UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 4, 1999
Commission File Number 0-16852
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1704 Automation Parkway, San Jose, California 95131
Telephone: (408) 576-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___.
On July 4, 1999, 65,448,887 shares of the Registrant's common stock, $0.01
par value, were issued and outstanding.
<PAGE>
INDEX
KOMAG, INCORPORATED
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated statements of operations--Three- and six-months
ended July 4, 1999 and June 28, 1998 ............................ 3
Consolidated balance sheets--July 4, 1999
and January 3, 1999 ............................................. 4
Consolidated statements of cash flows--Six months
ended July 4, 1999 and June 28, 1998 ............................ 5
Notes to consolidated financial statements--
July 4, 1999 .................................................... 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................12-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 22
Item 2. Changes in Securities ........................................... 22
Item 3. Defaults Upon Senior Securities ................................. 22
Item 4. Submission of Matters to a Vote of Security Holders .............22-23
Item 5. Other Information ............................................... 24
Item 6. Exhibits and Reports on Form 8-K ................................ 24
SIGNATURES .............................................................. 25
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<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Trade Sales $ 23,913 $ 78,808 $ 113,926 $ 154,865
Net Sales to Related Party 69,313 -- 69,313 --
--------- --------- --------- ---------
NET SALES 93,226 78,808 183,239 154,865
Cost of sales 97,857 114,445 187,123 222,097
--------- --------- --------- ---------
GROSS PROFIT (LOSS) (4,631) (35,637) (3,884) (67,232)
Operating expenses:
Research, development and engineering 12,151 18,085 24,166 33,029
Selling, general and administrative 5,612 4,942 11,090 9,553
Amortization of Intangibles 7,359 -- 7,359 --
Restructuring charges 4,321 187,768 4,321 187,768
--------- --------- --------- ---------
29,443 210,795 46,936 230,350
--------- --------- --------- ---------
OPERATING LOSS (34,074) (246,432) (50,820) (297,582)
Other income (expense):
Interest income 1,345 2,381 2,961 4,933
Interest expense (5,935) (4,755) (10,939) (9,309)
Other, net 869 (409) 1,530 3,914
--------- --------- --------- ---------
(3,721) (2,783) (6,448) (462)
Loss before income taxes, minority interest,
--------- --------- --------- ---------
and equity in joint venture loss (37,795) (249,215) (57,268) (298,044)
Provision for income taxes 350 703 750 703
--------- --------- --------- ---------
Loss before minority interest and equity in
joint venture loss (38,145) (249,918) (58,018) (298,747)
Minority interest in net income of consolidated subsidiary 89 592 340 497
Equity in net loss of unconsolidated joint venture -- (11,374) (1,402) (20,798)
--------- --------- --------- ---------
NET LOSS $ (38,234) $(261,884) $ (59,760) $(320,042)
========= ========= ========= =========
Basic loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05)
========= ========= ========= =========
Diluted loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05)
========= ========= ========= =========
Number of shares used in basic computation 64,246 52,916 59,080 52,866
========= ========= ========= =========
Number of shares used in diluted computation 64,246 52,916 59,080 52,866
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
July 4 January 3
1999 1999
--------- ---------
ASSETS (unaudited) (note)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 30,506 $ 64,467
Short-term investments 63,965 63,350
Accounts receivable (including $40,295 and
$512 due from related parties in 1999
and 1998, respectively) less allowances
of $3,076 in 1999 and $2,847 in 1998 51,682 43,434
Inventories:
Raw materials 6,625 8,434
Work-in-process 11,913 10,672
Finished goods 25,728 14,534
--------- ---------
Total inventories 44,266 33,640
Prepaid expenses and deposits 4,214 4,348
Income taxes receivable 2,216 2,216
Deferred income taxes 7,883 7,883
--------- ---------
Total current assets 204,732 219,338
Investment in Unconsolidated Joint Venture -- 1,399
Property, Plant and Equipment
Land 7,785 7,785
Building 129,344 128,359
Equipment 704,884 686,169
Furniture 10,921 10,911
Leasehold Improvements 86,780 86,565
--------- ---------
939,714 919,789
Less allowances for depreciation and amortization (495,734) (449,772)
--------- ---------
Net property, plant and equipment 443,980 470,017
Net Intangible Assets 77,258 --
Deposits and Other Assets 2,629 3,341
--------- ---------
$ 728,599 $ 694,095
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 260,000 $ 260,000
Trade accounts payable 27,465 27,274
Accounts payable to related parties 1,854 1,848
Accrued compensation and benefits 16,446 15,544
Other liabilities 27,337 7,382
Income taxes payable 163 134
--------- ---------
Total current liabilities 333,265 312,182
Note Payable to Related Party 21,186 --
Deferred Income Taxes 52,564 52,564
Other Long-term Liabilities 16,230 1,403
Minority Interest in Consolidated Subsidiary 4,479 4,139
Stockholders' Equity
