKCL for at least the first half of 1998. AKCL is subject to
many of the same risks facing the Company, including the risks
associated with new product introduction. In addition, the equity income
derived from AKCL fluctuates over time due to its dependence on a more
limited customer base (MKE and Fujitsu Ltd. accounted for 76% and 17%,
respectively, of AKCL's 1997 net sales) and yen/dollar exchange rate
fluctuations.
Volatility of Stock Price
The Company's Common Stock has experienced and can be expected to
experience substantial price volatility in response to actual or
anticipated quarterly variations in operating results; announcements of
technological innovations or new products by the Company or its
competitors; the success or failure of new product qualifications
(especially as new generations of product are introduced); developments
related to patents or other intellectual property rights; developments
in the Company's relationships with its customers or suppliers;
announcements of alliances, mergers or other relationships by or between
the Company's competitors and/or customers; and other events or factors.
In addition, any shortfall or changes in revenue, gross margins,
earnings or other financial results from analysts' expectations could
cause the price of the Company's Common Stock to fluctuate
significantly. In recent years, the stock market in general has
experienced extreme price and volume fluctuations which have
particularly affected the market price of many technology companies and
which have often been unrelated to the operating performance of those
companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Price Range of Common
Stock."
Patents and Proprietary Information
Protection of technology through patents and other forms of
intellectual property rights in technically sophisticated fields is
commonplace. In the disk drive industry, it is not uncommon for
companies and individuals to initiate actions against others in the
industry to enforce intellectual property rights. There can be no
assurance that others have not or will not perfect intellectual property
rights and either enforce those rights to prevent the Company from
practicing certain technologies or demand royalty payments from the
Company in return for practicing those technologies, both of which may
have a material adverse affect on the Company's results of operations.
As a measure of protection, the Company has entered into cross-license
agreements with certain of its customers. In addition, the Company
reviews, on a routine basis, patent issuances in the U.S. and patent
applications that are published in Japan. Through these reviews, the
Company occasionally becomes aware of a patent, or an application that
may mature into a patent, which could give rise to a claim of
infringement. When such patents are identified, the Company investigates
the validity and possibility of actual infringement. The Company is
presently involved in such an investigation of several recently issued
patents.
Other Risk Factors
The Company relies on a limited number of suppliers, in some cases a
sole supplier, for certain materials and equipment used in its
manufacturing processes. These materials include aluminum substrates,
nickel plating solutions, certain polishing and texturing supplies, and
sputtering target materials. These suppliers work closely with the
Company to optimize the Company's production processes. Although this
reliance on a limited number of suppliers, or a sole supplier, entails
some risk that the Company's production capacity would be limited if one
or more of such materials were to become unavailable or available in
reduced quantities, the Company believes that the advantages of working
closely with these suppliers outweigh such risks. If such materials
should be unavailable for a significant period of time, the Company's
results of operations would be adversely affected.
Given the Company's dependence on a few customers and a limited
number of product programs for each customer, the magnitude of the
inventory commitments the Company must make to support its customers'
programs and the Company's limited remedies in the event of program
cancellations, if a customer cancels or materially reduces one or more
product programs, or should a customer experience financial
difficulties, the Company may be required to take significant inventory
charges, which, in turn, could materially and adversely affect the
Company's results of operations. While the Company has taken certain
charges including inventory write-downs, to address known issues, there
can be no assurance that the Company will not be required to take
additional inventory write-downs due to the Company's inability to
obtain necessary product qualifications or due to further order
cancellations by customers.
Recently the Company was forced to reduce, for a short period of
time, operations at its Malaysian factories due to smoke generated by
wide-spread fires in the region. This curtailment did not have a
material effect on the Company's operations. In addition, the Company's
California manufacturing facilities, its Japanese joint venture (AKCL),
its Japanese supplier of aluminum blanks for substrate production, other
Japanese suppliers of key manufacturing supplies and its Japanese
supplier of sputtering machines are each located in areas with seismic
activity. The Company has incurred no significant disruptions to its
business due to seismic activity; however, there can be no assurance
that natural or man-made disasters will not result in a prolonged
disruption of production in the future. Such disruptions could have a
material adverse effect on the Company's results of operations.
ITEM 2. PROPERTIES
Worldwide (excluding AKCL), the Company currently occupies facilities
totaling approximately 1.6 million square feet. The Company owns three
disk-manufacturing facilities in Malaysia, two in Penang and one in
Sarawak. The square footage of each of these facilities and acreage of
the related land parcels are 340,000 square feet and 13 acres, 275,000
square feet and 18 acres, and 275,000 square feet and 89 acres. The
Company leases five manufacturing facilities in Milpitas, San Jose and
Santa Rosa, California. The Company's new headquarters facility and new
R&D facility in San Jose, California were occupied in the first quarter
of 1997. These facilities are leased for the following terms:
Facility Size Current Lease
(square feet) Term Expires Extension Options
225,000 September 2006 20 years
188,000 January 2007 20 years
103,000 July 1999 10 years
97,000 (1) February 2001 10 years
96,000 (2) February 2001 10 years
82,000 February 2007 20 years
48,000 December 1999 -
44,000 April 1999 10 years
In addition to the facilities listed above, the Company leases other
smaller facilities in California and Singapore. The Company owned
approximately 6 acres of undeveloped land adjacent to its Milpitas
manufacturing complex, which it sold in March 1998.
(1) This facility was vacated in the third quarter of 1997 as part of
the Company's restructuring plan and subleased in December 1997.
(2) Subsequent to year-end, the Company closed this facility as part of
the Company's restructuring plan.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which either the Company
or its subsidiaries is a party or to which any of its property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during
the Company's fourth quarter of 1997.
Executive Officers of the Registrant
As of February 23, 1998 the executive officers of the Company are as
follows:
Name Age Position
- ------------------------- ---- ---------------------------------------------
Tu Chen.................. 62 Chairman of the Board of Directors
Stephen C. Johnson....... 55 President, Chief Executive Officer and Director
Christopher H. Bajorek... 54 Senior Vice President and Chief Technical Officer
Willard Kauffman......... 62 Senior Vice President and Chief Operating Officer
William L. Potts, Jr. ... 51 Senior Vice President, Chief Financial Officer
and Secretary
Thian Hoo Tan............ 49 Senior Vice President - Worldwide Manufacturing
Fred J. Wiele............ 59 Senior Vice President - Marketing and Sales
Ronald Allen............. 49 Vice President - Equipment Technology and
Automation
Richard Austin........... 42 Vice President - U.S. Manufacturing
Elizabeth A. Lamb........ 46 Vice President - Human Resources
Ray Martin............... 54 Vice President - Product Assurance and Product
Test
Steven J. Miura.......... 45 Vice President - Advanced Products
Sonny Wey................ 58 Vice President - Product Research and Development
Tsutomu T. Yamashita..... 43 Vice President - Process Technology Research and
Development
Dr. Chen is a founder of the Company and has served as Chairman of
the Board from its inception in June 1983. From 1971 to June 1983, he
was a Member, Research Staff and principal scientist at Xerox
Corporation's Palo Alto Research Center. From 1968 to 1971, Dr. Chen was
employed as a research scientist for Northrop Corp. Dr. Chen received
his Ph.D. and M.S. degrees in Metallurgical Engineering from the
University of Minnesota and holds a B.S. degree in Metallurgical
Engineering from Cheng Kung University in Taiwan. Dr. Chen is a
director of Headway Technologies, Inc.
Mr. Johnson has served as President and Chief Executive Officer of
the Company since September 1983. From 1977 to 1983, Mr. Johnson was an
officer of Boschert Incorporated, a manufacturer of switching power
supplies, initially as Vice President, Marketing and subsequently as
President and Chief Executive Officer. Mr. Johnson holds a B.S. degree
in Engineering from Princeton University, a M.S. degree in Electrical
Engineering from the University of New Mexico and an M.B.A. degree from
the Harvard Graduate School of Business. Mr. Johnson is a director of
Uniphase Corporation.
Dr. Bajorek joined the Company and was elected to the newly created
position of Senior Vice President-Chief Technical Officer in June 1996.
Dr. Bajorek was most recently Vice President, Technology Development and
Manufacturing for the Storage Systems Division of IBM in San Jose,
California. During his 25-year career with IBM, Dr. Bajorek held various
positions in research and management related to magnetic recording,
magnetic bubble and optical storage applications. He holds a Ph.D.
degree in Electrical Engineering and Business Economics from Caltech.
Mr. Kauffman was appointed Senior Vice President and Chief Operating
Officer in February 1990. For three years prior to joining the company,
Mr. Kauffman was Executive Vice President and Chief Operating Officer of
Vitelic Corporation. Prior to that, he was employed at Intel Corporation
for 16 years in a variety of positions, including Vice President of
Component Production and Vice President of Component Quality. Mr.
Kauffman holds B.S. and M.S. degrees in Engineering Physics from Lehigh
University.
Mr. Potts joined the Company in 1987 and served as Vice President and
Chief Financial Officer from January 1991 until his promotion to Senior
Vice President and Chief Financial Officer in January 1996. In addition,
Mr. Potts serves as Secretary. Prior to joining Komag, Mr. Potts held
financial management positions at several high-technology manufacturing
concerns. He has also served on the consulting staff of Arthur Andersen
& Co. Mr. Potts holds a B.S. degree in Industrial Engineering from
Lehigh University and an M.B.A. degree from the Stanford Graduate School
of Business.
Mr. Tan was appointed Vice President of Manufacturing in September
1993 and was promoted to Senior Vice President-Worldwide Manufacturing
in February 1998. He previously served as Vice President-
Manufacturing-Asia Operations in charge of the Company's operations in
Penang and Sarawak, Malaysia. Prior to that, he served as the Managing
Director of the Company's Penang, Malaysia operation. Mr. Tan joined
Komag in 1989 and was in charge of operations at the Company's first San
Jose, California manufacturing facility. Before joining Komag in 1989,
Mr. Tan was Vice President of Operations at HMT Technology. Mr. Tan
holds a M.S. degree in Physics from the University of Malaya at Kuala
Lumpur.
Mr. Wiele joined the Company as Senior Vice President-Marketing and
Sales in June 1996. Most recently, he was General Manager, Worldwide
Sales and Marketing for the Storage Systems Division of IBM in San Jose,
California. During his 31 years with IBM, Mr. Wiele held various
marketing and sales positions within the domestic and overseas
operations of IBM. He headed product management for AS/400 hardware and
software for IBM's U.S. Marketing and Services Division. He also
directed marketing and product management for IBM Europe, Middle East
and Africa. He holds a B.S. degree in Mechanical Engineering from
Villanova University.
Mr. Allen was promoted to Vice President-Equipment Technology and
Automation in January 1997. Mr. Allen joined the Company in October 1983
to establish the Company's automation manufacturing program that he has
since directed. Prior to joining Komag, Mr. Allen was employed with
Xerox's Palo Alto Research Center as a member of the research staff. Mr.
Allen holds a B.S. degree in Physics and a minor in Chemistry from
Dillard University.
Mr. Austin joined the Company in October 1988 as Facilities and
Equipment Maintenance Manager. Prior to his promotion to Vice
President-U.S. Manufacturing in August 1997, Mr. Austin served Komag as
Vice President-Manufacturing and Corporate Facilities. Prior to joining
Komag, Mr. Austin was an Equipment Maintenance and Facilities Manager at
VLSI Technology Inc. Mr. Austin also worked at National Semiconductor
and Rockwell International between 1975 and 1983.
Ms. Lamb joined the Company as Vice President-Human Resources in
October 1996. From 1995 to 1996 she was Director of Worldwide Staffing
and Employee Relations at Adaptec. Prior to that, Ms. Lamb was Director
of Compensation, Benefits and Executive programs at Tandem. Ms. Lamb
holds a B.A. degree in Communications from San Jose State University.
Mr. Martin joined the Company as Vice President-Product Assurance
and Product Test in October 1997. From 1990 to 1997, he headed product
engineering and head/media development as Director of Process and
Technology at Quantum Corporation. Prior to working at Quantum, Mr.
Martin held a number of management and engineering positions at several
leading disk drive manufacturers, including Western Digital, Seagate,
and IBM. Mr. Martin holds a B.S. degree in Mechanical Engineering from
Kansas State University.
Mr. Miura joined the Company in 1984 as Director of Test Engineering
prior to his promotion to Vice President-Quality and Product
Integration in November 1991. He currently serves as Vice President-
Advanced Products. Before joining Komag, Mr. Miura held various
engineering positions at IBM. Mr. Miura holds both B.S. and M.S. degrees
in Electrical Engineering from the University of California, Davis.
