SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. __)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
KOMAG, INCORPORATED
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 27, 1998
The annual meeting of stockholders (the "Annual Meeting" of Komag,
Incorporated (the "Company")) will be held at Komag, Incorporated, Building 9,
1705 Automation Parkway, San Jose, California, 95131 on Wednesday, May 27, 1998,
at 10:00 a.m. for the following purposes:
1. To elect the Board of Directors for the following year.
2. To approve an amendment to the Company's 1988 Employee Stock
Purchase Plan to increase the number of shares issuable
thereunder by 1,300,000 shares.
3. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending January 3,
1999.
4. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Stockholders of record at the close of
business on March 30, 1998 will be entitled to vote at the Annual Meeting. A
list of stockholders entitled to vote at the Annual Meeting will be available
for inspection at the offices of the Company. Whether or not you plan to attend
the Annual Meeting in person, please sign, date and return the enclosed proxy in
the reply envelope provided. If you attend the Annual Meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
Annual Meeting will be counted. The prompt return of your proxy will assist us
in preparing for the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting. A
map to Komag's location is included at the end of the Proxy Statement for
reference.
BY ORDER OF THE BOARD OF DIRECTORS
Stephen C. Johnson,
President and Chief Executive Officer
Tu Chen,
Chairman of the Board
San Jose, California
April 10, 1998
<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 27, 1998
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Komag, Incorporated, a Delaware corporation (the "Company"), for use at the
Annual Meeting to be held on May 27, 1998. The Annual Meeting will begin at
10:00 a.m. at Komag, Incorporated, Building 9, 1705 Automation Parkway, San
Jose, CA 95131. Stockholders of record on March 30, 1998 will be entitled to
notice of and to vote at the Annual Meeting.
This Proxy Statement and accompanying proxy (the "Proxy") were first
mailed to stockholders on or about April 17, 1998.
Voting
On March 30, 1998, the record date for determination of stockholders
entitled to vote at the Annual Meeting, there were 52,894,878 shares of Common
Stock outstanding. Each stockholder is entitled to one (1) vote for each share
of Common Stock held by such stockholder. Directors will be elected by a
plurality vote. Other matters submitted for stockholder approval at this Annual
Meeting will be decided by the affirmative vote of a majority of the shares
present or represented and entitled to vote on each such matter. Abstentions
with respect to any matter other than the election of directors are treated as
shares present or represented and entitled to vote on that matter and thus have
the same effect as negative votes. If shares are not voted by the broker who is
the record holder of the shares, or if shares are not voted in other
circumstances in which proxy authority is defective or has been withheld with
respect to any matter, these non-voted shares are not deemed to be present or
represented for purposes of determining whether stockholder approval of that
matter has been obtained. Each stockholder voting for the election of directors
may cumulate such stockholder's vote. Under cumulative voting, a stockholder is
allowed one (1) vote per share multiplied by the number of directors to be
elected (nine (9) at this meeting) and may cast such cumulative total for one
(1) nominee or may distribute such number among as many nominees as such
stockholder chooses.
Revocability of Proxies
Any person giving a proxy has the power to revoke it at any time before
its exercise. A proxy may be revoked by filing with the Secretary of the Company
at the Company's principal executive office, 1704 Automation Parkway, San Jose,
California, 95131, a notice of revocation or another signed proxy with a later
date. You may also revoke your proxy by attending the Annual Meeting and voting
in person.
Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement and any
additional soliciting materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward these solicitation materials to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
<PAGE>
Principal Stockholders
<TABLE>
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock per Schedule 13G filings
prior to March 30, 1998 for all persons who are known to be beneficial owners of
five percent or more of the Company's Common Stock.
<CAPTION>
Name and Address of Percent
Beneficial Owner Amount and Nature of Beneficial Ownership of Class
---------------- ----------------------------------------- --------
<S> <C> <C>
Franklin Resources, Inc. 5,420,485 10.2%
777 Mariners Island Boulevard
San Mateo, CA 94404 (sole) voting power and dispositive power as to
5,023,700 shares by Franklin Advisers, Inc.; sole
voting power as to 113,000 shares and sole
dispositive power as to 380,900 shares by Franklin
Advisory Services, Inc.; sole dispositive power as to
15,885 shares by Franklin Management, Inc. per
February 14, 1998 Schedule 13G filing)
Neuberger & Berman, LLC 4,620,024 8.7%
605 Third Avenue
New York, NY 10158-3698 (shared dispositive power as to all shares; sole
voting power as to 2,745,024 of such shares and
shared voting power as to 1,850,000 shares per
February 9, 1998 Schedule 13G filing)
Merrill Lynch Asset Management 4,562,400 8.6%
800 Scudders Mill Road
Plainsboro, NJ 08536 (shared dispositive power and shared voting power as
to all such shares per February 14, 1998 Schedule
13G filing) Note: The Company believes that this
stockholder disposed of shares subsequent to this
Schedule 13G filing, thereby reducing ownership to
less than 2,000,000 shares and less than 5% of class.
Barclays Global Fund Advisors 3,079,463 5.8%
45 Fremont Street
San Francisco, CA 94105 (sole dispositive power as to all shares; sole voting
power as to 3,055,463 of such shares per February 13,
1998 Schedule 13G filing)
Spears, Benzak, Salomon & Farrell, Inc. 2,877,084 5.5%
127 Public Square
Cleveland, OH 44114-1306 (sole voting power as to all shares, sole dispositive
power as to 2,873,924 of such shares per February 13,
1998 Schedule 13G filing)
</TABLE>
2
<PAGE>
Stock Ownership Table
The table below indicates the number of shares of the Corporation's
common stock beneficially owned as of March 30, 1998 by directors, the nominees
recommended by the Nominating Committee and nominated by the Board of Directors
for election as directors, by each of the executive officers listed in the
Summary Compensation Table below, and by all directors and executive officers as
a group. Except as otherwise noted, each person has sole investment and voting
powers with respect to the shares shown as beneficially owned. Ownership
information is based upon information furnished by the respective individuals.
DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS
Shares Beneficially Owned(12)
-----------------------------
Name Number Percentage
---- ------ ----------
Tu Chen (1), ................................... 667,124 1.3%
Stephen C. Johnson (2) ......................... 459,049 *
Craig R. Barrett(3) ............................ 68,000 *
Chris A. Eyre(3) ............................... 47,000 *
Irwin Federman(4) .............................. 87,871 *
George A. Neil(5) .............................. 33,000 *
Max Palevsky(3) ................................ 112,127 *
Anthony Sun(3) ................................. 99,810 *
Masayoshi Takebayashi (6)(7) ................... 20,250 *
Willard Kauffman (8) ........................... 140,771 *
Christopher H. Bajorek (9) ..................... 64,282 *
Fred J. Wiele (10) ............................. 39,884 *
Executive officers and directors as a group
(21 persons) (11) .............................. 2,347,755 4.4%
* Less than 1%
(1) Includes 175,518 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(2) Includes 249,985 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(3) Includes 46,000 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
3
<PAGE>
(4) Includes 16,750 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(5) Includes 32,000 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(6) Includes 20,250 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(7) Excludes shares held by Kobe Steel, Ltd. and Kobe Steel USA Holdings
Incorporated. Mr. Takebayashi is an Executive Officer of Kobe Precision,
Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd., and on such
basis may be deemed, under the 1934 Act, the beneficial owner of the
2,000,002 shares beneficially owned by such corporations with shared voting
and investment power with respect thereto. Mr. Takebayashi disclaims
beneficial ownership of these shares.
(8) Includes 98,198 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(9) Includes 62,708 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(10) Includes 38,333 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 30,
1998.
(11) Includes 1,215,103 shares subject to options which are currently
exercisable or which will become exercisable within sixty (60) days after
March 30, 1998.
(12) Some of the individuals may share voting power with regard to the shares
listed herein with their spouses.
ITEM NO. 1 --
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall be
comprised of between eight (8) and twelve (12) directors, with the exact number
to be fixed by the Board. The currently authorized number is nine (9) directors.
At the Annual Meeting, nine (9) directors will be elected to serve until the
Company's next Annual Meeting and until their successors are elected and
qualified. The Board of Directors has selected nine (9) nominees, all of whom
are current directors of the Company.
Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unavailable to
serve. Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR the nominees named below. The nine (9) candidates receiving
the highest number of affirmative votes of the shares entitled to vote at the
Annual Meeting will be elected directors of the Company.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote FOR the
election of each of the following nominees to serve as directors of the Company
for the ensuing year until the next Annual Meeting at which time their
successors are elected and qualified.
4
<PAGE>
Directors and Nominees
<TABLE>
Set forth below is information regarding the directors and nominees,
including information furnished by them as to principal occupations, business
experience, certain other directorships held by them, any arrangements pursuant
to which they were selected as directors or nominees.
<CAPTION>
Year
First
Elected
Name Age Director
---- --- --------
<S> <C> <C> <C>
Tu Chen ........................ Chairman of the Board of the Company 63 1983
Stephen C. Johnson ............. President and Chief Executive Officer of the 55 1983
Company
Craig R. Barrett ............... Executive Vice President and Chief Operating
Officer, Intel Corporation 58 1989
Chris A. Eyre .................. Private Investor 51 1983
Irwin Federman ................. General Partner, U.S. Venture Partners 62 1983
George A. Neil ................. Consultant to Asahi Glass America, Incorporated 60 1994
Max Palevsky ................... Private Investor 73 1984
Anthony Sun .................... General Partner, Venrock Associates 45 1983
Masayoshi Takebayashi .......... President, Chief Executive Officer, 62 1992
Kobe Precision, Incorporated
</TABLE>
Dr. Chen is a founder of the Company and has served as Chairman of the
Board of the Company from its inception in June 1983. From 1971 to June 1983, he
was a Member, Research Staff and principal scientist at Xerox Corporation's Palo
Alto Research Center. From 1968 to 1971, Dr. Chen was employed as a research
scientist for Northrop Corp. Dr. Chen is a director of Asahi Komag Co., Ltd. and
Headway Technologies, Incorporated.
Mr. Johnson is a founder of the Company and has served as President,
Chief Executive Officer and a director of the Company since September 1983. Mr.