Preferred stock -- --
Common stock 654 539
Additional paid-in capital 444,262 407,549
Accumulated deficit (144,620) (84,860)
Accumulated other comprehensive income 579 579
--------- ---------
Total stockholders' equity 300,875 323,807
--------- ---------
$ 728,599 $ 694,095
========= =========
<FN>
Note: The balance sheet at January 3, 1999 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------------------
July 4 June 28
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (59,760) $(320,042)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 48,608 68,496
Amortization of Intangibles 7,359 --
Provision for losses on accounts receivable 225 (1,320)
Equity in net loss of unconsolidated joint venture 1,402 20,798
(Gain) Loss on disposal of property, plant and equipment 229 (1,116)
Impairment charge related to property, plant and equipment -- 175,000
Deferred rent 1,095 216
Minority interest in net income of consolidated subsidiary 340 497
Changes in operating assets and liabilities:
Accounts receivable 31,310 46,184
Accounts receivable from related parties (39,783) 3,997
Inventories (8,477) 16,273
Prepaid expenses and deposits 131 1,000
Trade accounts payable 191 (8,696)
Accounts payable to related parties 6 (2,434)
Accrued compensation and benefits 902 1,853
Other liabilities (1,482) 2,971
Income taxes receivable 29 22,180
Restructuring liability (367) 7,779
--------- ---------
Net cash provided by (used in) operating activities (18,042) 33,636
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (17,564) (74,329)
Purchases of short-term investments (1,965) (38,300)
Proceeds from short-term investments at maturity 1,350 --
Proceeds from disposal of property, plant and equipment 30 5,325
Deposits and other assets (25) 414
--------- ---------
Net cash used in investing activities (18,174) (106,890)
FINANCING ACTIVITIES
Increase in long-term obligations -- 15,000
Sale of Common Stock, net of issuance costs 2,255 3,585
--------- ---------
Net cash provided by financing activities 2,255 18,585
Increase (decrease) in cash and cash equivalents (33,961) (54,669)
Cash and cash equivalents at beginning of year 64,467 133,897
--------- ---------
Cash and cash equivalents at end of period $ 30,506 $ 79,228
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 4, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and six-month periods ended July
4, 1999 are not necessarily indicative of the results that may be expected for
the year ending January 2, 2000.
The financial statements have been prepared on a going concern basis.
The Report of Independent Auditors on the Company's financial statements for the
year ended January 3, 1999 included in the Company's Annual Report on Form 10-K
contained an explanatory paragraph which indicated substantial doubt about the
Company's ability to continue as a going concern because of recent operating
losses and lack of compliance with certain covenants of its various bank
agreements. Such non-compliance constitutes an event of default under the
agreements. The Company has not been in payment default under these credit
facilities and has continued to pay all interest charges and other fees
associated with these facilities on their scheduled due dates. Amounts
outstanding under these unsecured credit agreements at July 4, 1999 amounted to
$260 million. To date, the Company's lenders have not accelerated any principal
payments under these facilities. The Company is currently negotiating with its
lenders for amendments to its existing credit facilities. There can be no
assurance that the Company will be able to obtain such amendments to its credit
facilities on commercially reasonable terms. In the event that the Company does
not successfully amend its credit facilities or restructure its debt
obligations, the Company could be required to significantly reduce or possibly
suspend its operations, and/or sell additional securities on terms that would be
highly dilutive to current stockholders of the Company. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
assets and liabilities that may result from the outcome of this uncertainty.
-6-
<PAGE>
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended January 3, 1999.
The Company uses a 52-53 week fiscal year ending on the Sunday closest
to December 31. The three- and six-month reporting periods included in this
report are comprised of thirteen and twenty-six weeks, respectively.
NOTE 2 - INVESTMENT IN DEBT SECURITIES
The Company invests its excess cash in high-quality, short-term debt
and equity instruments. None of the Company's investments in debt securities
have maturities greater than one year. The following is a summary of the
Company's investments by major security type at amortized cost which
approximates fair value:
Jul 4 Jan 3
(in thousands) 1999 1999
-------- --------
Municipal auction rate preferred stock $ 62,000 $ 63,350
Corporate debt securities 9,526 33,765
Mortgage-backed securities 23,181 34,060
-------- --------
$ 94,707 $131,175
======== ========
Amounts included in cash and cash equivalents $ 30,742 $ 67,825
Amounts included in short-term investments 63,965 63,350
-------- --------
$ 94,707 $131,175
======== ========
The Company utilizes zero-balance accounts and other cash management
tools to invest all available funds including bank balances in excess of book
balances.