Dr. Wey was appointed Vice President-Engineering in April 1988. Dr.
Wey currently serves as Vice President-Product Research and
Development. Dr. Wey joined the Company in November 1983 and has held
director positions in both engineering and manufacturing. For 10 years
prior to joining the Company, Dr. Wey worked in various engineering and
engineering management positions at IBM. Dr. Wey received his Ph.D.
degree in Physical Chemistry from the Illinois Institute of Technology
and holds a B.S. degree in Chemical Engineering from National Chen-Kung
University in Taiwan.
Mr. Yamashita joined the Company in 1984 and was Senior Director of
Research prior to his promotion to Vice President-Research and
Development in January 1995. Mr. Yamashita currently serves as Vice
President-Process Technology Research and Development. Prior to joining
the Company, Mr. Yamashita was a graduate research assistant in the
Department of Material Science and Engineering at Stanford University.
Mr. Yamashita holds a B.S. degree in Chemistry and an M.S. degree in
Materials Science from Stanford University.
PART II
ITEMS 5, 6, 7 and 8.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol KMAG. The following table sets forth the range of high and low
closing sales prices, as reported on the Nasdaq National Market. At February 20,
1998 the Company had approximately 507 holders of record of its Common Stock and
52,806,139 shares outstanding.
Price Range of
Common Stock
--------------------
HIGH LOW
--------- ---------
1996
First Quarter 33 1/4 23
Second Quarter 36 9/16 24
Third Quarter 27 19 3/8
Fourth Quarter 36 21
1997
First Quarter 32 7/8 25 13/32
Second Quarter 35 1/8 16 7/16
Third Quarter 22 7/16 16 1/8
Fourth Quarter 21 3/8 14 1/2
1998
First Quarter (through
February 20, 1998) 15 5/8 12 1/16
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. Certain of Komag's debt agreements limit the
amount of dividend payments without the lenders' consent.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of Komag, Incorporated. The financial data and
operating information is derived from the consolidated financial statements of
Komag, Incorporated and should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts and number of employees)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net Sales $631,082 $577,791 $512,248 $392,391 $385,375
Gross Profit 93,546 175,567 197,486 125,386 91,439
Restructuring Charge 52,157 -- -- -- 38,956
Income (Loss) Before
Minority Interests and Equity
in Joint Venture Income (Loss) (16,838) 100,553 101,410 54,156 (33,738)
Minority Interests in Net Income
(Loss) of Consolidated
Subsidiaries 400 695 1,957 1,091 (18,977)
Equity in Net Income (Loss) of
Unconsolidated Joint Venture (4,865) 10,116 7,362 5,457 4,860
Net Income (Loss) ($22,103) $109,974 $106,815 $58,522 ($9,901)
Basic Income (Loss) Per Share ($0.42) $2.15 $2.24 $1.31 ($0.23)
Diluted Income (Loss) Per Share ($0.42) $2.07 $2.14 $1.27 ($0.23)
Consolidated Balance Sheet Data:
Working Capital $296,099 $142,142 $252,218 $118,230 $97,265
Net Property, Plant & Equipment 678,596 643,706 329,174 228,883 187,267
Long-term Debt (less current
portion) 245,000 70,000 -- 16,250 29,482
Stockholders' Equity 686,184 697,940 574,564 331,215 255,331
Total Assets $1,084,664 $938,357 $686,315 $424,095 $382,297
Number of Employees at Year-end 4,738 4,101 2,915 2,635 3,497
<FN>
(1) Results of operations for 1997 included a $52.2 million restructuring charge
related to the consolidation of the Company's U.S. manufacturing
operations.
(2) Results of operations for 1993 included the Company's thin-film head
operations and a restructuring charge for the closure of the thin-film
head operations.
(3) The Company paid no cash dividends during the five-year period.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Overview
The Company's business is both capital intensive and volume
sensitive, making capacity planning and efficient capacity use
imperative. Physical capacity, utilization of this physical capacity,
yields and average unit sales price constitute the key determinants of
the Company's profitability. Of these key determinants, price and
utilization are the most sensitive to changes in product demand. If
capacity and product price are fixed at a given level and demand is
sufficient to support a higher level of output, then increased output
attained through improved utilization rates and higher manufacturing
yields will translate directly into increased sales and improved gross
margins. Alternatively, if demand for the Company's products decreases,
falling average selling prices and lower capacity utilization could
adversely affect the results of the Company's operations.
Risk Factors
The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties. While this discussion represents the Company's current
judgment on the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any
future performance suggested herein. Factors that could cause actual
results to differ include the following: industry supply-demand
relationship and related pricing for enterprise and high-end desktop
disk products; successful product qualification of next-generation
products; successful deployment of new process technologies into
manufacturing; utilization of manufacturing facilities; rate of
improvement in manufacturing efficiencies; extensibility of process
equipment to meet more stringent future product requirements;
availability of sufficient cash resources; vertical integration and
consolidation within the Company's limited customer base; increased
competition; and availability of certain sole-sourced raw material
supplies. See "Business-Risk Factors" for more detailed discussions
of the Company's risk factors.
1997 vs. 1996
Operating results for 1997 were dramatically lower than 1996.
Entering 1996, the Company was producing mature product offerings at
high yields with full utilization of its capacity and strong demand for
these products. Gross margins exceeding 40% in both the first and
second quarters of 1996 were at near-record levels for the Company. In
the third quarter of 1996, the Company began a rapid transition to MR
and proximity-inductive thin-film media products. Manufacturing yields
for these products were substantially below the high yields achieved
during the first half of 1996. Additionally, the Company devoted
significant portions of its manufacturing capacity to development
efforts for the new products. As a result of these low yield and
equipment utilization rates, the Company's sales in the second half of
1996 were production constrained and declined from the levels during the
first half of the year. Furthermore, an increasing mix of the low
yielding new products led to higher unit costs and sequential declines
in the gross margin percentage in the second half of 1996. The gross
margin percentages for the third and fourth quarters of 1996 were 24.0%
and 11.7%, respectively.
Net sales increased sequentially to $167.2 million and $175.1
million during the first and second quarters of 1997, respectively. The
sequential increases were primarily due to manufacturing capacity
additions. The gross margin percentages for the first and second
quarters of 1997 were 23.5% and 20.4%, respectively. Demand for thin-
film media products fell sharply at the end of the second quarter of
1997 as an excess supply of enterprise-class disk drives caused drive
manufacturers to reduce their build plans for this class of drives. The
resulting imbalance between media supply and demand caused a loss of
sales and prevented the Company from fully utilizing its expanded
capacity during the last half of 1997. Net sales and the gross margin
percentage fell sharply to $129.7 million and 0.2%, respectively, in the
third quarter of 1997.
During the third quarter of 1997, the Company undertook an
evaluation of the size and location of its existing production capacity
relative to the short-term market demand outlook. Based upon this
evaluation, the Company implemented a restructuring plan in August 1997.
Under the restructuring plan, the Company consolidated its U.S.
manufacturing operations into its San Jose, California facilities and
closed two older factories in Milpitas, California. The first Milpitas
factory was closed at the end of the third quarter of 1997 and the
second factory was closed in January 1998. Over time, the Company
expects that its Malaysian manufacturing operations will account for an
increasing portion of the Company's production output. These facilities
are closer to the customers' disk drive assembly plants in Southeast
Asia and enjoy certain cost and tax advantages over the Company's U.S.
manufacturing facilities.
Net sales and the gross margin percentage at $159.0 million and
11.6%, respectively, for the fourth quarter of 1997 improved over the
third quarter of 1997. In December 1997, several disk drive
manufacturers initiated cutbacks in their high-end desktop product
production plans for early 1998 in response to supply-demand imbalances
within that industry segment. Weakened demand for desktop media
products, combined with the continuing slow recovery of the enterprise-
class market segment and the increased capacity of captive media
suppliers, resulted in an excess supply of media and heightened price
competition among independent media suppliers.
While these conditions dampened the results for the fourth quarter
of 1997, the most significant impact of lower unit volumes and average
selling prices will be evident in the Company's results for the first
quarter of 1998. The Company expects that net sales for the first
quarter of 1998 could fall as much as 55% relative to the fourth quarter
of 1997. Improving industry conditions and shipment of new, higher-
density products could improve the Company's net sales in the second
quarter of 1998 but financial results will likely remain under pressure
due to low capacity utilization and continuing pricing issues. In
response to this situation, the Company has implemented a hiring freeze
and idled portions of its Malaysian production operations for
approximately two weeks during the first quarter of 1998. The Company
also accelerated the closure of its second Milpitas manufacturing
facility, which it initially planned to close in June 1998.
Additionally, the Company reduced its 1998 capital expenditure plan to
$120 million, compared to nearly $200 million in 1997.
Net Sales
Net sales for 1997 increased to $631.1 million, up 9% from $577.8
million in 1996. The higher sales were primarily due to an increase in
unit sales volume. The overall average selling price increased less
than 1% in 1997 relative to 1996. The overall average selling price
typically strengthens only as the result of product transitions to more
technologically advanced, higher-priced product offerings. Price
reductions for individual product offerings are characteristic of the
thin-film media industry. Sales of the new MR and proximity-inductive
products, which began in the third quarter of 1996, increased rapidly
and accounted for nearly all unit sales in the last half of 1997. The
effect of the sales mix shift to these new higher-priced, next-
generation products more than offset the effect of price reductions on
individual product offerings and resulted in the flat overall average
selling price.
In addition to sales of internally produced disk products, the
Company has historically resold products manufactured by its Japanese
joint venture, Asahi Komag Co., Ltd. ("AKCL"). Distribution sales of
thin-film media manufactured by AKCL were $10.5 million in 1997 and $5.7
million in 1996. The Company expects that distribution sales of AKCL
product will remain a relatively small percentage of the Company's net
sales.
During 1997, five customers accounted for over 95% of consolidated
net sales: Western Digital Corporation ("Western Digital")-38%;
Maxtor Corporation, a subsidiary of Hyundai Electronics America,
("Maxtor")-19%; Quantum Corporation ("Quantum"), together with its
Japanese contract manufacturing partner, Matsushita-Kotobuki Electronics
Industries, Ltd. ("MKE")-15%; Seagate Technology, Inc.
("Seagate")-14%; and International Business Machines ("IBM")-10%.
The distribution of sales among customers may vary from quarter to
quarter based on the match of the Company's product capabilities with
specific disk drive programs of the customers. The Company's customer
mix shifted dramatically in the third quarter of 1997 as a result of the
reduction in enterprise-class disk drive production by the Company's
customers. In the third quarter of 1997, Quantum (together with MKE)
and Seagate collectively accounted for less than 10% of the Company's
net sales. The Company's disk sales to these customers were primarily
incorporated into enterprise-class disk drives. These two customers
accounted for 35% of net sales in the second quarter of 1997.
Unit production increased 6% in 1997 relative to 1996. Increased
production volume typically occurs due to increased capacity (additional
sputtering lines and improvements in process cycle times) and/or
improvements in manufacturing efficiencies (improved production
throughput from higher yields and/or better equipment utilization). The
Company increased capacity 25% in 1997 relative to 1996. Equipment
utilization rates decreased significantly in 1997 compared to 1996 as
the Company operated below capacity in the last half of 1997 due to weak
market demand for enterprise-class disk products. Overall manufacturing
yields declined as the Company experienced continuing yield losses on MR
products. These losses were due in large measure to certain deficiencies
in the Company's front end processing operations. Additionally, the
overall manufacturing yield was substantially higher during the first
half of 1996 prior to the transition to proximity-inductive and MR
media.
Gross Margin
The gross margin percentage for 1997 decreased to 14.8% from 30.4%
for 1996. The substantial decrease in the gross margin percentage
between the years was primarily attributable to a combination of lower
manufacturing yields, reduced equipment utilization rates and inherently
higher material and processing costs for MR and advanced proximity
disks. Additionally, the Company incurred inventory write-downs in
1997, which accounted for approximately one-fourth of the decrease in
the gross margin percentage.