Johnson is a director of Asahi Komag Co. Ltd., Dastek Holding Company, Dastek
(M) Sdn. Bhd., Komag Distribution Company, Komag Asia-Pacific, Incorporated,
Komag Technology (N) B.V., Komag Netherlands Antiles N.V., and Uniphase
Corporation. From 1977 to 1983, Mr. Johnson was an officer of Boschert
Incorporated, a manufacturer of switching power supplies, initially as Vice
President, Marketing and subsequently as President and Chief Executive Officer.
Dr. Barrett has served as a director of the Company since April 1989.
Since 1974 he has been employed by Intel Corporation in a variety of capacities,
currently as a director (elected January 15, 1992) and as President and Chief
Operating Officer. From 1993 to 1997 Dr. Barrett was Executive Vice President
and Chief Operating Officer. From 1990 to 1993 he was Senior Vice President and
General Manager of the Microcomputer Components Group. From 1987 to 1989, he was
Senior Vice President and General Manager of the Components Technology and
Manufacturing Group, and from 1985 to 1987, he served as Vice President and
General Manager of the Components Technology and Manufacturing Group.
5
<PAGE>
Mr. Eyre has served as a director of the Company since September 1983.
Mr. Eyre is a private investor and from 1980 to 1987 served as a general partner
of Merrill, Pickard, Anderson & Eyre, a general partnership which manages a
series of venture capital partnerships.
Mr. Federman has served as a director of the Company since September
1983. In April 1990, Mr. Federman joined U.S. Venture Partners, a general
partnership which manages a series of venture capital partnerships, as a general
partner. From February 1988 to March 1990, Mr. Federman served as Managing
Director of Dillon, Read & Co. Incorporated, an investment banking and
securities firm. From 1979 until August 1987, Mr. Federman was President and
Chief Executive Officer of Monolithic Memories, Incorporated. Mr. Federman was
elected Vice Chairman of the Board of Directors of Advanced Micro Devices,
Incorporated ("AMD") when Monolithic Memories merged with AMD, and served in
that capacity until January 1988. He is also a director of Western Digital
Corporation, SanDisk Corporation, Checkpoint Software Technologies, Ltd.,
Neomagic, Incorporated, and MMC Networks, Inc.
Mr. Neil has served as Consultant to Asahi Glass America, Incorporated
since January 1997. From 1990 through 1996, Mr. Neil served as Senior Vice
President of Asahi Glass America, Incorporated. From March 1989 to January 1990,
Mr. Neil held several executive positions at various ceramic companies. From
August 1986 to July 1990, Mr. Neil was a consultant and President for
Thunderbird Technologies, a company specializing in high-speed, low power
integrated circuits. From October 1961 to May 1986, Mr. Neil served in various
management positions with Corning, Incorporated, including Executive Vice
President of Iwaki Glass and President of Corning Japan. Mr. Neil was selected
as a nominee pursuant to the terms of a Common Stock Purchase Agreement between
the Company and Asahi Glass Co. Ltd. (See "Additional Information--Certain
Relationships and Related Transactions" below.)
Mr. Palevsky has served as a director of the Company since November
1984. He was a member of the Governing Board of the Institute for Advanced
Study, Princeton, New Jersey. Mr. Palevsky retired as a director and Chairman of
the Executive Committee of Xerox Corporation in 1972. He is a director emeritus
of Intel Corporation.
Mr. Sun has served as a director of the Company since September 1983.
Since 1979, he has been associated with Venrock Associates, a venture capital
partnership, and has been a general partner since 1980. Mr. Sun is a director of
Cognex Corporation, Inference Corp., Award Software International, Worldtalk
Communications Corporation, 3Dfx Interactive Incorporated, and several privately
held companies.
Mr. Takebayashi has served as a director of the Company since May 1992.
Since September 1964, he has served in various positions with Kobe Steel, Ltd.
and its subsidiaries, most recently as President, Chief Executive Officer of
Kobe Precision, Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd.,
since January 1988. From January 1986 to December 1988, he was the General
Manager, International Marketing and Sales Overseas Department of the Aluminum &
Copper Division of Kobe Steel, Ltd. He is a member of the board of directors for
Kobe Precision Technology Malaysia, Bhd., and a member of the Board of Directors
of Komag Material Technology, Incorporated. Mr. Takebayashi was selected as a
nominee pursuant to the terms of a Common Stock Purchase Agreement between the
Company and Kobe Steel USA Holdings Incorporated. (See "Additional
Information--Certain Relationships and Related Transactions" below.)
Committees and Meetings of the Board of Directors
During the fiscal year ended December 28, 1997, the Board of Directors
held five (5) meetings. During this period, each of the directors attended or
participated in at least eighty percent (80%) of the aggregate number of Board
of Directors meetings and committee meetings of the Board on which he served.
The Company has five standing committees: an Audit Committee, a Compensation
Committee, a Primary Stock Option Plan Committee, a Nominating Committee, and a
Special Stock Option Plan Administration Committee.
6
<PAGE>
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent auditors and reviewing reports of the
Company's auditors regarding the Company's accounting practices and systems of
internal accounting controls. The Audit Committee formally met four (4) times
during the last fiscal year. This Committee currently consists of Messrs. Eyre,
Neil and Sun.
The Compensation Committee reviews and approves the Company's general
compensation policies and sets compensation levels for the Company's executive
officers. This Committee currently consists of Dr. Barrett and Messrs. Federman,
Palevsky and Takebayashi. During fiscal 1997, the Compensation Committee
formally met two (2) times. The Compensation Committee also met two (2) times in
January 1998 for discussion of fiscal 1997 and 1998 compensation matters.
The Primary Stock Option Plan Committee administers the discretionary
option grant program of the Company's Restated 1987 Stock Option Plan (the
"Option Plan") with respect to the Company officers who are subject to the
short-swing profit restrictions of the federal securities laws. The Committee
will also administer the Company's Employee Stock Purchase Plan. This Committee
currently consists of Dr. Barrett and Messrs. Federman and Palevsky. The Primary
Stock Option Plan Committee met in September 1997 for discussion of fiscal 1997
and 1998 stock option matters.
The Nominating Committee is responsible for recommending nominees for
members of the Company's Board of Directors. This Committee currently consists
of Dr. Chen, and Messrs. Eyre, Johnson, Neil and Takebayashi, with Dr. Chen
serving as Chairman. This Committee met on March 18, 1998. The Nominating
Committee has not instituted proceedings to consider nominees recommended by
security holders, but may do so in the future.
The Special Stock Option Plan Administration Committee (the "Secondary
Committee") has separate but concurrent jurisdiction with the Primary Stock
Option Plan Committee to administer the discretionary option grant program of
the Option Plan with respect to non-officer employees. The option grants made by
the Secondary Committee will comply with certain guidelines established by the
Primary Stock Option Plan Committee. The Secondary Committee currently consists
of Dr. Chen and Mr. Johnson and performs its duties on an ongoing basis.
Director Remuneration
Non-employee Board members receive $4,500 per fiscal quarter and a
$1,000 meeting fee for each Board of Directors meeting or Board Committee
meeting attended, including telephonic meetings. Non-employee Board members are
also eligible to receive periodic option grants under the Automatic Option Grant
Program in effect for them under the Option Plan. Each individual who first
becomes a non-employee Board member, whether through election by the
stockholders or appointment by the Board, will receive, at the time of such
initial election or appointment, a stock option grant for 30,000 shares of
Common Stock. In addition, on the date of each Annual Stockholders Meeting, each
individual who is re-elected as a non-employee Board member will receive an
option grant for 7,500 shares of Common, provided such individual has served on
the Board for at least six months. Each option grant will have an exercise price
equal to the fair market value of the option shares on the grant date and will
have a maximum term of ten years, subject to earlier termination upon the
optionee's cessation of Board service.
Each of the non-employee Board Members re-elected at the 1997 Annual
Meeting (Messrs. Barrett, Eyre, Federman, Neil, Palevsky, Sun and Takebayashi)
received at that time an option grant for 7,500 shares with an exercise price of
$34.125 per share. Each option will become exercisable for all the option shares
upon the optionee's completion of one year of Board service measured from the
grant date. However, the option will become immediately exercisable for all of
the option shares upon an acquisition of the Company by merger, consolidation or
asset sale or upon certain other changes in control or ownership of the Company.
Upon the successful completion of a hostile tender offer for more than 50% of
the Company's outstanding Common Stock, each of these options will automatically
be canceled, and each optionee will in return receive a cash distribution from
the Company in an amount per canceled option share equal to the excess of (i)
the highest reported price per share of Common Stock paid in the tender offer
over (ii) the option exercise price payable per share.
7
<PAGE>
ITEM NO. 2 -- APPROVAL OF AMENDMENT
TO 1988 EMPLOYEE STOCK PURCHASE PLAN
Introduction
The stockholders are being asked to vote on a proposal to approve an
amendment to the Company's 1988 Employee Stock Purchase Plan (the "Purchase
Plan") which will increase the number of shares available for issuance by
1,300,000 shares of Common Stock. The Board of Directors believes that the share
increase is necessary to assure that eligible employees of the Company and its
participating affiliates will continue to have the opportunity to acquire an
equity interest in the Company and thereby further align their interests with
those of the stockholders.
The Purchase Plan was adopted by the Board of Directors on January 21,
1988, and was approved by the stockholders on June 7, 1988. On January 30, 1998,
the Board of Directors adopted the amendment to the Purchase Plan which is the
subject of this Item No. 2.
The terms and provisions of the Purchase Plan, as amended, are
summarized below. This summary, however, does not purport to be a complete
description of the Purchase Plan. Copies of the actual plan document may be
obtained by any stockholder upon written request to the Secretary of the Company
at the corporate offices in San Jose, California.
Administration
The Purchase Plan will be administered by the Primary Stock Option Plan
Committee, which consists of at least two non-employee Board members appointed
by the Board. Such Committee, as Plan Administrator, has full authority to adopt
administrative rules and procedures and to interpret the provisions of the
Purchase Plan. All costs and expenses incurred in the administration of the
Purchase Plan are paid by the Company without charge to participants.
Securities Subject to the Purchase Plan
The maximum number of shares of Common Stock that may be sold to
participants over the term of the Purchase Plan may not exceed 4,850,000 shares,
assuming stockholder approval of this Item No. 2. However, not more than
1,660,088 shares may be issued under the Purchase Plan after March 30, 1998
(assuming stockholder approval of this Item No. 2). The shares of Common Stock
issuable under the Purchase Plan may be either shares newly issued by the
Company or shares reacquired by the Company, including shares purchased on the
open market.
In the event any change is made to the Company's outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
combination of shares, or other similar change in the corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
purchasable under the Purchase Plan, (ii) the class and maximum number of
securities purchasable per participant on any one purchase date, and (iii) the
class and number of securities purchasable and the price per share payable under
each outstanding purchase right. Such adjustments will prevent any dilution or
enlargement of participant rights under the Purchase Plan.
8
<PAGE>
Eligibility and Participation
Any individual who is employed on a basis under which he or she is
expected to work more than twenty (20) hours per week for more than five (5)
months per calendar year in the employ of the Company or any participating
parent or subsidiary corporation (including any corporation which subsequently
becomes such at any time during the term of the Purchase Plan) is eligible to
participate in the Purchase Plan upon commencement of employment. Currently,
Komag Material Technology, Incorporated, Komag Asia-Pacific, Incorporated, and
Komag U.S.A. (Malaysia) Sdn. are participating corporate affiliates.
As of March 30, 1998, 3,189,912 shares of Common Stock had been issued
under the Purchase Plan, and 1,660,088 shares were available for future issuance
(assuming stockholder approval of this Item No. 2). As of March 30, 1998,
approximately 4,639 employees (including 14 executive officers) were eligible to
participate in the Purchase Plan.
Purchase Periods
The Purchase Plan will be implemented in a series of overlapping
purchase periods, each to be of duration (not to exceed twenty-four (24) months
per purchase period) as determined by the Plan Administrator prior to the
commencement date of the purchase period. Purchase periods may begin, at the
Plan Administrator's discretion, on the first day or the first Monday of each
fiscal quarter or each alternate fiscal quarter. Accordingly, up to four (4)
separate purchase periods may commence in each fiscal year during which the
Purchase Plan remains in existence.
Participants will be granted a separate purchase right for each
purchase period in which they participate. The purchase right will be granted on
the first day of the purchase period and will automatically be exercised on the
last date of each successive three (3)-month or six (6)-month period within that
purchase period ("Purchase Date"). No employee may participate in more than one
purchase period at a time.
Purchase Price
The purchase price of the Common Stock acquired on each Purchase Date
will be equal to eighty-five percent (85%) of the lower of (i) the fair market
value per share of Common Stock on the date on which such purchase right is
granted or (ii) the fair market value on such Purchase Date. The fair market
value of Common Stock on any relevant date will be the closing price per share
on such date as reported on the Nasdaq National Market. The fair market value
per share determined on such basis was $14.625 on March 30, 1998.
Purchase Rights and Stock Purchases
Each participant may authorize periodic payroll deductions of up to ten
percent (10%) of his or her base pay during the relevant purchase period for the
purchase of Common Stock under the Purchase Plan. On each Purchase Date, the
accumulated payroll deductions of each participant will be automatically applied
to the purchase of whole shares of Common Stock at the purchase price in effect
for that Purchase Date. The maximum number of shares purchasable by the
participant on any Purchase Date may not exceed 3,000 shares in the case of
quarterly Purchase Dates or 6,000 shares in the case of semi-annual Purchase
Dates. In addition, no executive officer of the Company may purchase more than
50,000 shares in the aggregate over the term of the Purchase Plan.
9
<PAGE>
Termination of Purchase Rights
The purchase right of a participant will terminate upon (i) such
individual's termination of employment or (ii) his or her voluntary withdrawal
from the Purchase Plan. Any payroll deductions which the participant may have
made with respect to the terminated purchase right will be refunded. However,
should the participant's employment terminate by reason of death or permanent
disability, then that participant (or the legal representative of his or her
estate) may, in lieu of such refund, elect to have the accumulated payroll
deductions applied to the purchase of Common Stock on the next Purchase Date.
Stockholder Rights
No participant will have any stockholder rights with respect to the
shares covered by his or her purchase right until the shares are actually
purchased on the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
Assignability
No purchase rights will be assignable nor transferable by the
participant except by will or by laws of inheritance. An outstanding purchase
right may, during the participant's lifetime, be exercisable only by that
participant.
Merger or Liquidation of Company
In the event the Company or its stockholders enter into an agreement to
dispose of all or substantially all of the assets or outstanding capital stock
of the Company by means of a sale, merger or reorganization in which the Company
will not be the surviving corporation or in the event the Company is liquidated,
then all outstanding purchase rights will, in connection with the consummation
of such transaction, be exercised immediately prior to such transaction by
applying all payroll deductions previously collected from participants during
the purchase period to the purchase of whole shares of Common Stock at a price
per share equal to eighty-five percent of the lower of (i) the fair market value
per share of Common Stock on the start date of the purchase period in which that
transaction occurs or (ii) the fair market value per share at the time of
purchase.
Amendment and Termination
The Purchase Plan will terminate upon the earlier of (i) December 31,
2001 or (ii) the date on which all shares available for issuance thereunder are
sold pursuant to exercised purchase rights. However, the Board may at any time
alter, suspend or discontinue the Purchase Plan. However, the Board may not,
without stockholder approval, (i) increase the number of shares issuable under
the Purchase Plan, except in connection with certain changes in the Company's
capital structure, (ii) alter the purchase price formula so as to reduce the
purchase price or (iii) modify the eligibility requirements for participation in
the Purchase Plan.
10
<PAGE>
Stock Issuances
<TABLE>
The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated groups, the
number of shares of Common Stock purchased under the Purchase Plan between
January 1, 1997 and March 30,1998, together with the weighted average purchase
price paid per share.
PURCHASE PLAN TRANSACTIONS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Number of Weighted Average
Name Purchased Shares Purchase Price
---- ---------------- --------------
<S> <C> <C>
Stephen C. Johnson 984 $13.97
Tu Chen 1,077 $13.53
Christopher H. Bajorek 984 $13.97
Willard Kauffman 984 $13.97
Fred J. Wiele 1,059 $13.61
All executive officers as a group (14 persons) 12,642 $13.43
All employees, including current officers who are not 435,558 $13.02
executive officers, as a group (2,853 persons)
- ---------------------------------------------------------------------------------------------------
</TABLE>
New Plan Benefits
As of March 30, 1998, no purchase rights had been granted under the
Purchase Plan on the basis of the 1,300,000-share increase which forms part of
this Item No. 2.
Federal Tax Consequences
The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan or in the event the participant should die while still owning the purchased
shares.
If the participant sells or otherwise disposes of the purchased shares
within two (2) years after the start date of the offering period in which such
shares were acquired or within one (1) year after the date on which those shares
were actually purchased, then the participant will recognize ordinary income in
the year of sale or disposition equal to the amount by which the fair market
value of the shares on the purchase date exceeded the purchase price paid for
those shares, and the Company will be entitled to an income tax deduction, for
the taxable year in which such disposition occurs, equal in amount to such
excess.
If the participant sells or disposes of the purchased shares more than
two (2) years after his or her entry date into the offering period in which the
shares were acquired and more than one year after the purchase date of those
shares, then the participant will recognize ordinary income in the year of sale
or disposition equal to the lesser of (i) the amount by which the fair market
value of the shares on the sale or disposition date exceeded the purchase price
11
<PAGE>
paid for those shares or (ii) fifteen percent (15%) of the fair market value of
the shares on the participant's entry date into that offering period. Any
additional gain upon the disposition will be taxed as a long-term capital gain.
The Company will not be entitled to an income tax deduction with respect to such
disposition.
If the participant still owns the purchased shares at the time of
death, the lesser of (i) the amount by which the fair market value of the shares
on the date of death exceeds the purchase price or (ii) fifteen percent (15%) of
the fair market value of the shares on his or her entry date into the offering
period in which those shares were acquired will constitute ordinary income in
the year of death.
Accounting Treatment
Under current accounting rules, the issuance of Common Stock under the
Purchase Plan will not result in a compensation expense chargeable against the
Company's reported earnings provided that prior to the beginning of each
offering period the Company has an authorized share reserve equal to or greater
than the number of shares issued during the offering period. However, the
Company must disclose, in notes to the Company's financial statements, the pro
forma impact which the purchase rights granted under the Purchase Plan would
have upon the Company's reported earnings were the value of those purchase
rights treated as compensation expense.
Recommendation of the Board of Directors
The Company is seeking the affirmative vote of a majority of the issued
and outstanding shares present or represented and entitled to vote at the 1998
Annual Meeting for approval of the amendment to the Purchase Plan. The Board of
Directors believes that the amendment to the Purchase Plan is necessary in order
to continue to provide equity incentives to attract and retain the services of
high quality employees. For this reason, the Board of Directors recommends that
the stockholders vote FOR this proposal. If the stockholders do not approve the
proposal, then no purchase rights will be granted under the Purchase Plan that
require usage of the 1,300,000-share increase. However, the Purchase Plan will
continue in effect until the available reserve of Common Stock under the
Purchase Plan as last approved by the stockholders is issued.
12
<PAGE>
ITEM NO. 3 --
RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the stockholders to ratify the selection of Ernst
& Young LLP as the Company's independent auditors for the fiscal year ending
January 3, 1999. The affirmative vote of the holders of a majority of the shares
represented and voting at the Annual Meeting will be required to ratify the
selection of Ernst & Young LLP.
In the event the stockholders fail to ratify the appointment, the Board
of Directors will reconsider its selection. Even if the selection is ratified,
the Board in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board feels that
such a change would be in the best interests of the Company and its
stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them FOR the ratification of the selection of Ernst & Young
LLP.
Ernst & Young LLP has audited the Company's financial statements
annually beginning in 1986. Representatives of the firm, who are expected to be
present at the Annual Meeting, will have the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate questions.
Recommendation of the Board of Directors
The affirmative vote of a majority of the issued and outstanding voting
shares is sought for the ratification of the selection of Ernst & Young LLP. The
Board of Directors recommends that the stockholders vote FOR this proposal.
13
<PAGE>
Executive Compensation and Related Information
In compliance with the Securities and Exchange Commission's regulations
on disclosure of Executive Compensation, this section presents the Report of the
Compensation Committee, a Stock Performance Graph comparing Company stockholder
return relative to a broad market index and a peer group index, and Summary and
Companion Compensation Tables presenting a detailed representation of the
Company's executive compensation practices.