Operating Expenses
Research and development ("R&D") expenses increased 75% ($22.0
million) in 1997 relative to 1996. The Company moved into a newly
constructed 188,000-square-foot R&D facility in the first quarter of
1997. Costs for the new facility and increased R&D staffing accounted
for the increases between the years. In 1998, the Company plans to
spend approximately $50 million for R&D, comparable to the amount spent
in 1997. R&D spending will focus on the introduction of new product
generations, on process changes to manufacture such products and on
improvements to increase yields of products currently in volume
production. Selling, general and administrative ("SG&A") expenses
decreased $6.1 million in 1997 compared to 1996. The decrease was
mainly due to a decrease of $10.2 million in provisions for bonus and
profit sharing programs offset by increased provisions for bad debt of
$2.4 million. Excluding provisions for bonus/profit sharing programs
and provisions for bad debt, SG&A expenses increased $1.7 million due
primarily to higher payroll and facility-related costs. The Company
moved into a newly constructed administration facility in March 1997.
In the third quarter of 1997, the Company implemented a
restructuring plan involving the consolidation of its U.S. manufacturing
operations and recorded a restructuring charge of $52.2 million. The
restructuring charge included $3.9 million for severance costs
associated with approximately 330 terminated employees, $33.0 million
for the write-off of the net book value of equipment and leasehold
improvements, $10.1 million related to equipment order cancellations and
other equipment-related costs and $5.2 million for facility closure
costs. Non-cash items included in the restructuring charge totaled
approximately $33.0 million. The Company has made cash payments
totaling approximately $7.9 million primarily for severance and
equipment-related costs. The majority of the remaining $11.3 million
restructuring liability, primarily related to equipment order
cancellations and facility closure costs, is expected to be paid in
1998.
Interest Income/Expense and Other Income
Interest income decreased $1.7 million (26%) in 1997 relative to
1996 primarily due to a lower average investment balance in 1997.
Interest expense increased $8.5 million in 1997 compared to 1996. The
Company was debt free from late 1995 until November 1996. Between
November 1996 and the end of 1997, the Company borrowed $245 million
under its credit facilities. Other income increased $1.3 million in
1997 relative to 1996 mainly due to foreign currency gains generated by
the weakening of the Malaysian ringgit.
Income Taxes
The tax provision benefit of 55% for 1997 represents tax loss
carrybacks associated with the Company's U.S. operations. The effective
income tax rate for 1996 of 17% was lower than the 1996 combined federal
and state statutory rate of 41% primarily as a result of an initial
five-year tax holiday granted to the Company's wholly owned thin-film
media operation, Komag USA (Malaysia) Sdn. ("KMS"), which commenced in
July 1993. Assuming the Company fulfills certain commitments under its
license to operate within Malaysia, this initial tax holiday may be
extended for an additional five-year period by the Malaysian government.
The impact of this tax holiday was to reduce the Company's 1997 net loss
by approximately $20.8 million ($0.40 per share under both the basic and
diluted methods) and increase 1996 net income by approximately $21.8
million ($0.43 basic income per share and $0.41 diluted income per
share). Losses incurred prior to the commencement of this initial tax
holiday, approximately $6.2 million, are available for carryforward to
years following the expiration of this tax holiday. The Company has
also been granted an additional ten-year tax holiday for its second and
third plant sites in Malaysia. This new tax holiday had not yet
commenced at December 28, 1997.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated
Joint Venture
The minority interest in the net income of consolidated subsidiary
during 1997 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA")
share of Komag Material Technology, Inc.'s ("KMT") net income. KMT
recorded net income of $2.0 million and $3.5 million in 1997 and 1996,
respectively.
The Company records 50% of AKCL's net income (loss) as equity in
net income (loss) of unconsolidated joint venture. AKCL reported a net
loss of $9.7 million for 1997, compared to net income of $20.2 million
for 1996. AKCL's results for 1997 included a gain on the sale of its
investment in Headway Technologies, Inc. ("Headway") of $5.3 million
(net of tax). AKCL's results for 1996 included write-downs of $4.5
million (net of tax) related to its investment in Headway. Excluding
the Headway-related items, AKCL's net loss was $15.0 million in 1997
compared to net income of $24.7 million in 1996.
AKCL was primarily producing mature inductive products with more
stable, higher yields in 1996. Product transition issues related to
AKCL's qualification and production of MR products adversely affected
1997 results. AKCL operated substantially under capacity for the
majority of 1997. While AKCL has obtained qualification on new MR
product offerings recently, the Company anticipates that AKCL will
continue to underutilize its capacity through at least the first half of
1998. In February 1998, AKCL decided to replace certain manufacturing
equipment. The capacity underutilization, coupled with the equipment
write-off, will most likely generate substantial quarterly losses at
AKCL for at least the first half of 1998.
AKCL plans to use a combination of static and in-line sputtering
machines to manufacture its disk products. AKCL believes that the
products produced by a static sputtering process will be technically
similar to those produced by other Japanese media suppliers, thus
improving AKCL's ability to meet specific requirements of certain
Japanese customers on a timely basis. AKCL also plans to implement the
new epitaxial process on certain in-line sputtering equipment. The
successful implementation of the epitaxial process on AKCL's in-line
sputtering equipment, and the Japanese market acceptance of products
produced using in-line equipment, will determine AKCL's relative mix of
in-line and static sputtering capacity.
The Company translates AKCL's yen-based statements of operations
to U.S. dollars at the average exchange rate in effect for each
quarterly period. The Japanese yen weakened approximately 11% in 1997
relative to 1996. AKCL's net loss would have been $11.5 million in 1997
had the yen-based statement of operations been translated at the average
rate in effect for 1996.
Impact of Year 2000
Many computer systems were not designed to handle any dates beyond
the year 1999. Such systems were designed using two digits rather than
four to define the applicable year. Any computer programs that have
time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. The Company is
currently evaluating the impact of the year 2000 on its operations,
suppliers and customers. Nothing has come to the attention of the
Company that would materially impact the results of the Company's
operations. However, there can be no assurance that a year 2000 issue,
if encountered, would not have a material impact on the Company's
results of operations.
1996 vs. 1995
Product transitions were significant factors in both the 1995 and
1996 fiscal years. In 1995, the Company transitioned to its then-
current leading-edge inductive disk product family. Quarterly sales and
gross margins increased sequentially during 1995 from $105.1 million and
31.2%, respectively, in the first quarter of 1995 to $153.5 million and
42.6%, respectively, in the fourth quarter of 1995. The Company entered
1996 with continuing strong demand for its inductive media products.
Quarterly sales in excess of $150 million and gross margins exceeding
40% in both the first and second quarters of 1996 were at near-record
levels for the Company. During the third and fourth quarters of 1996,
the Company began a rapid transition to MR and proximity-inductive
media. Sales and gross margins decreased during the last half of 1996
as low manufacturing yields on these new products and high usage of
production equipment for product and process development activities
prevented the Company from fulfilling customer demand for the products.
In the third quarter of 1996, net sales and gross profit decreased to
$131.5 million and 24.0%. Net sales and gross profit were $141.2
million and 11.7% for the fourth quarter of 1996. During the fourth
quarter of 1996, the Company achieved volume production of MR disk
products and also increased the production volume for proximity-
inductive products. These two new products accounted for 54% of unit
shipments during the fourth quarter.
Net Sales
Net sales for 1996 increased to $577.8 million, up 13% from $512.2
million in 1995. The higher sales resulted from the net effect of a 21%
increase in unit sales volume and an 8% decrease in the overall average
selling price. The effects of price reductions on maturing inductive
disk products were only partially offset by a product mix shift to
higher-priced MR and proximity-inductive media. Distribution sales of
product manufactured by AKCL increased to $5.7 million in 1996 from $0.9
million in 1995.
The increase in unit production required to support the increase
in unit sales volume for 1996 relative to 1995 was primarily achieved
through the addition of production lines. Improvements in process cycle
times only slightly outpaced decreases in manufacturing yields and
equipment utilization between the years and resulted in a marginal
improvement in manufacturing efficiencies. Manufacturing yields and
equipment utilization decreased between the years mainly due to
substantially lower yield and utilization rates in the last half of 1996
on the new MR and proximity-inductive product families. Development
time for these new products, incurred on manufacturing lines, lowered
the manufacturing equipment utilization rate in the last half of 1996.
Gross Margin
The gross margin percentage for 1996 decreased to 30.4% from 38.6%
for 1995. The combination of an 8% decrease in the overall average
selling price, lower yield and equipment utilization rates in the last
half of 1996 and higher costs associated with the production of the new
MR and advanced proximity disks resulted in the lower gross margin
percentage.
Operating Expenses
Research and development ("R&D") expenses increased 24% ($5.6
million) in 1996 relative to 1995. The increase was primarily due to
development costs associated with next-generation proximity and MR media
products. Selling, general and administrative ("SG&A") expenses
decreased $10.9 million in 1996 compared to 1995. The decrease was
mainly due to a $12.0 million reduction in the provision for the
Company's bonus and profit sharing programs. Lower provisions in 1996
were primarily due to the Company's 1996 operating profit performance
relative to the Company's 1996 operating profit plan. Provisions for
bad debt also decreased $2.5 million between the years. Excluding
provisions for bad debt and the Company's bonus and profit sharing
programs, SG&A expenses increased approximately $3.6 million. Increases
in administrative costs required to support the growth in operations in
both the U.S. and Malaysia accounted for the increase.
Interest Income/Expense and Other Income
Interest income increased $0.6 million (11%) in 1996 relative to
1995 primarily due to a higher average investment balance in 1996.
Interest expense decreased $1.2 million in 1996 compared to 1995. The
Company repaid all of its existing outstanding debt in September 1995
and remained debt free until November 1996. The Company borrowed $70.0
million under its credit facilities during November and December 1996.
Other income increased $0.7 million in 1996 relative to 1995 mainly due
to the commencement of a royalty from AKCL for sales AKCL made outside
of Japan. The royalty began in the second half of 1996 and amounted to
$1.3 million for the year.
Income Taxes
The effective income tax rate for 1996 of 17% was lower than the
1996 combined federal and state statutory rate of 41% and the effective
income tax rate of 25% in 1995 primarily as a result of an initial five-
year tax holiday granted to the Company's wholly owned thin-film media
operation, Komag USA (Malaysia) Sdn. ("KMS"), which commenced in July
1993. The effective tax rate for 1996 was lower than the rate in effect
for 1995 primarily due to growth in the percentage of consolidated
income derived from the Company's Malaysian operations in 1996. The
impact of the tax holiday was to increase net income by approximately
$21.8 million ($0.43 basic income per share and $0.41 diluted income per
share) and $11.5 million ($0.24 basic income per share and $0.23 diluted
income per share) in 1996 and 1995, respectively.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated
Joint Venture
The minority interest in the net income of consolidated subsidiary
during 1996 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA")
share of Komag Material Technology, Inc.'s ("KMT") net income. KMT
was owned 55% by the Company and 45% by Kobe USA from November 1988 to
December 1995. On December 28, 1995, the Company increased its
ownership of KMT to 80% through the purchase of KMT Common Stock
directly from Kobe USA. Kobe USA retained a 20% minority interest
investment in KMT. KMT recorded net income of $3.5 million and $4.3
million in 1996 and 1995, respectively.
The Company records 50% of AKCL's net income as equity in net
income of unconsolidated joint venture. AKCL reported net income of
$20.2 million for 1996, up from $14.7 million for 1995. Excluding
losses related to Headway, AKCL recorded net income of $24.7 million in
1996, up from $16.9 million in 1995. AKCL's improved operating
performance in 1996 was primarily due to the combination of an increase
in the overall average selling price of its products and a reduction in
the overall average unit production cost on a substantially higher unit
sales volume. The Company translates AKCL's yen-based income statements
to U.S. dollars at the average exchange rate in effect for each
quarterly period. The Japanese yen weakened approximately 13% in 1996
relative to 1995. AKCL's net income would have been approximately $23.9
million in 1996 had the yen-based income statement been translated at
the average rate in effect for 1995.
Liquidity and Capital Resources
Consolidated cash and short-term investments of $166.2 million at
the end of 1997 increased from $93.2 million at the end of 1996.
Operating activities generated $84.4 million in cash during 1997 and
partially funded the Company's $199.1 million of capital spending during
the year. The Company borrowed $175.0 million under its credit
facilities. Sales of Common Stock under the Company's stock option and
stock purchase programs during the year generated $11.8 million. Working
capital increased to $296.1 million at the end of 1997 from $142.1
million at the end of 1996. Trade accounts payable and accounts payable
to related parties decreased $36.2 million primarily due to reductions
in capital spending at the end of 1997 relative to the end of 1996.
Trade accounts receivable and accounts receivable from related parties
were $17.8 million higher at the end of 1997 than at the end of 1996.
The increase was due to a combination of higher net sales in the fourth
quarter of 1997 and an increase in days of sales outstanding at the end
of 1997 compared to the corresponding period of 1996.
Total capital expenditures for 1998 are currently planned at
approximately $120 million. The 1998 capital spending plan primarily
includes costs to upgrade existing facilities and equipment to support
the deployment of new process technologies into manufacturing and to
improve yield and productivity.
Current noncancellable capital commitments total approximately $75
million. At December 28, 1997, the Company had $100 million available
under its $345 million unsecured, multiyear bank lines of credit. The
Company's lines of credit are subject to certain covenants, including
the number and size of consecutive quarterly losses. In anticipation of
a violation of these profitability tests at the end of the first quarter
of 1998, the Company renegotiated the terms and covenants of its $175
million syndicated loan facility to provide for continued access to
these funds. Current borrowings under this facility totaled $100
million at December 28, 1997. The availability of the remaining $75
million under this facility is subject to maintenance of certain
financial ratios. The Company currently expects to remain in compliance
with its other credit facilities through at least the first half of
1998. There can be no assurance that these funds will remain available
should the Company violate its loan covenants at any future date or that
any available funds will be sufficient for the Company's needs. The
Company believes that it will be able to fund planned 1998 expenditures
from a combination of cash flow from operations, funds available from
existing bank lines of credit and existing cash balances. If the Company
is unable to obtain sufficient capital, it could be required to reduce
its capital equipment and research and development expenditures, which
could have a material adverse affect on the Company's results of
operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
KOMAG, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations,
1997, 1996 and 1995
Consolidated Balance Sheets, 1997 and 1996
Consolidated Statements of Cash Flows,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Komag, Incorporated
We have audited the accompanying consolidated balance sheets of
Komag, Incorporated as of December 28, 1997 and December 29, 1996, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December
28, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedule based on our audits. We did not audit the financial
statements of Asahi Komag Co., Ltd. (a corporation in which the Company
has a 50% interest) as of December 28, 1997 and December 29, 1996, and
for each of the three years in the period ended December 28, 1997.
Those financial statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to
data included for Asahi Komag Co., Ltd. as of December 28, 1997 and
December 29, 1996, and for each of the three years in the period ended
December 28, 1997, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Komag,
Incorporated at December 28, 1997 and December 29, 1996, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 28, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
February 27, 1998
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales (see Note 13) $631,082 $577,791 $512,248
Cost of sales (see Notes 12 and 13) 537,536 402,224 314,762
---------- ---------- ----------
Gross profit 93,546 175,567 197,486
---------- ---------- ----------
Operating expenses:
Research, development and engineering 51,427 29,409 23,804
Selling, general and administrative 27,523 33,665 44,598
Restructuring charge 52,157 -- --
---------- ---------- ----------
131,107 63,074 68,402
---------- ---------- ----------
Operating income (loss) (37,561) 112,493 129,084
---------- ---------- ----------
Other income (expense):
Interest income 4,753 6,437 5,802
Interest expense (9,116) (625) (1,856)
Other, net 4,104 2,843 2,189
---------- ---------- ----------
(259) 8,655 6,135
---------- ---------- ----------
Income (loss) before income taxes,
minority interest and equity in
joint venture income (loss) (37,820) 121,148 135,219
Provision (benefit) for income taxes (20,982) 20,595 33,809
---------- ---------- ----------
Income (loss) before minority
interest and equity in joint
venture income (loss) (16,838) 100,553 101,410
Minority interest in net income
of consolidated subsidiary 400 695 1,957
Equity in net income (loss) of
unconsolidated joint venture (4,865) 10,116 7,362
---------- ---------- ----------
Net income (loss) ($22,103) $109,974 $106,815
========== ========== ==========
Basic income (loss) per share ($0.42) $2.15 $2.24
========== ========== ==========
Diluted income (loss) per share ($0.42) $2.07 $2.14
========== ========== ==========
Number of shares used in basic computation 52,217 51,179 47,589
========== ========== ==========
Number of shares used in diluted computation 52,217 53,132 49,905
========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year End
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $133,897 $90,741
Short-term investments 32,300 2,500
Accounts receivable, less allowances of
$4,424 in 1997 and $3,087 in 1996 77,792 55,676
Accounts receivable from related parties 4,106 8,449
Inventories:
Raw materials 33,730 33,734
Work-in-process 17,490 21,774
Finished goods 15,558 6,452
----------- -----------
Total inventories 66,778 61,960
Prepaid expenses and deposits 3,697 2,866
Refundable income taxes 24,524 13,326
Deferred income taxes 28,595 15,579
----------- -----------
Total current assets 371,689 251,097
Investment in Unconsolidated Joint Venture 30,126 39,754
Property, Plant and Equipment
Land 9,526 9,367
Building 126,405 110,991
Leasehold improvements 141,111 131,737
Furniture 11,791 7,754
Equipment 793,561 673,210
----------- -----------
1,082,394 933,059
Less allowances for depreciation
and amortization (403,798) (289,353)
----------- -----------
Net property, plant and equipment 678,596 643,706
Deposits and Other Assets 4,253 3,800
----------- -----------
$1,084,664 $938,357
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable $40,043 $80,089
Accounts payable to related parties 7,093 3,294
Accrued compensation and benefits 13,596 21,835
Other liabilities 3,596 1,913
Income taxes payable 9 1,824
Restructuring liability 11,253 --
----------- -----------
Total current liabilities 75,590 108,955
Long-term Debt 245,000 70,000
Deferred Income Taxes 73,335 57,806
Other Long-term Liabilities 960 497
Minority Interest in Consolidated Subsidiary 3,595 3,159
Commitments
Stockholders' Equity
Preferred Stock, $0.01 par value per share:
Authorized--1,000 shares
No shares issued and outstanding -- --
Common Stock, $0.01 par value per share:
Authorized--85,000 shares
Issued and outstanding--52,794 shares
in 1997 and 51,696 shares in 1996 528 517
Additional paid-in capital 401,869 388,305
Retained earnings 281,476 303,579
Accumulated translation adjustment 2,311 5,539
----------- -----------
Total stockholders' equity 686,184 697,940
----------- -----------
$1,084,664 $938,357
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net cash provided by operating activities-
see detail on following page $84,396 $200,892 $188,792
----------- ----------- -----------
Investing Activities
Acquisition of property, plant and equipment (199,112) (403,062) (166,450)
Purchase of subsidiary shares from
minority interest holder -- -- (6,750)
Purchases of short-term investments (37,585) (163) (177,993)
Proceeds from short-term investments
at maturity 7,785 196,462 50,478
Proceeds from disposal of equipment 550 1,883 916
Deposits and other assets (1,190) (649) 113
Dividend distribution from
unconsolidated joint venture 1,535 -- --
----------- ----------- -----------
Net cash used in investing activities (228,017) (205,529) (299,686)
----------- ----------- -----------
Financing Activities
Proceeds from long-term obligations 175,000 70,000 --
Payments of long-term obligations -- -- (29,482)
Sale of Common Stock, net of issuance costs 11,777 10,778 132,871
Distribution to minority interest holder -- (279) (280)
----------- ----------- -----------
Net cash provided by
financing activities 186,777 80,499 103,109
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 43,156 75,862 (7,785)
Cash and cash equivalents at beginning of year 90,741 14,879 22,664
----------- ----------- -----------
Cash and cash equivalents at end of year $133,897 $90,741 $14,879
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) ($22,103) $109,974 $106,815
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 128,542 86,928 65,483
Provision for losses on accounts receivable 1,315 (1,011) 1,519
Equity in net (income) of unconsolidated
joint venture 4,865 (10,117) (7,362)
Loss on disposal of equipment 2,854 445 508
Non-cash portion of restructing charge
related to write-off of property,
plant and equipment 33,013 -- --
Deferred income taxes 2,513 13,153 17,418
Deferred rent 463 23 (74)
Minority interest in net income of
consolidated subsidiary 400 695 1,957
Changes in operating assets and liabilities:
Accounts receivable (23,431) 6,995 (18,615)
Accounts receivable from related parties 4,343 (3,415) (4,820)
Inventories (4,818) (32,939) (4,920)
Prepaid expenses and deposits (831) 974 (2,811)
Trade accounts payable (40,046) 51,372 10,875
Accounts payable to related parties 3,799 (4,467) 5,407
Accrued compensation and benefits (8,239) (10,131) 14,053
Other liabilities 1,683 (183) 431
Income taxes payable (receivable) (11,179) (7,404) 2,928
Restructuring liability 11,253 -- --
----------- ----------- -----------
Net cash provided by operating activities $84,396 $200,892 $188,792
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid for interest $8,148 $340 $2,204
Cash paid (refunded) for income taxes (12,305) 15,280 13,463
Income tax benefit from stock
options exercised 1,834 3,138 3,582
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------------ Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment
---------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 45,803 $458 $238,033 $86,790 $5,934
Common Stock issued under stock
option and purchase plans,
including related tax benefits 1,411 14 14,298 -- --
Sale of Common Stock, net of
issuance costs 3,500 35 122,068 -- --
Net income -- -- -- 106,815 --
Accumulated translation adjustment -- -- -- -- 119
---------- ------- ------------ ------------- -------------
Balance at December 31, 1995 50,714 507 374,399 193,605 6,053
Common Stock issued under stock
option and purchase plans,
including related tax benefits 982 10 13,906 -- --
Net income -- -- -- 109,974 --
Accumulated translation adjustment -- -- -- -- (514)
---------- ------- ------------ ------------- -------------
Balance at December 29, 1996 51,696 517 388,305 303,579 5,539
Common Stock issued under stock
option and purchase plans,
including related tax benefits 1,098 11 13,564 -- --
Net loss -- -- -- (22,103) --
Accumulated translation adjustment -- -- -- -- (3,228)
---------- ------- ------------ ------------- -------------
Balance at December 28, 1997 52,794 $528 $401,869 $281,476 $2,311
========== ======= ============ ============= =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include
the accounts of the Company, its wholly owned and majority-owned
subsidiaries (see Note 12) and equity in its unconsolidated joint
venture (see Note 13). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Foreign Currency Translation: The functional currency of the Company's
unconsolidated joint venture is the Japanese yen. Translation
adjustments relating to the translation of these statements are included
as a separate component of stockholders' equity and not included in net
income. The functional currency for the Company's Malaysian operation
is the U.S. dollar. Remeasurement gains and losses, resulting from the
process of remeasuring these foreign currency financial statements into
U.S. dollars, are included in operations.
Foreign Exchange Gains and Losses: The Company enters into foreign
currency forward exchange contracts to reduce the impact of currency
fluctuations on firm purchase order commitments for equipment and
construction-in-process. Gains and losses related to these contracts
are included in the cost of the assets acquired. The Company had
approximately $14,095,000 and $10,320,000 in foreign exchange forward
purchase contracts outstanding at December 28, 1997 and December 29,
1996, respectively. These forward exchange contracts were comprised of
Japanese yen, Malaysian ringgit and Singapore dollar foreign currencies.
The fair market value of these foreign exchange contracts was
approximately $1,200,000 lower than the contract value at December 28,
1997. There were no significant unhedged purchase commitments at
December 28, 1997.
Cash Equivalents: The Company considers as a cash equivalent any highly
liquid investment that matures within three months of its purchase date.
Short-Term Investments: The Company invests its excess cash in high-
quality, short-term debt instruments. None of the Company's debt
security investments have maturities greater than one year. At December
28, 1997, all short-term investments are designated as available for
sale. Interest and dividends on the investments are included in
interest income.
The following is a summary of the Company's investments by major
security type at amortized cost, which approximates fair value:
Fiscal Year Ended
-----------------------
1997 1996
----------- -----------
(in thousands)
Municipal auction rate preferred stock $32,300 $2,500
Corporate debt securities 56,837 55,618
Mortgage-backed securities 79,419 35,699
----------- -----------
$168,556 $93,817
=========== ===========
Amounts included in cash and cash equivalents $136,256 $91,317
Amounts included in short-term investments 32,300 2,500
----------- -----------
$168,556 $93,817
=========== ===========
There were no realized gains or losses on the Company's investments
during 1997 as all investments were held to maturity during the year.
The Company utilizes zero-balance accounts and other cash management
tools to invest all available funds, including bank balances in excess
of book balances.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation is
computed by the straight-line method over the estimated useful lives of
the assets. The estimated useful life of the Company's buildings is 30
years. Furniture and equipment are generally depreciated over 3 to 5
years and leasehold improvements are amortized over the shorter of the
lease term or the useful life.
Revenue Recognition: The Company records sales upon shipment and
provides an allowance for estimated returns of defective products.