REPORT OF THE COMPENSATION AND PRIMARY STOCK OPTION COMMITTEES
ON EXECUTIVE COMPENSATION
The Compensation Committee's members, Craig R. Barrett, Irwin Federman,
Max Palevsky and Masayoshi Takebayashi, are independent directors who are not
employees of the Company and who further qualify as outside directors under
Section 162(m) of the Internal Revenue Code. The Compensation Committee is
accountable for the approval of cash compensation programs that fairly
compensate key executives and employees and that relate the pay levels of
officers to the performance of the Company. The Primary Stock Option Committee's
members, Craig R. Barrett, Irwin Federman and Max Palevsky qualify as
disinterested persons for purposes of Rule 16b-3 adopted under the 1934 Act. The
Primary Stock Option Committee is responsible for all stock option grants to
executive officers.
Objectives of the Company's Executive Compensation Plan
The Company's executive compensation is based on the premise that the
executive officers are responsible for achievement of the Company's goals and
objectives and are rewarded when achievement of these goals results in
successful financial performance. The plan is intended to control fixed base
salary costs, to provide a high degree of compensation leverage on both the
upside and the downside, to allow flexibility to respond to specific individual
issues such as retention, and to balance cost to stockholders against providing
appropriate incentives for value creation. To structure the actual annual
compensation plans, the Compensation Committee relies on research performed by
an independent compensation consulting firm and advice from the Company's human
resources department. For comparison purposes, the Company has identified a
group of high-performing companies ("peer companies") both within and outside
the Company's industry. The Company competes with the peer companies for the
hiring and retention of key executives and accordingly compares its executive
compensation practices to these companies. Each peer company shares at least one
attribute, such as high technology, location or size with the Company. Such
comparisons also include the relative financial performance of the Company and
the peer companies. Since executive search and retention is not industry
specific, no attempt is made to correlate the list of peer companies with the
companies in Nasdaq Computer Manufacturers Index, the Company's Industry index
in the "Stock Performance Graph."
The total compensation plan developed for each officer includes base
salary, incentive bonus and stock options in addition to participation in the
Company's Cash and Deferred Profit Sharing and Employee Stock Purchase Plans
subject to the same eligibility criteria applicable to all employees. Executive
officers are also eligible to defer salary under the Komag Savings and Deferred
Profit Sharing Plan and Non-qualified Deferred Compensation Plan. Base salary is
targeted at or below the 50th percentile of base salaries for executives with
similar positions among the peer companies. The Compensation Committee considers
this level of base salary sufficient, in the context of the total compensation
package, to attract and retain executives of the caliber required to manage a
company that employs leading edge technology in a highly competitive, rapidly
changing industry. The Company's targeted base salary levels control the fixed
component of compensation in the event of poor business conditions or Company
performance. On an individual by individual basis, the base salaries of the
Company's executive officers range from the 40th percentile to the 75th
percentile. Variation from the targeted range is due to individual
qualifications, including performance, specific technical knowledge, experience
and/or total targeted cash compensation as judged by the Compensation Committee.
14
<PAGE>
To complement base salary, the Compensation Committee administers the
Management Bonus Plan (the "Bonus Plan"). The Bonus Plan is designed to provide
substantial rewards for exceeding financial performance targets and little or no
payout when the Company performs poorly. Specifically, the Bonus Plan provides a
pool of funds available for bonus payments based on the Company's operating
income as compared to the Annual Operating Plan as approved by the Board of
Directors in the first quarter of each fiscal year. The maximum pool is equal to
7% of operating income when actual operating income is greater than or equal to
122% of the Annual Operating Plan. This percentage declines linearly to 2% of
operating income at a level of 66.67% of the Annual Operating Plan and to 0%
when there is no operating income or an operating loss. The pool is allocated to
the executives, up to each executive's pre-established maximum allocation, and
to other non-executive employees, in accordance with the plan formula approved
by the Company's stockholders. Since the Company sustained an operating loss in
1997, no payments were accrued or paid under the Bonus Plan for the fiscal year.
The Compensation Committee also administers the Company's Discretionary
Bonus Plan (the "Discretionary Plan"). The Discretionary Plan is designed to
allow the Compensation Committee the flexibility to grant a bonus to an
executive if there is a specific retention issue related to the executive's
level of income or if an executive has achieved a substantial objective during a
time when the Bonus Plan cannot provide a payout. No such issues arose during
1997 and therefore no payments were accrued or made under this plan for the
fiscal year.
In addition to cash compensation the Company's executive compensation
plan includes stock options that are designed to align the interests of the
executive officers with those of stockholders, providing each officer with a
significant incentive to manage the Company from the long-term perspective of an
owner with an equity stake in the business. The stock option plan encourages
long-term retention and provides rewards to executives and other eligible
employees commensurate with growth in stockholder value. The Primary Stock
Option Committee had the sole responsibility for making option grants to the
Company's executive officers during 1997. The Primary Stock Option Committee
also approved the guidelines for option grants made to other key employees
during that fiscal year. Based on a review of competitive data, the Primary
Stock Option Committee targeted total option grants for 1997 to fall within a
range of 2.5% - 4.0% of total shares outstanding. Actual option grants, net of
cancellations, for the fiscal year totaled 3.5% of the weighted average number
of shares issued and outstanding. All stock options were granted at the market
price per share on the date of grant and have a maximum term of ten years.
The Primary Stock Option Committee has established guidelines for the
number of options to be granted to each level of executive officer,
non-executive management and key individual contributor based on analysis of
competitive data and internal estimates of the number of options necessary to
attract and retain these employees. These guidelines were used to determine the
range of options to be granted to each employee through the Company's annual
grant program. The Primary Stock Option Committee applied its judgment of
individual performance, with some consideration for the number of unvested
options held by an individual, when making specific grants to each executive
officer. These options will vest entirely in the fourth year after grant so that
generally the vesting will not overlap with previously granted options. In total
254,550 stock options were granted to twelve (12) eligible executive officers
pursuant to the annual grant program.
In addition to the annual grants, the Primary Stock Option Committee
granted a special award of 299,582 options to five executive officers. In the
Primary Stock Option Committee's judgment these executives are critical to the
Company's future competitive capability and a special incentive for continued
service was warranted. The options will become exercisable in a series of annual
installments over either a three or four year period.
Finally, the Primary Stock Option Committee deemed it in the best
interest of the Company to grant new options, as a retention tool, that
reflected the lower price level of the Company's stock in the second half of
1997. Accordingly, in October 1997 the Primary Stock Option Committee granted
152,166 options to thirteen (13) eligible executive officers. Each of these
options becomes exercisable in a series of installments during the second
through fourth years after grant.
15
<PAGE>
Compensation of the Chief Executive Officer and of the Chairman of the Board
Stephen C. Johnson's and Tu Chen's base salaries for 1997 were at
approximately the 40th percentile of salaries paid to executives in comparable
positions at the peer companies, in accordance with the Compensation Committee's
target. Due to the Company's performance in 1997, no merit increases were
awarded for 1998. As no cash bonuses were paid for 1997 under the Company's
plans, Mr. Johnson and Dr. Chen received variable compensation only under the
Company's Cash Profit Sharing Plan pursuant to which a distribution was made
based upon the Company's profitability during the first half of the fiscal year.
Mr. Johnson and Dr. Chen were each granted stock options for 113,810 shares
during the year. They were among the five officers receiving the special
continued service awards described above.
Compliance with Internal Revenue Code Section 162(m)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a Federal income tax
deduction for compensation paid to certain officers, to the extent that
compensation exceeds one (1) million dollars per officer in any one year. This
limitation will be in effect for each fiscal year of the Company beginning after
December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based. Compensation
which does qualify as performance-based compensation will not have to be taken
into account for purposes of this limitation. At the 1994 Annual Meeting, the
Company obtained stockholder approval for certain amendments to the Company's
Stock Option Plan which were designed to assure that any compensation deemed
paid in connection with the exercise of stock options granted under that plan,
with an exercise price equal to the market price of Common Stock on the grant
date, will qualify as performance-based compensation. The Bonus Plan was
restructured in 1996 and approved by stockholders so that the payments made
under that plan would also qualify as performance-based compensation under
Section 162(m) and the Company obtained a ruling from the Internal Revenue
Service that the payments under the Bonus Plan will qualify as performance-based
compensation. An amendment to the Bonus Plan was subsequently approved by
stockholders in 1997, and future payments thereunder should continue to qualify
as performance-based compensation which would not be subject to the Code Section
162(m) limitation on deductibility.
MEMBERS OF THE COMPENSATION COMMITTEE
Craig R. Barrett Irwin Federman Max Palevsky Masayoshi Takebayashi
MEMBERS OF THE PRIMARY STOCK OPTION COMMITTEE
Craig R. Barrett Irwin Federman Max Palevsky
The members of the Compensation Committee and the Primary Stock Option
Committee of the Company's Board of Directors are as named in the above report.
No member of either committee was at any time during the 1997 fiscal year, or at
any other time, an officer or employee of the Company.
No executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more of its executive
officers serving as a member of the Company's Board of Directors, the
Compensation Committee, or the Primary Stock Option Committee. Mr. Takebayashi,
a member of the Company's Board of Directors, is an executive officer of Kobe
Precision, Inc. a wholly-owned subsidiary of Kobe Steel, Ltd. ("Kobe") and is a
member of the Board of Komag Material Technology, Incorporated, a joint venture
of the Company and Kobe. For further information concerning this joint venture,
see the section below entitled Certain Relationships and Related Transactions.
16
<PAGE>
Stock Performance Graph
<TABLE>
The following graph shows a five year comparison of cumulative total
return on common stock for the Company, the S&P 500 Composite Index, and the
Computer Manufacturing Index from December 31, 1992 through December 31, 1997.