Research and Development: Research and development costs are expensed as
incurred.
Stock Compensation: The Company has adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). In accordance with the provisions of FAS 123, the
Company applies APB Opinion 25 and related Interpretations in accounting
for its stock-based compensation plans. Note 5 to the Consolidated
Financial Statements contains a summary of the pro forma effects to
reported net income (loss) and income (loss) per share for 1997, 1996
and 1995 as if the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as
prescribed by FAS 123.
Income Taxes: The provision (benefit) for income taxes is based on
pretax financial accounting income (loss). Deferred tax assets and
liabilities are recognized for the expected tax consequences of
temporary differences between the tax and book basis of assets and
liabilities.
Income (Loss) Per Share: In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share" ("FAS 128").
FAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported primary
earnings per share. Earnings per share amounts for all periods
presented have been restated to conform to FAS 128 requirements.
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands, except per share amounts)
Numerator: Net income (loss) ($22,103) $109,974 $106,815
----------- ----------- -----------
Denominator for basic income (loss)
per share - weighted-average shares 52,217 51,179 47,589
----------- ----------- -----------
Effect of dilutive securities:
Employee stock options -- 1,953 2,316
----------- ----------- -----------
Denominator for diluted income (loss)
per share 52,217 53,132 49,905
----------- ----------- -----------
Basic income (loss) per share ($0.42) $2.15 $2.24
=========== =========== ===========
Diluted income (loss) per share ($0.42) $2.07 $2.14
=========== =========== ===========
Fiscal Year: The Company uses a 52-53 week fiscal year ending on the
Sunday closest to December 31. The years ended December 28, 1997,
December 29, 1996 and December 31, 1995 were each comprised of 52 weeks.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment, which is the development,
production and marketing of high-performance thin-film media for use in
hard disk drives. The Company sells to original equipment manufacturers
in the rigid disk drive market and computer system manufacturers that
produce their own disk drives.
Summary information for the Company's operations by geographic location
is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net sales
To customers from U.S. operations $290,986 $316,658 $344,218
To customers from Far East operations 340,096 261,133 168,030
Intercompany from Far East operations 121,945 75,608 25,123
Intercompany from U.S. operations 38,310 22,232 6,683
----------- ----------- -----------
791,337 675,631 544,054
Eliminations (160,255) (97,840) (31,806)
----------- ----------- -----------
Total net sales $631,082 $577,791 $512,248
=========== =========== ===========
Operating income (loss)
U.S. operations ($112,022) $9,108 $63,755
Far East operations 70,821 107,774 67,930
----------- ----------- -----------
(41,201) 116,882 131,685
Eliminations 3,640 (4,389) (2,601)
----------- ----------- -----------
Total operating income (loss) ($37,561) $112,493 $129,084
=========== =========== ===========
Identifiable assets
U.S. operations $768,395 $708,436 $573,006
Far East operations 467,990 381,015 201,915
----------- ----------- -----------
1,236,385 1,089,451 774,921
Eliminations (151,721) (151,094) (88,606)
----------- ----------- -----------
Total identifiable assets $1,084,664 $938,357 $686,315
=========== =========== ===========
Export sales by domestic operations included the following:
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
Far East (see Note 13) $268,117 $249,130 $151,000
Europe 11,896 -- --
</TABLE>
NOTE 3. CONCENTRATION OF CUSTOMER AND SUPPLIER RISK
The Company performs ongoing credit evaluations of its customers'
financial conditions and generally requires no collateral. Significant
customers accounted for the following percentages of net sales in 1997,
1996 and 1995:
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
Western Digital Corporation 38% 22% 12%
Maxtor Corporation 19% <10% <10%
Quantum Corporation/MKE 15% 18% 23%
Seagate Technology, Inc. 14% 52% 44%
International Business Machines 10% <10% <10%
Hewlett-Packard Company -- <10% 15%
In early 1996, Seagate merged with Conner Peripherals, Inc. In
addition, Quantum ceased disk drive production in Milpitas, California
and Penang, Malaysia and contracted with its Japanese manufacturing
partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), to
manufacture all of its disk drives. Percentages for 1997, 1996 and 1995
represent the combined sales to Seagate/Conner and Quantum/MKE.
Hewlett-Packard exited the disk drive manufacturing business in 1996.
Kobe Steel, Ltd. ("Kobe") supplies aluminum substrate blanks to Komag
Material Technology, Inc. ("KMT"), and the Company in turn purchases
KMT's entire output of finished substrates. The Company also purchases
substantial quantities of finished substrates from Kobe in addition to
the substrates purchased from KMT. The Company also relies on a limited
number of other suppliers, in some cases a sole supplier, for certain
other materials used in its manufacturing processes. These materials
include nickel plating solutions, certain polishing and texturing
supplies and sputtering target materials. These suppliers work closely
with the Company to optimize the Company's production processes.
Although this reliance on a limited number of suppliers, or a sole
supplier, entails some risk that the Company's production capacity would
be limited if one or more of such materials were to become unavailable
or available in reduced quantities, the Company believes that the
advantages of working closely with these suppliers outweigh such risks.
If such materials should be unavailable for a significant period of
time, the Company's results of operations could be adversely affected.
NOTE 4. STOCKHOLDER'S EQUITY
In 1995, the Company raised $122,100,000 from the sale of 3,500,000
shares of Common Stock in a follow-on public stock offering.
NOTE 5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
At December 28, 1997, the Company has stock-based compensation plans,
which are described below. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recorded in the financial
statements for its stock option and stock purchase plans. Had
compensation cost for the stock-based compensation plans been determined
consistent with Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
Fiscal Year Ended
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands, except per
share amounts)
Net income: As reported ($22,103) $109,974 $106,815
Pro forma (36,833) 102,355 103,584
Basic EPS: As reported ($0.42) $2.15 $2.24
Pro forma (0.71) 2.00 2.18
Diluted EPS: As reported ($0.42) $2.07 $2.14
Pro forma (0.71) 1.93 2.08
Since FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected
until 1999.
In September 1997, the Company's Board of Directors approved the 1997
Supplemental Stock Option Plan ("Supplemental Plan"). Under the
Supplemental Plan, the Company may grant nonqualified stock options to
purchase up to 3,600,000 shares of Common Stock. In January 1998, the
Company's Board of Directors approved a 1,000,000 share increase in the
total number of shares that may be issued under the Supplemental Plan.
Under the Company's stock option plans ("Plans"), including the
Supplemental Plan, the Company may grant options to purchase up to
21,860,000 shares of Common Stock. Options may be granted to employees,
directors, independent contractors and consultants. Options under the
Supplemental Plan may not, however, be granted to the Company's
executive officers or nonemployee members of the Company's Board of
Directors. The Plans provide for issuing both incentive stock options
and nonqualified stock options, both of which must be granted at fair
market value at the date of grant. Outstanding options generally vest
over four years and expire no later than ten years from the date of
grant. Options may be exercised in exchange for cash or outstanding
shares of the Company's Common Stock. Approximately 16,000, 5,000 and
17,000 shares of the Company's Common Stock were received in exchange
for option exercises in 1997, 1996 and 1995, respectively.
In October 1997, the Company's Board of Directors approved an option
exchange program, subject to election by the option holders, whereby
options to purchase 1,806,000 shares of the Company's Common Stock at
prices ranging from $19.75 to $36.00 per share were canceled and
reissued at $19.44 per share, which was the fair market value of the
Company's Common Stock at that time. The new options generally vest
over two to four years. The option exchange program was not available
to the Company's executive officers or nonemployee members of the
Company's Board of Directors.
At December 28, 1997, approximately 6,473,000 shares of Common Stock
were reserved for future option grants and 6,894,000 shares of Common
Stock were reserved for the exercise of outstanding options.
Approximately 2,297,000, 1,917,000 and 1,487,000 of the outstanding
options were exercisable at December 28, 1997, December 29, 1996 and
December 31, 1995, respectively.
For purposes of the 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 used for grants in 1997,
1996 and 1995, respectively: risk-free interest rates of 6.3%, 6.1% and
6.4%; volatility factors of the expected market price of the Company's
Common Stock of 61.9%, 60.0% and 59.3%; and a weighted-average expected
life of the options of 6.5, 5.9 and 6.2 years. There was no dividend
yield included in the calculation as the Company does not pay dividends.
The weighted-average fair value of options granted during 1997, 1996 and
1995 was $11.06, $12.88 and $8.58, respectively.
A summary of stock option transactions is as follows:
Weighted-
average
Exercise
Shares Price
--------- ------------
(in thousands, except per share amounts)
Outstanding at January 1, 1995 4,699 $8.55
Granted 1,479 16.58
Exercised (997) 7.20
Cancelled (153) 10.24
--------- -------
Outstanding at December 31, 1995 5,028 11.13
Granted 1,651 25.65
Exercised (635) 9.00
Cancelled (299) 16.43
--------- -------
Outstanding at December 29, 1996 5,745 15.26
Granted 4,141 22.38
Exercised (678) 9.66
Cancelled (2,314) 25.42
--------- -------
Outstanding at December 28, 1997 6,894 $16.68
========= =======
The following table summarizes information concerning currently
outstanding and exercisable options (option shares in thousands):
<TABLE>
<CAPTION>
Options Oustanding Options Exercisable
------------------------------------ ------------------------
Remaining
Range of Number Contractual Exercise Number Exercise
Exercise Prices* Outstanding Life (yrs)* Price* Exercisable Price*
- ----------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.06 - $ 10.00 1,535 5.9 $8.41 1,444 $8.39
10.01 - 14.00 1,412 7.5 11.76 594 10.67
14.01 - 21.00 2,615 9.1 19.05 100 19.93
21.01 - 28.00 901 8.2 25.32 103 25.19
28.01 - 34.13 431 8.1 29.84 56 33.94
------------ ------------
Enter 6,894 2,297
============ ============
* Weighted-average
</TABLE>
Under the terms of the Employee Stock Purchase Plan ("ESPP Plan"),
employees may elect to contribute up to 10% of their compensation toward
the purchase of shares of the Company's Common Stock. The purchase
price per share will be the lesser of 85% of the fair market value of
the stock on the first day of enrollment in a twenty-four-month offering
period or the last day of each semi-annual period within the twenty-
four-month offering period. The total number of shares of stock that
may be issued under the Plan cannot exceed 3,550,000 shares. Shares
issued under the ESPP Plan approximated 436,000, 352,000 and 431,000 in
1997, 1996 and 1995, respectively. At December 28, 1997, approximately
360,000 shares of Common Stock were reserved for future issuance under
the ESPP Plan. In January 1998, the Company's Board of Directors
approved a 1,300,000 share increase in the total number of shares that
may be issued under the ESPP Plan. The increase is subject to
shareholder approval.
For purposes of the pro forma disclosure, the fair value of the
employees' purchase rights has been estimated using the Black-Scholes
model assuming risk-free interest rates of 6.5%, 5.6% and 6.4% in 1997,
1996 and 1995, respectively. Volatility factors of the expected market
price were 60%, 60% and 59% for 1997, 1996 and 1995, respectively. The
weighted-average expected life of the purchase rights was six months for
1997, 1996 and 1995. The weighted-average fair value of those purchase
rights granted in 1997, 1996 and 1995 was $6.37, $5.09 and $6.36,
respectively.
NOTE 6. BONUS AND PROFIT SHARING PLANS
Under the terms of the Company's cash profit sharing plan, a percentage
of consolidated semi-annual operating profit, as defined in the plan, is
allocated among all employees who meet certain criteria. In 1997 and
1996, under the terms of the Company's bonus plans, a percentage of
consolidated annual operating profit, as defined in the respective bonus
plans, was paid to eligible employees. In 1995, various percentages of
an operating unit's annual operating profit, as defined in the
respective bonus plans, was paid to eligible employees. The Company
expensed $1,966,000, $9,078,000 and $19,990,000 under these bonus and
cash profit sharing plans in 1997, 1996 and 1995, respectively.
The Company and its subsidiaries maintain savings and deferred profit
sharing plans. Employees who meet certain criteria are eligible to
participate. In addition to voluntary employee contributions to these
plans, the Company contributes four percent of semi-annual consolidated
operating profit, as defined in the plans. These contributions are
allocated to all eligible employees. Furthermore, the Company matches a
portion of each employee's contributions to the plans up to a maximum
amount. The Company contributed $2,534,000, $5,573,000 and $6,653,000
to the plans in 1997, 1996 and 1995, respectively.
Expenses for the Company's bonus and profit sharing plans are included
in selling, general and administrative expenses.