The past performance of the Company's Common Stock is no indication of future
performance.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
------------------------- -------------- -------------- -------------- -------------- ------------- -------------
Prices indexed to an
initial investment of
$100 12/31/92 12/31/93 12/30/94 12/29/95 12/27/96 12/26/97
<S> <C> <C> <C> <C> <C> <C>
------------------------- -------------- -------------- -------------- -------------- ------------- -------------
Komag, Incorporated $100.00 $101.43 $149.29 $263.57 $307.14 $163.57
------------------------- -------------- -------------- -------------- -------------- ------------- -------------
Nasdaq Composite $100.00 $114.80 $112.21 $158.70 $195.43 $230.56
------------------------- -------------- -------------- -------------- -------------- ------------- -------------
Nasdaq Computer Mfg. $100.00 $94.77 $104.08 $163.93 $226.88 $253.33
------------------------- -------------- -------------- -------------- -------------- ------------- -------------
</TABLE>
The chart above assumes $100 invested on December 31, 1992, in Komag,
Incorporated Common Stock, S&P 500 Composite Index and Computer Manufacturing
Index, and the reinvestment of dividends (although dividends have not been
declared on the Company's Common Stock). Historical returns are not necessarily
indicative of future performance. The graph was plotted using the following
data:
17
<PAGE>
Summary of Cash and Certain Other Compensation
<TABLE>
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the Company's four other highest-paid
executive officers whose base salary and bonus for the 1997 fiscal year was in
excess of $100,000 (the "Named Executive Officers") for services rendered in all
capacities to the Company and its subsidiaries for the 1997, 1996 and 1995
fiscal years. No executive officer who would have otherwise been included in
such table on the basis of salary and bonus earned for the 1997 fiscal year
resigned or terminated employment during that fiscal year.
I. SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Long Term
Annual Compensation Awards
Name and ------------------- Securities All Other
Principal Underlying Compen-
Position Year Salary Bonus Option Granted sation
-------- ---- ------ ----- -------------- ------
($)(1) ($)(2) (#) ($)(3)
<S> <C> <C> <C> <C> <C>
Stephen C. Johnson 1997 $428,000 $10,621 113,810 $9,067
President and 1996 $402,000 $66,949 43,500 $29,744
Chief Executive Officer 1995 $387,000 $1,049,619 58,000 $39,567
Tu Chen 1997 $428,000 $10,621 113,810 $9,067
Chairman of the Board 1996 $402,000 $66,949 43,500 $29,744
1995 $387,000 $1,049,619 58,000 $39,514
Christopher H. Bajorek 1997 $316,654 $7,966 160,825 $6,956
Senior Vice President and 1996 $150,000 $30,000 110,000 --
Chief Technical Officer 1995 -- -- -- --
Willard Kauffman 1997 $305,244 $7,643 27,285 $6,700
Senior Vice President and 1996 $289,000 $78,147 25,500 $21,559
Chief Operating Officer 1995 $278,000 $395,699 30,600 $28,609
Fred J. Wiele 1997 $249,995 $6,204 32,528 $5,556
Senior Vice President 1996 $125,000 $10,000 80,000 --
Marketing and Sales 1995 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes salary deferred under the Komag Savings and Deferred Profit
Sharing Plan and the Company's Non-Qualified Deferred Compensation
Plan.
18
<PAGE>
(2) Includes amounts earned for the indicated year under the Company's Cash
Profit Sharing Plan, the Management Bonus Plan and the Discretionary
Bonus Plan. Amount earned under the Cash Profit Sharing Plan are
accrued during a given year and are paid in July of that year and
January or February of the following year. Bonuses earned under the
Management Bonus Plan are accrued during a given year and paid in
January or February of the following year. Bonuses under the
Discretionary Bonus Plan are awarded by the Compensation Committee for
a particular fiscal year solely on the basis of such Committee's
competitive compensation analysis for that year and are paid in January
or February of the following year. For the 1997 fiscal year, the only
bonuses paid were under the Cash Profit Sharing Plan.
(3) Includes for the fiscal years indicated below: (i) the matching
contributions ($0.25 match per $1.00 individual contribution) made by
the Company on behalf of each Named Executive Officer to the Section
401(k) Savings Program, up to a maximum match of $625 and (ii) the
semi-annual profit sharing contributions made by the Company on behalf
of each Named Executive Officer to the Savings and Deferred
Profit-Sharing Plan and Deferred Compensation Plan:
----------------------------------------------------------------------
Matching Profit Sharing
Contribution Contribution
------------ ------------
Stephen C. Johnson 1997 $625 $ 8,442
1996 $625 $29,119
1995 $237 $39,330
Tu Chen 1997 $625 $8,442
1996 $625 $29,119
1995 $184 $39,330
Christopher H. Bajorek 1997 $625 $6,331
1996 -- --
1995 -- --
Willard Kauffman 1997 $625 $6,075
1996 $625 $20,934
1995 $312 $28,297
Fred J. Wiele 1997 $625 $4,931
1996 -- --
1995 -- --
----------------------------------------------------------------------
</FN>
</TABLE>
19
<PAGE>
Stock Options
<TABLE>
The following table provides information with respect to the stock
option grants made for the 1997 fiscal year under the Company's Restated 1987
Stock Option Plan to the Named Executive Officers. Except for the limited stock
appreciation right described below, which formed part of the option grant made
to each of the Named Executive Officers, no stock appreciation rights were
granted to such individuals during the 1997 fiscal year. Potential Realizable
Values noted below reflect hypothetical appreciation based on the stock price at
grant date.
II. OPTION GRANTS TABLE
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates
Stock Price
Appreciation
Individual Grants for Option Term
----------------- ---------------
Number of % of
Securities Total Exercise
Underlying Options or Base Valuation
Options Granted to Price per SFAS
Date of Granted Employees ($/Share) Expiration 123
Name Grant(1) (#) in Fiscal Year (2) Date 5%($)(3) 10%($)(3) pro forma(4)
---- --------- --- -------------- --------- ---- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Johnson 01/06/97 43,500 1.05% $26.75 01/06/07 $731,798 $1,854,518 $782,504
01/20/97 49,791 1.20% $28.44 01/20/07 $890,472 $2,256,630 $952,173
10/06/97 20,519 .49% $19.44 10/06/07 $250,827 $635,645 $269,815
Tu Chen 01/06/97 43,500 1.05% $26.75 01/06/07 $731,798 $1,854,518 $782,504
01/20/97 49,791 1.20% $28.44 01/20/07 $890,472 $2,256,630 $952,173
10/06/97 20,519 .49% $19.44 10/06/07 $250,827 $635,645 $269,815
Christopher H. Bajorek 01/06/97 25,500 .61% $26.75 01/06/07 $428,985 $1,087,132 $458,710
01/20/97 100,000 2.41% $28.44 01/20/07 $1,788,419 $4,532,206 $1,912,340
10/06/97 35,325 .85% $19.44 10/06/07 $431,818 $1,094,311 $464,506
Willard Kauffman 01/06/97 20,400 .49% $26.75 01/06/07 $343,188 $869,706 $366,968
10/06/97 6,885 .16% $19.44 10/06/07 $84,163 $213,286 $90,535
Fred J. Wiele 01/06/97 17,850 .43% $26.75 01/06/07 $300,289 $760,992 $321,097
10/06/97 14,678 .35% $19.44 10/06/07 $179,426 $454,700 $193,009
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
Each option has a maximum term of 10 years, subject to earlier termination
upon the optionee's cessation of service. Each option will become immediately
exercisable for all the option shares in the event the Company is acquired by
a merger or asset sale (unless the option is assumed or replaced by the
acquiring entity) or in the event the optionee's employment terminates by
reason of death, permanent disability or retirement at or after age 65. Each
option includes a limited stock appreciation right which would result in the
cancellation of that option upon a take-over of the Company effected through a
hostile tender offer for more than 50% of the Company's outstanding Common
Stock. In return, the optionee will be entitled to a cash distribution from
the Company per canceled option share equal to the highest reported price paid
per share of Common Stock in such tender offer, less the option exercise price
per share.
20
<PAGE>
(1) The option granted to each Named Executive Officer will become
exercisable for the option shares in a series of installments over such
individual's period of service with the Company as specified below,
measured from the grant date.
Grant Date Vesting Schedule
---------- ----------------
01/06/97 Vesting and exercisable for 8.33% of option shares
upon completion of thirty-seven (37) months of
service following the grant date, and the remainder
vesting in eleven (11) successive equal monthly
installments of 8.33% each upon completion of each
subsequent month of service, becoming fully vested
and exercisable forty-eight (48) months following
grant date.
01/20/97 Vesting and exercisable at varying percentages (from
10% to 50%) of the option shares upon completion of
one (1) year of service following grant date, with
the remainder in subsequent annual installments over
either a two (2) or three (3) year period, becoming
fully vested and exercisable in no longer than four
(4) years following grant date.
10/06/97 Vesting and exercisable for 25% of option shares upon
completion of one (1) year of service following grant
date, and the remainder vesting in twelve (12)
successive equal quarterly installments upon
completion of each additional quarter of service,
becoming fully vested and exercisable forty-eight
(48) months after grant date.
(2) The exercise price may be paid in cash, in shares of the Company's
Common Stock valued at fair market value on the exercise date, or
through a cashless exercise procedure involving a same-day sale of the
purchased shares.
(3) There is no assurance provided to any executive officer, or any other
holder of the Company's securities, that the actual stock price
appreciation from the grant date and over the 10 year option term will
be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over the option
term, no value will be realized from the option grants made to the
executive officers.
(4) For purposes of such pro forma disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest
rate of 6.3%; volatility factor of the expected market price of the
Company's Common Stock of 61.9%; and a weighted-average expected life
of such options of 6.5 years. There was no dividend yield included in
the calculation since the Company does not pay dividends. The
weighted-average fair value of options granted to all employees during
1997 was $11.06. For officer grants during 1997, the weighted-average
fair value of the options was $17.20.
</FN>
</TABLE>
21
<PAGE>
Option Exercises and Holdings
<TABLE>
The table below sets forth information concerning the exercise of
options during the 1997 fiscal year and unexercised options held as of the end
of such year by the Named Executive Officers. No stock appreciation rights were
exercised during such fiscal year, and except for the limited stock appreciation
rights described in Footnote (1) to the Option Grant Table above which form part
of each stock option grant, no stock appreciation rights were outstanding at the
end of such fiscal year.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options In-The-Money
Shares At Fiscal Options at Fiscal
Acquired Value Year-End(#) Year-End ($)(2)
on Exercise Realized(1) Exercisable (E)/ Exercisable (E)/
Name (#) (#) Unexercisable (U) Unexercisable (U)
---- --- --- ----------------- -----------------
<S> <C> <C> <C> <C>
Stephen C. Johnson -- -- 218,807 E $1,360,293 E
219,143 U $121,592 U
Tu Chen -- -- 144,347 E $824,792 E
219,143 U $121,592 U
Willard Kauffman -- -- 84,667 E $461,077 E
86,718 U $72,260 U
Christopher H. Bajorek -- -- 41,250 E $0.00 E
229,575 U $0.00 U
Fred J. Wiele -- -- 30,000 E $0.00 E
82,528 U $0.00 U
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) Value Realized equals the market price value of the shares at the time
of exercise less the exercise price thereof.
(2) Excess of the closing price per share of the Company's Common Stock at
the end of the fiscal year ($14.3125) over the option exercise price.
If the closing price is less than the exercise price, then the value of
unexercised options equals zero.
</FN>
</TABLE>
22
<PAGE>
Employment Contracts and Termination of Employment Agreements
None of the Company's executive officers have employment contracts or
severance agreements with the Company.
Officer Loans
The Company has advanced the sum of $169,079 to Mr. Bajorek during the
1997 fiscal year to finance the cost of his legal fees in connection with a
lawsuit brought by his former employer. The advances bear interest at the market
rate required under the federal tax laws. The highest amount outstanding under
these advances during the 1997 fiscal year was $176,194, and as of March 30,
1998, the amount outstanding was $229,939.
Certain Relationships and Related Transactions
The Company and Kobe Steel USA Holdings Incorporated ("Kobe USA") are
joint investors in Komag Material Technology, Inc. ("KMT"). The Company
currently owns 80% of KMT and Kobe USA owns the remaining 20%. Pursuant to the
Company's joint venture agreement with Kobe USA and its parent corporation Kobe
Steel, Ltd. ("Kobe Steel" and, collectively with Kobe USA, "Kobe"), Kobe has
agreed to supply substrate blanks to KMT, and the Company has agreed to purchase
KMT's entire output of finished substrates. The Company made payments of
approximately $42,738,000 to KMT in 1997 for the purchase of finished aluminum
substrates. These payments were determined pursuant to a formula-based price
whereby the prices paid by the Company may be higher or lower than those
available from unrelated third parties. In 1997 the Company also purchased
approximately $52,308,000 of products from Kobe Steel and its subsidiaries and
distributors. The Company believes that the terms and conditions for the above
payments were as favorable as could be obtained from unrelated third parties.
Pursuant to the terms of a Common Stock Purchase Agreement between Kobe
USA and the Company (the "Kobe Agreement"), in March 1990 Kobe USA purchased
2,000,000 shares of the Company's Common Stock for $20,000,000. Kobe has agreed
to limit its ownership of the Company's total voting securities to not greater
than twenty percent (20%), except that under circumstances such as a potential
change of control or the emergence of a larger stockholder, Kobe has a right of
first refusal with respect to the issuance of new securities by the Company, and
is also entitled to consideration as a future joint venture partner of the
Company. In addition, the Kobe Agreement generally restricts the right of Kobe
to sell or transfer the shares acquired under the Kobe Agreement. Kobe is also
required to vote its shares as directed by the Board of Directors of the
Company, subject to certain exceptions such as upon the liquidation or
disposition of the Company. Further, so long as Kobe continues to own at least
2,000,000 shares of the Company's Common Stock, the Kobe Agreement provides that
the Board of Directors of the Company and its Nominating Committee are generally
required to facilitate the election of a designee of Kobe to the Company's Board
of Directors and to the Nominating Committee. See "Item No. 1--Election of
Directors" above.
The Company and Asahi Glass Co., Ltd. ("Asahi"), a former holder of
greater than 5% of the Company's stock, also entered into a Common Stock
Purchase Agreement (the "Asahi Agreement") for the purchase of 2,000,000 shares
of the Company's Common Stock for $20,000,000 in January, 1989. The Asahi
Agreement was amended in March, 1990 to conform substantially with the terms and
conditions of the Kobe Agreement above. In 1997, the Company purchased
approximately $17,836,000 worth of equipment from Asahi. The Company believes
that the terms and conditions of these purchases were as favorable as could be
obtained from unrelated third parties.
23
<PAGE>
In 1997, the Company recorded sales of approximately $95,302,000 to
Asahi Komag Co., Ltd. ("AKCL"), a joint venture between the Company and Asahi
that manufacturers thin-film media in Japan, and made purchases of approximately
$14,686,000 from AKCL. The Company believes that the terms and conditions of
these purchases were as favorable as could be obtained from unrelated third
parties.
In September 1994, the Company announced its participation in Headway
Technologies, Inc. ("Headway"), a new company formed to research, develop and
manufacture advanced magnetoresistive ("MR") heads for the data storage
industry. Hewlett-Packard Company ("HP") and AKCL provided the initial cash
funding to Headway in exchange for equity interests. The Company and Asahi Glass
America, Incorporated, a wholly-owned subsidiary of Asahi, licensed to Headway
MR technology and contributed research and production equipment in exchange for
equity. In 1997, AKCL, Asahi Glass America, Incorporated, HP and the Company
sold their equity interests in Headway to a group of new investors for
$21,990,000. The Company retains no remaining interest in Headway.
Compliance with Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of common stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon written review of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 28, 1997, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten percent stockholders were met in a timely manner.
24
<PAGE>
OTHER BUSINESS
The Board of Directors knows of no other business that will be
presented for consideration at the Annual Meeting. If other matters are properly
brought before the Annual Meeting, however, it is the intention of the persons
named in the accompanying proxy to vote the shares represented thereby on such
matters in accordance with their best judgment.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the
Company's Annual Meeting of Stockholders to be held in 1999 must be received by
the Company no later than December 31, 1998 in order to be included in the proxy
statement and proxy relating to that meeting.
By Order of the Board of Directors
TU CHEN
Chairman of the Board
25
<PAGE>
KOMAG, INCORPORATED
The Annual meeting of Stockholders will be held at 10;00 a.m. on
Wednesday, May 27,1998, at Komag, Incorporated, Building 9, located at:
1705 Automation Parkway
San Jose, California 95131
[ Direction Map Graphic Omitted ]
<PAGE>
KOMAG, INCORPORATED
1988 EMPLOYEE STOCK PURCHASE PLAN
(Restated June 29, 1992 and Amended January 27, 1994,
January 22, 1997 and January 30, 1998)
I. PURPOSE
The Komag, Incorporated 1988 Employee Stock Purchase Plan (the
"Plan") is intended to provide eligible employees of the Company and one or more
of its Corporate Affiliates with the opportunity to acquire a proprietary
interest in the Company through participation in a plan designed to qualify as
an employee stock purchase plan under Section 423 of the Internal Revenue Code
(the "Code").
II. DEFINITIONS
For purposes of administration of the Plan, the following
terms shall have the meanings indicated:
Base Compensation means (i) the regular base earnings paid to
a Participant by one or more Participating Companies, before deduction for any
contributions made on the Participant's behalf to any Code Section 401(k) Plan
maintained by the Company or any Corporate Affiliate. The calculation of Base
Compensation may also include, at the discretion of the Plan Administrator
exercisable prior to the start of any purchase period, bonuses, overtime pay,
shift differentials and other differentials. Base Compensation shall be
calculated on the basis of equivalent bi-weekly straight-time hours (up to a
maximum of 79.50 hours for three-day shift employees and 80.00 hours for all
other employees) multiplied by straight-time rate. In no event shall Base
Compensation include any profit-sharing or other non-salary deferral
contributions made on the Participant's behalf pursuant to any qualified
profit-sharing plan under Code Section 401(a).
Board means the Board of Directors of the Company.
Company means Komag, Incorporated, a Delaware corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Komag, Incorporated, which shall by appropriate action adopt the Plan.
Corporate Affiliate means any company which is either the
parent corporation or a subsidiary corporation of the Company (as determined in
accordance with Section 424 of the Code), including any parent or subsidiary
corporation which becomes such after the Effective Date.
Effective Date means, with respect to the 1992 plan
restatement, June 29, 1992. However, should any Corporate Affiliate become a
Participating Company in the Plan after such applicable date, then such entity
shall designate a separate Effective Date with respect to its
<PAGE>
employee-Participants.
Employee means any person who is regularly engaged, for a
period of more than 20 hours per week for more than 5 months per calendar year,
in the rendition of personal services to the Company or any other Participating
Company for earnings considered wages under Section 3121(a) of the Code.
Fiscal Quarter means a three-month period corresponding to a
fiscal quarter of the Company, based on the Company's 52-53 week fiscal year
ending on the Sunday closest to December 31st of each year.
Participant means any Employee of a Participating Company
actively participating in the Plan.
Participating Company means the Company and such Corporate
Affiliate or Affiliates as may be designated from time to time by the Board. The
Participating Companies in the Plan, as of the Effective Date, are listed in
attached Schedule A.
Stock means shares of the common stock of the Company.
III. ADMINISTRATION
(a) The Plan shall be administered by a committee (the
"Committee") comprised of at least two non-employee members of the Board
appointed from time to time by the Board. The Committee as Plan Administrator
shall have full authority to administer the Plan, including authority to
interpret and construe any provision of the Plan and to adopt such rules and
regulations for administering the Plan as it may deem necessary in order to
comply with the requirements of Code Section 423. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan.
(b) No member of the Committee while serving as such shall be
eligible to participate in the Plan.
IV. PURCHASE PERIODS
(a) Stock shall be offered for purchase under the Plan through
a series of successive purchase periods until such time as (i) the maximum
number of shares of Stock available for issuance under the Plan shall have been
purchased or (ii) the Plan shall have been sooner terminated in accordance with
Article X or Article XI.
(b) The Plan shall be implemented in a series of successive or
overlapping purchase periods, each of such duration (not to exceed twenty-four
(24) months) as determined by the Plan Administrator prior to the start date of
the purchase period. Purchase periods will start, at the Plan Administrator's
discretion, either on the first day or the first Monday of each successive
2.
<PAGE>
Fiscal Quarter or each alternate successive Fiscal Quarter. Accordingly, either
four (4) or two (2) separate purchase periods may commence per Fiscal Year.
(c) The Participant shall be granted a separate purchase right
for each purchase period in which he/she participates. The purchase right shall
be granted on the first day of the purchase period and shall be automatically
exercised in (i) successive quarterly installments on the last day of each
Fiscal Quarter such purchase right remains outstanding, in the case of a
purchase period in which purchases are effected quarterly, or (ii) successive
semi-annual installments on the last day of each alternate Fiscal Quarter such
purchase right remains outstanding, in the case of a purchase period in which
purchases are effected semi-annually.
(d) An Employee may participate in only one purchase period at
a time. Accordingly, an Employee who wishes to join a new purchase period must
withdraw from the current purchase period in which he/she is participating and
must also enroll in the new purchase period prior to the commencement date for
that period.