NOTE 7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Fiscal Year Ended
-----------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Federal:
Current ($24,036) $3,988 $16,496
Deferred 2,192 10,265 14,830
--------- --------- ---------
(21,844) 14,253 31,326
State:
Current (490) 496 (1,284)
Deferred 321 2,888 2,588
--------- --------- ---------
(169) 3,384 1,304
Foreign:
Current 1,031 2,958 1,179
--------- --------- ---------
($20,982) $20,595 $33,809
========= ========= =========
The foreign provision above consists of withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries.
Deferred tax assets (liabilities) are comprised of the following:
Fiscal Year End
-------------------
1997 1996
--------- ---------
(in thousands)
Depreciation ($22,118) ($9,656)
State income taxes (10,299) (11,988)
Deferred income (34,023) (25,764)
Other (6,895) (10,398)
--------- ---------
Gross deferred tax liabilities (73,335) (57,806)
--------- ---------
Inventory valuation adjustments 8,971 3,448
Accrued compensation and benefits 3,175 2,956
State income taxes 2,484 5,123
Other 13,965 4,052
Tax benefit of net operating losses 35,046 35,046
--------- ---------
Gross deferred tax assets 63,641 50,625
--------- ---------
Deferred tax asset valuation allowance (35,046) (35,046)
--------- ---------
($44,740) ($42,227)
========= =========
As of December 28, 1997, a 60%-owned subsidiary of the Company, Dastek
Holding Company, has a federal tax net operating loss carryforward of
approximately $100,000,000. The Company has fully reserved for the
potential future federal tax benefit of this net operating loss in the
deferred tax asset valuation allowance due to the fact that its
utilization is limited to the subsidiary's separately computed future
taxable income and that the subsidiary has no history of operating
profits. The deferred tax asset valuation allowance was unchanged in
1997 and increased $257,000 and $1,189,000 in 1996 and 1995,
respectively. The $100,000,000 net operating loss carryforward expires
at various dates through 2010.
A reconciliation of the income tax provision at the 35% federal
statutory rate to the income tax provision at the effective tax rate is
as follows:
Fiscal Year Ended
-----------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Income taxes computed at federal
statutory rate ($13,237) $42,402 $47,327
State and foreign income taxes, net of
federal benefit 907 5,021 868
Tax-exempt interest income -- (1,193) (1,434)
Permanently reinvested foreign earnings (25,597) (26,050) (12,634)
Losses for which no current
year benefit available 16,561 -- --
Other 384 415 (318)
--------- --------- ---------
($20,982) $20,595 $33,809
========= ========= =========
Foreign pretax income was $74,400,000, $104,300,000 and $65,903,000 in
1997, 1996 and 1995, respectively.
Komag USA (Malaysia) Sdn. ("KMS"), the Company's wholly owned thin-
film media operation in Malaysia, was granted its initial tax holiday
for a period of five years commencing in July 1993. Assuming KMS
fulfills certain commitments under its license to operate within
Malaysia, this initial tax holiday may be extended for an additional
five-year period by the Malaysian government. The impact of this tax
holiday was to reduce the Company's 1997 net loss by approximately
$20,826,000 ($0.40 per share under both the basic and diluted methods)
and increase 1996 net income by approximately $21,800,000 ($0.43 basic
income per share and $0.41 diluted income per share). Losses incurred
prior to the commencement of this initial tax holiday, approximately
$6,237,000, are available for carryforward to years following the
expiration of the tax holiday. The Company has also been granted an
additional ten-year tax holiday for its second and third plant sites in
Malaysia. This new tax holiday had not yet commenced at December 28,
1997.
The Company has generated $230,681,000 of earnings for which no U.S. tax
has been provided as of December 28, 1997. These earnings are
considered to be permanently invested outside the United States.
NOTE 8. TERM DEBT AND LINES OF CREDIT
The Company has borrowed $245,000,000 and $70,000,000 under its term
debt and line of credit facilities at December 28, 1997 and December 29,
1996, respectively. At December 28, 1997, these borrowings incurred
interest at 6.5% to 7.4%, with interest-only payments due quarterly.
Principal payments under the line of credit agreements are due six and
twelve months after the borrowing date but may be extended by the
Company for additional one- to twelve-month periods through 1999 and
2002. The Company intends to extend the principal repayment under these
lines of credit and has classified the principal as long-term debt.
Interest rates in effect for the extension periods will be based upon
prevailing Eurodollar, Federal Funds and/or LIBOR rates plus 0.375% to
1.875% at the time of principal extension.
The Company's credit facilities total $345,000,000 and are comprised of
five agreements: a five-year term loan that expires in 2002, two
separate revolving line of credit agreements that expire in 2002 and two
separate four-year revolving line of credit agreements that expire in
1999 and 2000. These agreements may be extended, subject to bank
approvals, annually for an additional year, thus perpetuating their
multiyear tenors. At December 28, 1997, $100,000,000 was available
under these unsecured credit facilities. Subsequent to year-end, the
Company borrowed an additional $15,000,000 under these unsecured credit
facilities.
The Company's credit facilities require maintenance of certain financial
ratios and compliance with covenants, including limitations on both the
size and number of sequential quarterly losses. Additionally, these
covenants limit the amount of dividend payments without the lenders'
consents. At December 28, 1997, the Company was in compliance with its
debt covenants.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and short-term investments, accounts
receivable and certain other liabilities on the Consolidated Balance
Sheets approximate fair value at December 28, 1997 and December 29, 1996
due to the relatively short period to maturity of the instruments. Fair
value of long-term debt was based on quoted market prices or pricing
models using current market rates. The carrying value on the
Consolidated Balance Sheets approximates fair value at December 28, 1997
and December 29, 1996. See Note 1 for fair value of foreign currency
hedge contracts.
NOTE 10. LEASES AND COMMITMENTS
The Company leases certain production, research and administrative
facilities under operating leases that expire at various dates between
1999 and 2007. Certain of these leases include renewal options varying
from five to twenty years.
At December 28, 1997, the future minimum commitments for all
noncancellable operating leases are as follows (in thousands):
1998 $6,879
1999 5,944
2000 5,222
2001 4,900
2002 4,818
Thereafter 21,290
---------
Total minimum lease payments $49,053
=========
Rental expense for all operating leases amounted to $8,047,000,
$4,838,000 and $4,212,000 in 1997, 1996 and 1995, respectively.
The Company has current noncancellable capital commitments of
approximately $75,000,000.
NOTE 11. RESTRUCTURING CHARGE
In August 1997, the Company implemented a restructuring plan based on an
evaluation of the size and location of its existing production capacity
relative to the short-term market demand outlook. Under the
restructuring plan, the Company consolidated its U.S. manufacturing
operations into its San Jose, California facilities and closed two older
factories in Milpitas, California. The first Milpitas factory was
closed at the end of the third quarter of 1997 and the second factory,
originally scheduled for closure by the end of the second quarter of
1998, was closed in January 1998. Over time the Company expects that its
Malaysian manufacturing operations will account for an increasing
portion of the Company's production output. These facilities are closer
to customers' disk drive assembly plants in Southeast Asia and enjoy
certain cost and tax advantages over the Company's U.S. manufacturing
facilities.
The planned restructuring actions resulted in a charge of $52,200,000
and included reducing headcount, vacating leased facilities,
consolidating operations and disposing of assets. The restructuring
charge included $3,900,000 for severance costs associated with
approximately 330 terminated employees, $33,000,000 for the write-off of
the net book value of equipment and leasehold improvements, $10,100,000
related to equipment order cancellations and other equipment-related
costs and $5,200,000 for facility closure costs. Non-cash items
included in the restructuring charge totaled approximately $33,000,000.
At December 28, 1997, $11,300,000 related to the restructuring
activities remained in current liabilities. The Company has made cash
payments totaling approximately $7,900,000 primarily for severance costs
and equipment-related costs. The majority of the remaining
restructuring liability, primarily related to equipment order
cancellations and facility closure costs, is expected to be paid in
1998.
NOTE 12. KOMAG MATERIAL TECHNOLOGY, INC.
The Company's financial statements include the consolidation of the
financial results of Komag Material Technology, Inc. ("KMT"), which
manufactures and sells aluminum disk substrate products for high-
performance magnetic storage media. KMT is owned 80% by the Company and
20% by Kobe Steel USA Holdings Inc. ("Kobe USA"), a U.S. subsidiary of
Kobe Steel, Ltd. ("Kobe").
Other transactions between Kobe or its distributors and the Company were
as follows:
Fiscal Year Ended
-----------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Accounts payable to Kobe or its distributors:
Beginning of year $2,430 $3,302 $2,234
Purchases 52,308 53,554 34,478
Payments (49,908) (54,426) (33,410)
--------- --------- ---------
End of year $4,830 $2,430 $3,302
========= ========= =========
NOTE 13. UNCONSOLIDATED JOINT VENTURE
In 1987, the Company formed a partnership, Komag Technology Partners
("Partnership"), with the U.S. subsidiaries of two Japanese companies
and simultaneously formed a subsidiary, Asahi Komag Co., Ltd.
("AKCL"). The Company contributed technology in exchange for a 50%
interest in the Partnership. The Partnership and its subsidiary (joint
venture) established a facility in Japan to manufacture and sell the
Company's thin-film media products in Japan. AKCL also sells its
products to the Company for resale outside of Japan. In 1996, the
Company granted AKCL various licenses to sell its products to specified
customers outside of Japan in exchange for a 5% royalty on these sales.
The Company recorded approximately $1,388,000 and $1,305,000 of royalty
in other income in 1997 and 1996, respectively.
The Company's share of the joint venture's net income (loss) was
($4,865,000), $10,116,000 and $7,362,000 in 1997, 1996 and 1995,
respectively.
Other transactions between the joint venture and the Company were as
follows:
Fiscal Year Ended
-----------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Accounts receivable from joint venture:
Beginning of year $8,316 $4,906 $96
Sales 95,302 69,311 21,224
Cash receipts (99,565) (65,901) (16,414)
--------- --------- ---------
End of year $4,053 $8,316 $4,906
========= ========= =========
Accounts payable to joint venture:
Beginning of year $549 $355 $46
Purchases 14,686 12,145 5,460
Payments (12,979) (11,951) (5,151)
--------- --------- ---------
End of year $2,256 $549 $355
========= ========= =========
Equipment purchases by the Company from its joint venture partners were
$17,836,000, $20,655,000 and $18,195,000 in 1997, 1996 and 1995,
respectively.
Summary combined financial information for the Partnership and AKCL for
the years ended December 31, 1997, 1996 and 1995, and as of December 31,
1997 and 1996 is as follows. The subsidiary's total assets,
liabilities, revenues, costs and expenses approximate 100% of the
combined totals.
Fiscal Year Ended
-----------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Summarized Statements of Operations:
Net sales $186,474 $230,904 $173,177
Costs and expenses 200,305 188,707 143,766
Income tax provision (benefit) (4,101) 21,965 14,687
Net income (loss) ($9,730) $20,232 $14,724
Fiscal Year End
-------------------
1997 1996
--------- ---------
(in thousands)
Summarized Balance Sheets:
Current assets $63,512 $79,619
Noncurrent assets 151,540 129,068
--------- ---------
Total Assets $215,052 $208,687
========= =========
Current liabilities $115,106 $110,239
Long-term obligations 41,975 19,902
Partners' capital 57,971 78,546
--------- ---------
Total Liabilities and Partners' Capital $215,052 $208,687
========= =========
NOTE 14. PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.
Headway Technologies, Inc. ("Headway") was formed in 1994 to research,
develop and manufacture advanced magnetoresistive ("MR") heads for the
data storage industry. Hewlett-Packard Company ("HP") and AKCL (see
Note 13) provided the initial cash funding to Headway in exchange for
equity interests. The Company and Asahi America licensed to Headway MR
technology developed through a prior joint venture and contributed
certain research and production equipment in exchange for equity. As a
result of these transactions, the Company held a direct voting interest
in Headway of less than 20% and had no cost basis in its investment in
Headway. In 1997, the Company sold its interest in Headway.
AKCL invested in Headway in 1994 and recorded partial write-downs of its
investment through 1995 based upon net losses incurred at Headway.
During the third quarter of 1996, Headway's major customer, HP,
announced the closure of its disk drive manufacturing operations. Based
upon anticipated future operating losses at Headway arising from the
loss of HP's business, AKCL wrote off its remaining Headway investment
at the end of the third quarter of 1996. In 1997, AKCL sold its entire
interest in Headway for $10,800,000 to a group of new investors as part
of a recapitalization and AKCL recorded the proceeds from this sale as a
gain ($5,300,000, net of tax).