(e) The acquisition of Stock through participation in the Plan
for any purchase period shall neither limit nor require the acquisition of Stock
by the Participant in any subsequent purchase period. However, the acquisition
of Stock through participation in the Plan for any purchase period shall be
counted toward the limitations on the number of purchasable shares as provided
in Section VII(b) and the accrual limitations as provided in Section VIII.
(f) Under no circumstances shall any purchase rights granted
under the Plan be exercised, nor shall any shares of Stock be issued hereunder,
until such time as (i) the Plan shall have been approved by the Company's
shareholders and (ii) the Company shall have complied with all applicable
requirements of the Securities Act of 1933 (as amended), all applicable listing
requirements of any securities exchange on which the Stock is listed and all
other applicable requirements established by law or regulation.
V. ELIGIBILITY AND PARTICIPATION
(a) Every Employee of a Participating Company shall be
eligible to participate in the Plan on the first day of the first purchase
period following the Employee's commencement of service with the Company or any
Corporate Affiliate, but in no event shall participation commence prior to the
Effective Date.
(b) In order to participate in the Plan for a particular
purchase period, the Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) prior to the commencement date of the purchase period. Such
enrollment shall be effective for subsequent, but not overlapping, purchase
periods, unless the Employee notifies the Plan Administrator (or its designate)
to the contrary prior to the commencement date of any such subsequent purchase
period.
3.
<PAGE>
(c) The payroll deduction authorized by a Participant for
purposes of acquiring Stock under the Plan may be any multiple of 1% of the Base
Compensation paid to the Participant during the relevant purchase period, up to
a maximum of 10%. The deduction rate so authorized shall continue in effect for
the entire purchase period and for each subsequent purchase period, unless the
Participant shall, prior to the end of the purchase period for which the
purchase right is in effect, reduce the rate by filing the appropriate form with
the Plan Administrator (or its designate). The reduced rate shall become
effective as soon as practicable following the filing of such form. Each
Participant shall be permitted such a rate reduction only four (4) times in each
purchase period. The reduced rate shall continue in effect for the entire
purchase period and for each subsequent purchase period, unless the Participant
shall, prior to the commencement of any subsequent purchase period designate a
different rate (up to the 10% maximum) by filing the appropriate form with the
Plan Administrator (or its designate). The new rate shall become effective for
the first purchase period commencing after the filing of such form. Payroll
deductions, however, will automatically cease upon the termination of the
Participant's purchase right in accordance with Section VII(d) or (e) below.
VI. STOCK SUBJECT TO PLAN
(a) The Stock purchasable by Participants under the Plan
shall, solely in the Board's discretion, be made available from either
authorized but unissued Stock or from reacquired Stock, including shares of
Stock purchased on the open market. The total number of shares of Stock which
may be issued under the Plan shall not exceed 4,850,000 shares (subject to
adjustment under Section VI(b)). Such share reserve includes the 1,300,000-share
increase authorized by the Board on January 30, 1998, subject to stockholder
approval at the 1998 Annual Meeting.
(b) In the event any change is made to the Stock purchasable
under the Plan by reason of any recapitalization, stock dividend, stock split,
combination of shares or other change affecting the outstanding common stock of
the Company as a class without receipt of consideration, then appropriate
adjustments shall be made by the Plan Administrator to the class and maximum
number of shares purchasable under the Plan, the class and maximum number of
shares purchasable per Participant under any purchase right outstanding at the
time or purchasable per Participant over the term of the Plan, and the class and
number of shares and the price per share of the Stock subject to outstanding
purchase rights held by Participants under the Plan.
VII. PURCHASE RIGHTS
An Employee who participates in the Plan for a particular
purchase period shall have the right to purchase Stock on the purchase dates
designated by the Plan Administrator for such purchase period upon the terms and
conditions set forth below and shall execute a purchase agreement embodying such
terms and conditions and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.
(a) Purchase Price. The purchase price per share shall be the
lesser of (i) 85% of the fair market value of a share of Stock on the date on
which the purchase right is granted or (ii)
4.
<PAGE>
85% of the fair market value of a share of Stock on the date the purchase right
is exercised. For purposes of determining such fair market value (and for all
other valuation purposes under the Plan), the fair market value per share of
Stock on any date shall be determined in accordance with the following
provisions:
(i) If the Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the
Nasdaq National Market, the fair market value per share shall
be the closing selling price per share of Stock on the date in
question, as such prices are reported by the National
Association of Securities Dealers on the Nasdaq National
Market. If there is no reported closing selling price on the
date in question, then the closing selling on the last
preceding date for which such quotation exists shall be
determinative of fair market value.
(ii) If the Stock is at the time listed or
admitted to trading on any stock exchange, then the fair
market value shall be the closing selling price per share of
Stock on the date in question on the stock exchange determined
by the Plan Administrator to be the primary market for the
Stock, as such price is officially quoted on such exchange. If
there is no reported sale of Stock on such exchange on the
date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding
date for which such quotation exists.
(b) Number of Purchasable Shares. The number of shares
purchasable by a Participant on any particular purchase date shall be the number
of whole shares obtained by dividing the amount collected from the Participant
through payroll deductions during the quarterly or semi-annual period beginning
with the start of the purchase period or the most recent purchase date in the
same purchase period (whichever is applicable), together with any amount carried
over from the preceding purchase date in the same purchase period pursuant to
the provisions of Section VII(f), by the purchase price in effect for such
purchase date. However, the maximum number of shares purchasable by the
Participant on any purchase date shall not exceed 3,000 shares, in the case of a
purchase period in which purchases are effected quarterly, or 6,000 shares, in
the case of a purchase period in which purchases are effected semi-annually
(subject in either instance to adjustment under Section VI(b)). In addition, the
maximum number of shares for which purchase rights may in the aggregate be
granted to any individual who is subject to the short-swing profit restrictions
of the Federal securities laws shall not exceed 50,000 shares (subject to
adjustment under Section VI(b)) over the term of the Plan. Accordingly, no such
officer or director shall be eligible to receive purchase rights for any
purchase period if the number of shares which would otherwise be purchasable by
such individual for that purchase period would result in the issuance to such
individual of shares of Stock in excess of the maximum number of shares
purchasable in the aggregate by such individual over the term of the Plan. Each
of the foregoing share-limitations has been adjusted to reflect the two-for-one
forward split of the Stock effected on December 21, 1995.
5.
<PAGE>
Under no circumstances shall purchase rights be granted under
the Plan to any Employee if such Employee would, immediately after the grant,
own (within the meaning of Section 424(d) of the Code), or hold outstanding
options or other rights to purchase, stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or any of
its Corporate Affiliates.
(c) Payment. Payment for Stock purchased under the Plan shall
be effected by means of the Participant's authorized payroll deductions. Such
deductions shall begin on the first pay day coincident with or immediately
following the commencement date of the relevant purchase period and shall
terminate with the pay day ending with or immediately prior to the last day of
the purchase period. The amounts so collected shall be credited to the
Participant's individual account under the Plan, but no interest shall be paid
on the balance from time to time outstanding in the account. The amounts
collected from a Participant may be commingled with the general assets of the
Company and may be used for general corporate purposes.
(d) Termination of Purchase Rights.
(i) A Participant may, prior to any purchase date,
terminate his/her outstanding purchase right under the Plan by filing the
prescribed notification form with the Plan Administrator (or its designate). The
Company will then refund all sums previously collected from the Participant and
not previously applied to the purchase of Stock during the purchase period, and
no further amounts will be collected from the Participant with respect to the
terminated purchase right.
(ii) The termination shall be irrevocable with respect
to the particular purchase period to which it pertains and shall also require
the Participant to re-enroll in the Plan (by making a timely filing of a new
purchase agreement and payroll deduction authorization) if the Participant
wishes to resume participation in a subsequent purchase period.
(e) Termination of Employment. If a Participant ceases
Employee status during any purchase period, then the Participant's outstanding
purchase right under the Plan shall immediately terminate and all sums
previously collected from the Participant and not previously applied to the
purchase of stock during such purchase period shall be promptly refunded.
However, should the Participant die or become permanently disabled while in
Employee status, then the Participant or the person or persons to whom the
rights of the deceased Participant under the Plan are transferred by will or by
the laws of descent and distribution (the "successor") will have the election,
exercisable at any time prior to the purchase date for the quarterly or
semi-annual period in which the Participant dies or becomes permanently
disabled, to (i) withdraw all the funds in the Participant's payroll account at
the time of his/her cessation of Employee status or (ii) have such funds applied
to the purchase of shares of Stock on the next purchase date. In no event,
however, shall any further payroll deductions be added to the Participant's
account following his/her cessation of Employee status.
6.
<PAGE>
For purposes of the Plan: (a) a Participant shall be
considered to be an Employee for so long as such Participant remains in the
employ of the Company or any other Participating Company under the Plan and (b)
a Participant shall be deemed to be permanently disabled if he/she is unable, by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of at least twelve (12) months,
to engage in any substantial gainful employment.
(f) Stock Purchase. Outstanding purchase rights shall be
automatically exercised in a series of successive installments as provided in
Section IV(c). The exercise shall be effected by applying the amount credited to
the Participant's account on the last date of the Fiscal Quarter, in the case of
a purchase period in which purchases are effected quarterly, or the last date of
the alternate Fiscal Quarter, in the case of a purchase period in which
purchases are effected semi-annually, to the purchase of whole shares of Stock
(subject to the limitations on the maximum number of purchasable shares set
forth in Section VII(b)) at the purchase price in effect for such purchase date.
Any amount remaining in the Participant's account after such purchase shall be
held for the purchase of Stock on the next quarterly or semi-annual purchase
date within the purchase period; provided, however, that any amount not applied
to the purchase of Stock at the end of a purchase period shall be refunded
promptly after the close of the purchase period, and any amount not applied to
the purchase of stock by reason of the Section VII(b) limitations on the maximum
number of purchasable shares shall be refunded promptly after the quarterly or
semi-annual purchase date.
(g) Proration of Purchase Rights. Should the total number of
shares of Stock which are to be purchased pursuant to outstanding purchase
rights on any particular date exceed the number of shares then available for
issuance under the Plan, the Plan Administrator shall make a pro-rata allocation
of the available shares on a uniform and nondiscriminatory basis, and any
amounts credited to the accounts of Participants shall, to the extent not
applied to the purchase of Stock, be refunded to the Participants.
(h) Rights as Shareholder. A Participant shall have no rights
as a shareholder with respect to shares covered by the purchase rights granted
to the Participant under the Plan until the shares are actually purchased on the
Participant's behalf in accordance with Section VII(f). No adjustments shall be
made for dividends, distributions or other rights for which the record date is
prior to the date of such purchase.
A Participant shall be entitled to receive, as soon as
practicable after the date of each purchase, stock certificates for the number
of shares purchased on the Participant's behalf. Such certificate may, upon the
Participant's request, be issued in the names of the Participant and his/her
spouse as community property or as joint tenants with right of survivorship.
In lieu of delivering a stock certificate to each Participant,
the Plan Administrator may, in its discretion, implement a designated broker
program and direct the Company to issue a single stock certificate to a broker
designated by the Plan Administrator. Such designated broker shall establish an
account for each Participant in the Plan and shall effect transfers and sales
from
7.
<PAGE>
such account at the direction of the Participant. To facilitate the designated
broker program, the Plan Administrator may require, as a condition to
participation in the Plan, that a Participant agree to the issuance of his or
her stock certificates directly to the designated broker.
(i) Assignability. No purchase rights granted under the Plan
shall be assignable or transferable by a Participant except by will or by the
laws of descent and distribution, and the purchase rights shall, during the
lifetime of the Participant, be exercisable only by such Participant.
(j) Merger or Liquidation of Company. In the event the Company
or its shareholders enter into an agreement to dispose of all or substantially
all of the assets or outstanding capital stock of the Company by means of a
sale, merger or reorganization in which the Company will not be the surviving
corporation (other than a reorganization effected primarily to change the State
in which the Company is incorporated) or in the event the Company is liquidated,
then all outstanding purchase rights under the Plan shall automatically be
exercised immediately prior to such sale, merger, reorganization or liquidation
by applying all sums previously collected from Participants pursuant to their
payroll deductions in effect for such rights to the purchase of whole shares of
Common Stock, subject, however, to the applicable limitations of Section VII(b).
VIII. ACCRUAL LIMITATIONS
(a) No Participant shall be entitled to accrue rights to
acquire Stock pursuant to any purchase right under this Plan if and to the
extent such accrual, when aggregated with (I) Stock rights accrued under other
purchase rights outstanding under this Plan and (II) similar rights accrued
under other employee stock purchase plans (within the meaning of Section 423 of
the Code) of the Company or its Corporate Affiliates, would otherwise permit
such Participant to purchase more than $25,000 worth of stock of the Company or
any Corporate Affiliate (determined on the basis of the fair market value of
such stock on the date or dates such rights are granted to the Participant) for
each calendar year such rights are at any time outstanding.
(b) For purposes of applying the accrual limitations of
Section VIII(a), the right to acquire Stock under each purchase right
outstanding under the restated Plan shall accrue as follows:
- The right to acquire Stock under each such purchase
right shall accrue in a series of successive quarterly or semi-annual
installments as and when the purchase right first becomes exercisable
for each installment as provided in Section IV(c).
- No right to acquire Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Stock under that
purchase right or any other purchase rights held by the Participant at
the rate of $25,000 worth of Stock (based on the fair market value on
the date or dates of grant) for each calendar year (or portion thereof)
for which such purchase rights have been outstanding.
8.
<PAGE>
- If by reason of the Section VIII(a) limitations, the
Participant's outstanding purchase right does not accrue for a
particular purchase date of any purchase period, then the payroll
deductions which the Participant made during that quarterly or
semi-annual period with respect to such purchase right shall be
promptly refunded.
(c) In the event there is any conflict between the provisions
of this Article VIII and one or more provisions of the Plan or any instrument
issued thereunder, the provisions of this Article VIII shall be controlling.
IX. STATUS OF PLAN UNDER FEDERAL TAX LAWS
(a) The Plan is designed to qualify as an employee stock
purchase plan under Code Section 423. However, the Plan Administrator may, at
any time in its discretion, cease to administer the Plan as a qualified employee
stock purchase plan under Code Section 423. Accordingly, share purchases
effected under the Plan at any time after the Plan ceases to be administered as
a qualified employee stock purchase plan under Code Section 423 (whether
pursuant to purchase rights granted before or after the Plan ceases to be
qualified) shall result in taxable income to each Participant equal to the
excess of (i) the fair market value of the purchased shares on the purchase date
over (ii) the purchase price paid for such shares.
(b) To the extent required by law, the Company's obligation to
deliver shares to the Participant upon the exercise of any outstanding purchase
right shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements.
X. AMENDMENT AND TERMINATION
(a) The Board may from time to time alter, amend, suspend or
discontinue the Plan; provided, however, that no such action shall become
effective prior to the exercise of outstanding purchase rights at the end of the
quarterly or semi-annual period in which such action is authorized; and
provided, further, that no such action of the Board may, without the approval of
the shareholders of the Company, increase the number of shares issuable under
the Plan or the maximum number of shares which any one Participant may purchase
during a single purchase period or over the term of the Plan (except for
adjustments permitted under Section VI(b)), alter the purchase price formula so
as to reduce the purchase price specified in the Plan, otherwise materially
increase the benefits accruing to Participants under the Plan or materially
modify the requirements for eligibility to participate in the Plan.
(b) The Company shall have the right, exercisable in the sole
discretion of the Plan Administrator, to terminate the Plan immediately
following the end of a quarterly or semi-annual purchase date. Should the
Company elect to exercise such right, then the Plan shall terminate in its
entirety, and no further purchase rights shall thereafter be granted, and no
further
9.
<PAGE>
payroll deductions shall thereafter be collected, under the Plan.
XI. GENERAL PROVISIONS
(a) The Plan was initially adopted by the Board on January 21,
1988 and approved by the stockholders on June 7, 1988. In January 1991, the
Board approved a 250,000-share increase in the number of shares of Common Stock
issuable under the Plan, and the stockholders approved such increase in May
1991. The 1992 restatement of the Plan and the 250,000-share increase approved
by the Board on January 23, 1992 became effective on the first day of the first
purchase period which began after the 1992 Annual Stockholders Meeting.
Additional amendments were made to the Plan on January 27, 1994 and January 22,
1997 to increase the number of shares of Stock reserved for issuance under the
Plan, and the January 1997 amendment also extended the term of the Plan to
December 31, 2001. On January 30, 1998, the Board authorized an amendment to the
Plan to increase the number of shares of Stock available for issuance hereunder
by an additional 1,300,000 shares, subject to stockholder approval at the 1998
Annual Meeting. If such stockholder approval is not obtained, then no purchase
rights will be granted under the Purchase Plan on the basis of the
1,300,000-share increase.
(b) The provisions of this restated Plan shall apply only to
purchase rights exercised under the Plan from and after the Effective Date of
such restatement. All exercises effected under the Plan prior to such Effective
Date were governed by the terms and conditions of the Plan as in effect on each
such exercise date, and nothing in this restated Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of the shares of
Common Stock acquired thereunder.
(c) The Plan shall terminate upon the earlier of (i) December
31, 2001 or (ii) the date on which all shares available for issuance under the
Plan shall have been sold pursuant to purchase rights exercised under the Plan.
(d) All costs and expenses incurred in the administration of
the Plan shall be paid by the Company.
(e) Neither the action of the Company in establishing the
Plan, nor any action taken under the Plan by the Plan Administrator, nor any
provision of the Plan itself shall be construed so as to grant any person the
right to remain in the employ of the Company or any of its Corporate Affiliates
for any period of specific duration, and such person's employment may be
terminated at any time, with or without cause.
(f) The provisions of the Plan shall be governed by the laws
of the State of California.
10.
<PAGE>
Schedule A
Companies Participating in
1988 Employee Stock Purchase Plan
As of January 30, 1998
Komag, Incorporated
Komag Material Technology, Inc.
Komag U.S.A. (Malaysia) Sdn.
Komag Asia Pacific, Inc.
<PAGE>
APPENDIX A
PROXY THIS PROXY IS SOLICITED ON BEHALF OF PROXY
THIS BOARD OF DIRECTORS OF KOMAG, INCORPORATED
The undersigned hereby appoints STEPHEN C. JOHNSON and TU CHEN, or either
of them, as lawful agents and proxies of the undersigned (with all powers the
undersigned would possess if personally present, including full power of
substitution) to represent and to vote all shares of the Company's capital
stock which the undersigned is entitled to vote at the Company's Annual Meeting
of Stockholders on May 27, 1998, and any adjournment or postponements thereof as
follows:
(Continued, and to be signed on the other side)
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<S> <C> <C> <C>
[X] Please mark
your votes
as this
FOR AGAINST ABSTAIN
WITHHOLD 2. APPROVAL OF AMENDMENT TO THE COMPANY'S 1988 [ ] [ ] [ ]
1. ELECTIONS OF DIRECTORS FOR FOR ALL EMPLOYEE STOCK PURCHASE PLAN
[ ] [ ]
INSTRUCTION: If you wish to 3. RATIFICATION OF APPOINTMENT OF ERNST & YOUNG [ ] [ ] [ ]
withhold authority to vote for LLP AS INDEPENDENT AUDITORS
any individual nominee, strike
a line through that nominee's
name in the list below:
Receipt is hereby acknowledged to the Notice
Tu Chen, Stephen C. Johnson, Craig R. Barrett, of Annual Meeting of Shareholders and
Chris A. Eyre, Irwin Federman, George A. Neil, Proxy Statement dated April 10 1998.
Max Palevsky, Anthony Sun, Masayoshi Takebayashi
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------
This Proxy will be voted as directed, or if
I PLAN TO ATTEND THE MEETING [ ] no direction is indicated, will be voted FOR
each of the proposals below and, at the
direction of the persons named as proxies
upon such other matters as may properly come
before the meeting. This Proxy may be revoked
at any time before it is voted.
The Board of Directors recommends a vote FOR
Items 1, 2 and 3.
[ ]
Signature(s) ---------------------------------------------------------------------- Dated -------------------------------- , 1998
NOTE: (please sign exactly as shown on your stock certificate and on the envelope in which this proxy was mailed. When signing as
partner, corporate officer, attorney, executor, administrator, trustee, guardian, or in any other representative capacity, give full
title as such and sign your own name as well. If stock is held jointly, each joint owner should sign.)
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