NOTE 15. QUARTERLY SUMMARIES
(in thousands, except per share amounts, unaudited)
1997
---------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter(1)4th Quarter
----------- ----------- ----------- -----------
Net sales $167,242 $175,121 $129,694 $159,025
Gross profit 39,315 35,661 202 18,368
Net income (loss) 17,799 11,677 (52,748) 1,169
Basic income (loss)
per share $0.34 $0.22 ($1.01) $0.02
Diluted income (loss)
per share $0.33 $0.22 ($1.01) $0.02
1996
---------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales $152,839 $152,208 $131,533 $141,211
Gross profit 64,489 62,956 31,585 16,537
Net income 42,504 42,560 16,498 8,412
Basic income
per share $0.84 $0.83 $0.32 $0.16
Diluted income
per share $0.80 $0.80 $0.31 $0.16
(1) Results for the third quarter of 1997 included a $52,157,000 restructuring
charge to consolidate the Company's U.S. manufacturing operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEMS 10, 11, 12 and 13.
<TABLE>
Items 10 through 13 of Part III will be contained in the Komag,
Incorporated Proxy Statement for the Annual Meeting of Stockholders to
be held May 27, 1998 (the "1998 Proxy Statement"), which will be filed
with the Securities and Exchange Commission no later than May 7, 1998.
The cross- reference table below sets forth the captions under which the
responses to these items are found:
<CAPTION>
10-K Item Description Caption in 1998 Proxy Statement
- ---------- ----------- ------------------------------
<S> <C> <C>
10 Directors and Executive Officers "Item No. 1--Election of Directors:
Nominees; Business
Experience of Directors and
Nominees" and "Additional
Information: Certain
Relationships and Related
Transactions; Other Matters"
11 Executive Compensation "Additional Information: Executive
Compensation and Related
Information"
12 Security Ownership of Certain Beneficial "Additional Information: Principal
Owners and Management Stockholders"
13 Certain Relationships and Related "Additional Information: Certain
Transactions Relationships and Related
Transactions"
</TABLE>
The information set forth under the captions listed above, contained in
the 1998 Proxy Statement, are hereby incorporated herein by reference in
response to Items 10 through 13 of this Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents filed as part of this Report.
1. Financial Statements.
The following consolidated financial statements of Komag, Incorporated
are filed in Part II, Item 8 of this Report on Form 10-K:
Consolidated Statements of Operations-Fiscal Years 1997, 1996 and
1995
Consolidated Balance Sheets-December 28, 1997 and December 29, 1996
Consolidated Statements of Cash Flows-Fiscal Years 1997, 1996 and
1995
Consolidated Statements of Stockholders' Equity-Fiscal Years 1997,
1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule of Komag, Incorporated is
filed in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
Report of Other Auditor
--Report of Chuo Audit Corporation on Asahi Komag Co., Ltd.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended December 31, 1995).
3.2 Bylaws (incorporated by reference from Exhibit 3.3 filed with the
Company's Report on Form 10-K for the year ended December 30, 1990).
4.2 Specimen Stock Certificate (incorporated by reference from a similarly
numbered exhibit filed with Amendment No. 1 to the Registration
Statement).
10.1.1 Lease Agreement dated May 24, 1991 between Milpitas-Hillview and Komag,
Incorporated (incorporated by reference from Exhibit 10.1.2 filed with
the Company's report on Form 10-K for the year ended December 29,
1991).
10.1.2 Lease Agreement dated May 24, 1991, between Milpitas-Hillview II and
Komag, Incorporated (incorporated by reference from Exhibit 10.1.3
filed with the Company's report on Form 10-K for the year ended
December 29, 1991).
10.1.3 Lease Agreement dated July 29, 1988 by and between Brokaw Interests and
Komag Corporation (incorporated by reference from Exhibit 10.1.6 filed
with the Company's Report on Form 10-K for the year ended January 1,
1989).
10.1.4 Lease Agreement dated May 2, 1989 by and between Stony Point Associates
I and Komag Material Technology, Inc. (incorporated by reference from
Exhibit 10.1.6 filed with the Company's Report on Form 10-K for the
year ended December 31, 1989).
10.1.5 Amendment to Lease Agreement dated December 28, 1990 by and between
Milpitas- Hillview II and Komag, Incorporated (incorporated by
reference from Exhibit 10.1.11 filed with the Company's Report on Form
10-K for the year ended December 30, 1990).
10.1.6 Second Amendment to Lease dated December 28, 1990 by and between
Milpitas-Hillview and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.12 filed with the Company's Report on Form 10-K for
the year ended December 30, 1990).
10.1.7 First Amendment to Lease dated November 1, 1993 by and between Wells
Fargo Bank et al and Komag Material Technology, Inc. (incorporated by
reference from Exhibit 10.1.14 filed with the Company's Report on Form
10-K for the year ended January 2, 1994).
10.1.8 Lease Agreement dated May 27, 1994 by and between Hillview I Partners
and Komag, Incorporated (incorporated by reference from Exhibit 10.1.16
filed with the Company's Report on Form 10-Q for the quarter ended July
3, 1994).
10.1.9 Lease Agreement dated August 4, 1995 by and between Great Oaks
Interests and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.12 filed with Form 10-Q for the quarter ended October 1,
1995).
10.1.10 First Amendment to Lease dated November 3, 1995 by and between Great
Oaks Interests and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.10 filed with the Company's report on Form 10-K for
the year ended December 28, 1996).
10.1.11 Lease Agreement (B10) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.11 filed with the Company's report on Form 10-K
for the year ended December 28, 1996).
10.1.12 Lease Agreement (B11) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.12 filed with the Company's report on Form 10-K
for the year ended December 28, 1996).
10.2 Form of Directors' Indemnification Agreement (incorporated by reference
from Exhibit 10.9 filed with the Company's Report on Form 10-K for the
year ended December 30, 1990).
10.3.1 Joint Venture Agreement by and among Komag, Inc., Asahi Glass Co.,
Ltd., and Vacuum Metallurgical Company dated November 9, 1986, as
amended January 7, 1987 and January 27, 1987 (incorporated by reference
from Exhibit 10.10.1 filed with the Registration Statement on Form
S-1--File No. 33-13663) (confidential treatment obtained as to certain
portions).
10.3.2 General Partnership Agreement for Komag Technology Partners dated
January 7, 1987 (incorporated by reference from Exhibit 10.10.2 filed
with the Registration Statement on Form S-1--File No. 33-13663).
10.3.3 Technology Contribution Agreement dated January 7, 1987 by and between
Komag, Incorporated and Komag Technology Partners (incorporated by
reference from Exhibit 10.10.3 filed with the Registration Statement on
Form S-1--File No. 33-13663) (confidential treatment obtained as to
certain portions).
10.3.4 Technical Cooperation Agreement dated January 7, 1986 by and between
Asahi Glass Company, Ltd. and Komag, Incorporated (incorporated by
reference from Exhibit 10.10.4 filed with the Registration Statement on
Form S-1--File No. 33-13663).
10.3.5 Third Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated March
21, 1990 (incorporated by reference from Exhibit 10.10.5 filed with the
Company's Report on Form 10-K for the year ended December 31, 1989).
10.3.6 Fourth Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated May
24, 1990 (incorporated by reference from Exhibit 10.10.11 filed with
the Company's Report on Form 10-K for the year ended January 1, 1995).
10.3.7 Fifth Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated
November 4, 1994 (incorporated by reference from Exhibit 10.10.12 filed
with the Company's Report on Form 10-K for the year ended January 1,
1995).
10.3.8 Joint Venture Agreement dated March 6, 1989 by and between Komag,
Incorporated, Komag Material Technology, Inc. and Kobe Steel USA
Holdings Inc. (incorporated by reference from Exhibit 10.10.6 filed
with the Company's Report on Form 10-K for the year ended December 31,
1989) (confidential treatment obtained as to certain portions).
10.3.9 Joint Development and Cross-License Agreement dated March 10, 1989 by
and between Komag, Incorporated, Kobe Steel, Ltd., and Komag Material
Technology, Inc. (incorporated by reference from Exhibit 10.10.7 filed
with the Company's Report on Form 10-K for the year ended December 31,
1989).
10.3.10 Blank Sales Agreement dated March 10, 1989 by and between Komag,
Incorporated, Kobe Steel, Ltd., and Komag Material Technology, Inc.
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1989).
10.3.11 Finished Substrate Agreement dated March 10, 1989 by and between Komag,
Incorporated, Kobe Steel, Ltd., and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.10.9 filed with the
Company's Report on Form 10-K for the year ended December 31, 1989)
(confidential treatment obtained as to certain portions).
10.3.12 Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA
Holdings Inc. dated November 17, 1995 (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1995).
10.3.13 Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
Incorporated dated November 17, 1995 (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1995) (confidential treatment obtained
as to certain portions).
10.3.14 License Amendment Agreement among Komag, Incorporated, Komag Material
Technology, Inc. and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1995).
10.3.15 Substrate Sales Amendment Agreement among Komag, Incorporated, Komag
Material Technology, Inc. and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1995).
10.3.16 Joint Venture Amendment Agreement among Komag, Incorporated, Komag
Material Technology, Inc. and Kobe Steel USA Holdings Inc. dated
November 17, 1995 (incorporated by reference from a similarly numbered
exhibit filed with the Company's Report on Form 10-K for the year ended
December 31, 1995) (confidential treatment obtained as to certain
portions).
10.4.1 Restated 1987 Stock Option Plan, effective January 31, 1996 and forms
of agreement thereunder (incorporated by reference from a similarly
numbered exhibit filed with the Company's report on Form 10-Q for the
quarter ended June 30, 1996).
10.4.2 Komag, Incorporated 1996 Management Bonus Plan (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-Q for the quarter ended June 30, 1996).
10.4.3 1988 Employee Stock Purchase Plan Joinder Agreement dated July 1, 1993
between Komag, Incorporated and Komag USA (Malaysia) Sdn. (incorporated
by reference from Exhibit 10.11.11 filed with the Company's Report on
Form 10-K for the year ended January 2, 1994).
10.4.4 Komag, Incorporated Discretionary Bonus Plan. (incorporated by
reference from Exhibit 10.4.4 filed with the Company's report on
Form 10-K for the year ended December 28, 1996).
10.4.5 Komag, Incorporated 1997 Supplemental Stock Option Plan.
10.5.1 Komag, Incorporated Deferred Compensation Plan (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended January 1, 1995).
10.5.2 Amendment No. 1 to Komag, Incorporated Deferred Compensation Plan dated
January 1, 1997. (incorporated by reference from Exhibit 10.5.2 filed
with the Company's report on Form 10-K for the year ended December
28, 1996).
10.5.3 Komag Material Technology, Inc. 1995 Stock Option Plan (incorporated by
reference from Exhibit 10.11.12 filed with Form 10-Q for the Quarter
ended October 1, 1995).
10.6 Common Stock Purchase Agreement dated December 9, 1988 by and between
Komag, Incorporated and Asahi Glass Co., Ltd. (incorporated by
reference from Exhibit 1 filed with the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on December 20,
1988).
10.7 Common Stock Purchase Agreement dated February 6, 1990 by and between
Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by
reference from Exhibit 10.17 filed with the Company's Report on Form
10-K for the year ended December 31, 1989).
10.8 Registration Rights Agreement dated March 21, 1990 by and between
Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by
reference from Exhibit 10.18 filed with the Company's Report on Form
10-K for the year ended December 31, 1989).
10.9 Amendment No. 1 to Common Stock Purchase Agreement dated March 21, 1990
by and between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 10.19 filed with Amendment No.
1 to the Registration Statement filed with the Securities and Exchange
Commission on May 26, 1987).
10.10 Amended and Restated Registration Rights Agreement dated March 21, 1990
by and between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 10.20 filed with Amendment No.
1 to the Registration Statement filed with the Securities and Exchange
Commission on May 26, 1987).
10.11 Letter dated February 10, 1992 from the Malaysian Industrial
Development Authority addressed to Komag, Incorporated approving the
"Pioneer Status" of the Company's thin- film media venture in Malaysia
(incorporated by reference from Exhibit 10.28 filed with the Company's
report on Form 10-K for the year ended January 3, 1993).
10.12 Credit Agreement between Komag, Incorporated and Wells Fargo Bank, N.A.
(formerly First Interstate Bank of California)--Three Year
Facility--dated December 15, 1994 (incorporated by reference from
Exhibit 10.24 filed with the Company's report on Form 10-K for the year
ended January 1, 1995).
10.13 First Amendment to Credit Agreement by and between Komag, Incorporated
and The Industrial Bank of Japan, Limited, San Francisco Agency dated
November 19, 1996 (incorporated by reference to Exhibit 10.17 filed
with the Company's report on Form 10-K for the year ended December 28,
1996).
10.14 Second Amendment to Credit Agreement by and between Komag, Incorporated
and The Industrial Bank of Japan, Limited, San Francisco Agency dated
January 31, 1997 (incorporated by reference to Exhibit 10.18 filed with
the Company's report on Form 10-K for the year ended December 28,
1996).
10.15 Credit Agreement between Komag, Incorporated and The Dai-Ichi Kangyo
Bank, Limited, San Francisco Agency dated October 7, 1996 (incorporated
by reference to Exhibit 10.19 filed with the Company's report on Form
10-K for the year ended December 28, 1996).
10.16 First Amendment to Credit Agreement between Komag, Incorporated and The
Dai-Ichi Kangyo Bank, Limited, San Francisco Agency dated November 25,
1996 (incorporated by reference to Exhibit 10.20 filed with the
Company's report on Form 10-K for the year ended December 28, 1996).
10.17 Credit Agreement dated as of February 7, 1997 among Komag,
Incorporated, institutional lenders and The Industrial Bank of Japan,
Limited, San Francisco Agency, as agent for the lenders(incorporated by
reference to Exhibit 10.22 filed with the Company's report on Form 10-K
for the year ended December 28, 1996).
10.18 Amended and Restated Credit Agreement Among Komag, Incorporated and
BankBoston, N.A. as agent (incorporated by reference from Exhibit 10.23
filed with the Company's report on Form 10-Q for the quarter ended June
29, 1997).
10.19 First Amendment to Amended and Restated Credit Agreement dated October
9, 1997 among Komag, Incorporated and BankBoston, N.A. as agent
(incorporated by reference from Exhibit 10.24 filed with the Company's
report on Form 10-Q for the quarter ended September 28, 1997).
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Chuo Audit Corporation.
24 Power of Attorney. Reference is made to the signature pages of this
Report.
27 Financial Data Schedule.
- -----------------
The Company agrees to furnish to the Commission upon request a copy of any
instrument with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Company.
(b) Reports on Form 8-K.
Not Applicable
Undertaking
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of
1933, the undersigned registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8
identified below, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed
August 19, 1987), 33-19851 (filed January 28, 1988), 33-25230 (filed
October 28, 1988), 33-41945 (filed July 29, 1991), 33-45469 (filed
February 3, 1992), 33-53432 (filed October 16, 1992), 33-80594 (filed
June 22, 1994), 33-62543 (filed September 12, 1995), 333-06081 (filed
June 14, 1996), 333-23095 (filed March 11, 1997) and 333-31297 (filed
July 16, 1997).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Milpitas, California on
this 24th day of March, 1998.
Komag, Incorporated
By Stephen C. Johnson
----------------------------------
Stephen C. Johnson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Stephen C. Johnson and William L. Potts,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ TU CHEN Chairman of the Board March 24, 1998
- ------------------------ and Director
(Tu Chen)
/s/ STEPHEN C. JOHNSON President and Chief Executive March 24, 1998
- ----------------------- Officer
(Stephen C. Johnson)
/s/ WILLIAM L. POTTS, JR. Senior Vice President, Chief March 24, 1998
- ------------------------- Financial Officer and Secretary
(William L. Potts, Jr.) (Principal Financial and
Accounting Officer)
/s/ CRAIG R. BARRETT Director March 24, 1998
- -----------------------
(Craig R. Barrett)
/s/ CHRIS A. EYRE Director March 24, 1998
- -----------------------
(Chris A. Eyre)
/s/ IRWIN FEDERMAN Director March 24, 1998
- -----------------------
(Irwin Federman)
/s/ GEORGE A. NEIL Director March 24, 1998
- -----------------------
(George A. Neil)
/s/ MAX PALEVSKY Director March 24, 1998
- -----------------------
(Max Palevsky)
/s/ ANTHONY SUN Director March 24, 1998
- -----------------------
(Anthony Sun)
/s/ MASAYOSHI TAKEBAYASHI Director March 24, 1998
- -----------------------
(Masayoshi Takebayashi)
*By WILLIAM L. POTTS, JR.
----------------------
(William L. Potts, Jr.,
Attorney-in-Fact)
</TABLE>
<PAGE>
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES
KOMAG, INCORPORATED
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful
accounts $1,487 $1,519 $ -- $3,006
Allowance for sales returns 736 2,351 (1) 1,814 (2) 1,273
----------- ----------- ----------- -----------
$2,223 $3,870 $1,814 $4,279
=========== =========== =========== ===========
Year ended December 29, 1996
Allowance for doubtful
accounts $3,006 ($1,011) $11 $1,984
Allowance for sales returns 1,273 3,528 (1) 3,698 (2) 1,103
----------- ----------- ----------- -----------
$4,279 $2,517 $3,709 $3,087
=========== =========== =========== ===========
Year ended December 28, 1997
Allowance for doubtful
accounts $1,984 $1,286 ($28) $3,298
Allowance for sales returns 1,103 7,145 (1) 7,122 (2) 1,126
----------- ----------- ----------- -----------
Sub total 3,087 8,431 7,094 4,424
Restructuring liability -- 52,157 (3) 40,904 (4) 11,253
----------- ----------- ----------- -----------
$3,087 $60,588 $47,998 $15,677
=========== =========== =========== ===========
<FN>
(1) Additions to the allowance for sales returns are netted against sales.
(2) Actual sales returns of subsequently scrapped product were charged against
the allowance for sales returns. Actual sales returns of product that was
subsequently tested and shipped to another customer were netted directly
against sales.
(3) The Company recorded a restructuring charge of $52,157,000 to consolidate
its U.S. manufacturing operations.
(4) Charges against the restructuring liability included non-cash charges of
$33,000,000 for the write-off of the net book value of equipment and
leaseholds, and cash charges of approximately $7,900,000 for severance
and equipment related costs.
</FN>
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Asahi Komag Co., Ltd.
We have audited the accompanying consolidated balance sheets of Asahi
Komag Co., Ltd. and subsidiary (the "Company") as of December 31, 1997
and 1996, and the consolidated statements of income, cash flows, and
stockholder's equity for the years ended December 31, 1997, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. These standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred
to above present fairly, in all material respects the consolidated
financial position of Asahi Komag Co., Ltd. and subsidiary as of
December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997,
1996 and 1995 in conformity with generally accepted accounting
principles applicable in the United States of America.
As discussed in Note 2b of the notes to the consolidated financial
statements, the Company reporting entity changed in 1995 as a result of
the establishment of a wholly owned subsidiary.
As discussed in Note 14 of the notes to consolidated financial
statements, on February 9, 1998 the Company's board of directors
approved a plan to replace certain operating equipment with a net book
value of Y398,555 thousand (Japanese Yen).
The consolidated financial statements as of and for the year ended
December 31, 1997 have been translated into United States Dollars solely
for the convenience of the reader. Our audit included the translation,
and in our opinion such translation has been made in accordance with the
basis stated in note 2h to the financial statements.
CHUO AUDIT CORPORATION
Tokyo, Japan
February 27, 1998
EXHIBIT 10.4.5
KOMAG, INCORPORATED
1997 SUPPLEMENTAL STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
This 1997 Supplemental 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. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by one or more
committees comprised of Board members (the "Committee") or the Board may
retain the power to administer the Plan. The members of the 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. The Committee (or the Board if no Committee has been
designated) shall serve as the Plan Administrator and shall have full
power and authority (subject to the express provisions of the Plan) 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 options or
shares issued hereunder.
III. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to participate in the Plan shall
be
- employees (excluding officers and
directors) of the Corporation (or its parent or subsidiary
corporations),
- independent contractors and consultants of
the Corporation (or its parent or subsidiary corporations).
B. 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, the
time or times at which such option is to become exercisable and the
maximum term for which the option is to be outstanding.
C. 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.
IV. 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 Three Million Six Hundred Thousand (3,600,000)
shares (subject to adjustment from time to time in accordance with
paragraph IV.C of this Article One).
B. 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.
C. 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 the
Corporation's receipt of consideration), then unless such change results
in the termination of all outstanding options pursuant to the provisions
of paragraph II of Article Two of the Plan, appropriate adjustments shall
be made to (i) the aggregate number and/or class of shares issuable under
the Plan, and (ii) the number and/or class of shares and price per share
in effect under each outstanding option under the Plan. The purpose of
such adjustments to the outstanding options shall be to preclude the
enlargement or dilution of rights and benefits under such options.
ARTICLE TWO
OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to this Article Two shall be auth-
orized by action of the Plan Administrator and shall be 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.
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 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 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 day prior to 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
day prior to 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 day
prior to 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 day prior to 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, 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 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 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.
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 II 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. 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,
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. 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.
III. CANCELLATION AND REGRANT
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with consent of the affected option
holders, the cancellation of any or all outstanding options under the
Plan and to grant in substitution therefor new options covering the same
or different numbers of shares of Common Stock but having an exercise
price per share equal to one hundred percent (100%) of the fair market
value of the Common Stock on the new grant date.
IV. 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 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.
ARTICLE THREE
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.
II. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective upon its adoption by the
Board. Unless sooner terminated in accordance with paragraph II of
Article Two, the Plan shall terminate upon the earlier of (i) August
____, 2007 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.
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 Plan 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.
VI. REGULATORY APPROVALS
A. 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.
B. No shares of Common Stock or other assets shall be
issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state
securities laws, including the filing and effectiveness of the Form S-8
registration statement for the shares of Common Stock issuable under the
Plan, and all applicable listing requirements of any stock exchange (or
the Nasdaq National Market, if applicable) on which Common Stock is then
listed for trading.
KOMAG, INCORPORATED
Exhibit 21
List of Subsidiaries
Asahi Komag Co., Ltd., a Japanese corporation
Komag USA (Malaysia) Sdn., a Malaysian corporation
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-31297, 333-23095, 333-06081, 33-62453,
33-80594, 33-53432, 33- 45469, 33-41945, 33-25230, 33-19851 and 33-16625)
pertaining to the Komag, Incorporated Deferred Compensation Plan, the
Komag, Incorporated Restated 1987 Stock Option Plan, the Komag Material
Technology, Inc. 1995 Stock Option Plan, the Komag, Incorporated Employee
Stock Purchase Plan, the Komag, Incorporated Restated 1987 Stock Option
Plan, the Dastek International Stock Option Plan and the Dastek, Inc. 1992
Stock Option Plan and in the Registration Statement (Form S-3 No.
33-61161) of Komag, Incorporated and in the related Prospectus of our
report dated January 19, 1998, with respect to the consolidated financial
statements and schedule of Komag, Incorporated included in this Annual
Report (Form 10-K) for the year ended December 28, 1997.
ERNST & YOUNG LLP
San Jose, California
March 24, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this annual report on Form 10-K of our
report dated February 27, 1998 on our audit of the consolidated
financial statements of Asahi Komag Co., Ltd. and subsidiary as of
December 31, 1997 and 1996 and for the three years in the period ended
December 31, 1997.
CHUO AUDIT CORPORATION
Tokyo, Japan
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended December 28, 1997 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-28-1997
<PERIOD-START> Dec-30-1996
<PERIOD-END> Dec-28-1997
<PERIOD-TYPE> 12-MOS
<CASH> 133,897
<SECURITIES> 32,300
<RECEIVABLES> 81,090
<ALLOWANCES> 3,298
<INVENTORY> 66,778
<CURRENT-ASSETS> 371,689
<PP&E> 1,082,394
<DEPRECIATION> 403,798
<TOTAL-ASSETS> 1,084,664
<CURRENT-LIABILITIES> 75,590
<BONDS> 245,000
0
0
<COMMON> 528
<OTHER-SE> 685,656
<TOTAL-LIABILITY-AND-EQUITY> 1,084,664
<SALES> 631,082
<TOTAL-REVENUES> 631,082
<CGS> 537,536
<TOTAL-COSTS> 537,536
<OTHER-EXPENSES> 78,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,116
<INCOME-PRETAX> (37,820)
<INCOME-TAX> (20,982)
<INCOME-CONTINUING> (22,103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,103)
<EPS-PRIMARY> ($0.42)
<EPS-DILUTED> ($0.42)
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