NOTE 3 - INCOME TAXES
The Company's income tax provisions of approximately $0.4 million and
$0.8 million for the three- and six-month periods ended July 4, 1999 primarily
represent foreign withholding taxes. The Company's wholly-owned thin-film media
operation, Komag USA (Malaysia) Sdn. ("KMS") received an extension of its
initial five-year tax holiday for an additional five years commencing July 1998.
KMS has also been granted a ten-year tax holiday for its second and third plant
sites in Malaysia. The commencement date for this new tax holiday has not been
determined as of August 4, 1999.
-7-
<PAGE>
NOTE 4 - COMPREHENSIVE LOSS
<TABLE>
The following are the components of comprehensive loss:
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands)
Net loss $ (38,234) $(261,884) $ (59,760) $(320,042)
Foreign currency translation adjustments -- (633) -- (2,560)
--------- --------- --------- ---------
Comprehensive loss $ (38,234) $(262,517) $ (59,760) $(322,602)
========= ========= ========= =========
</TABLE>
Accumulated foreign currency translation adjustments on the
accompanying Consolidated Balance Sheets account for all of the Company's
accumulated other comprehensive loss at July 4, 1999 and January 3, 1999.
NOTE 5 - LOSS PER SHARE
<TABLE>
The net loss per share was computed using only the weighted-average
number of shares of common stock outstanding during the period. The following
table sets forth the computation of net loss per share.
<CAPTION>
Three Months Ended Six Month Ended
------------------------------ ------------------------------
July 4 June 28 July 4 June 28
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator: Net loss $ (38,234) $(261,884) $ (59,760) $(320,042)
--------- --------- --------- ---------
Denominator for basic
loss per share -
weighted-average shares 64,246 52,916 59,080 52,866
--------- --------- --------- ---------
Effect of dilutive securities:
Employee stock options -- -- -- --
Denominator for diluted
--------- --------- --------- ---------
loss per share 64,246 52,916 59,080 52,866
--------- --------- --------- ---------
Basic loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05)
========= ========= ========= =========
Diluted loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05)
========= ========= ========= =========
</TABLE>
-8-
<PAGE>
Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 60,803
and 412,795 for the three months ended July 4, 1999 and June 28, 1998,
respectively, and of 1,069,004 and 620,610 for the six months ended July 4, 1999
and June 28, 1998, respectively, were not included in the net loss per share
computation because the effect would be antidilutive.
NOTE 6 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 7 - PURCHASE OF WESTERN DIGITAL CORPORATION'S MEDIA OPERATIONS
In April 1999, the Company purchased the assets of Western Digital
Corporation's ("WDC's") media operations through the issuance of approximately
10.8 million shares of the Company's Common Stock and a note in the principal
amount of $30.1 million. The shares issued in the transaction, which represented
16.7% of the Company's outstanding shares on a post-issuance basis, are
unregistered and subject to trading restrictions. WDC may resell these shares in
specified increments over a three and one-half year period under registration
rights granted by the Company or under SEC rules after expiration of the
required holding periods. Principal and interest accrued on the note are due in
three years and the note is subordinated to the Company's senior credit
facilities. In the event WDC realizes a return on its Komag equity holdings in
excess of a targeted amount within three years, the excess amount will reduce
the balance due under the note. The Company discounted the principal amount of
the subordinated note payable to $21.2 million based on the Company's estimated
incremental borrowing rate of 18% for this class of financial instrument.
Additionally, the Company and WDC signed a volume purchase agreement
under which the Company agreed to supply a substantial portion of WDC's media
needs over the next three years. Under the volume purchase agreement WDC began
to purchase substantially all of its media requirements from the Company after
the closing date. The Company initially expected that second quarter 1999 unit
sales from the combined operations would grow sequentially in the range of
20-35% compared to the Company's first quarter of 1999 results. Actual unit
shipments for the second quarter fell considerably short of these expectations
as customer order reductions (including those from WDC) and lower-than-expected
volumes on certain new product programs restricted
-9-
<PAGE>
sequential unit sales growth to approximately 10%. In response to competitive
market conditions the Company's customers reduced the number of disks per drive
to support the delivery of lower priced disk drives to the rapidly expanding,
low-cost segment of the PC market. These customer actions, the continuing
imbalance between the supply and demand for disk products, and the lack of new
data-intensive applications continue to depress the Company's financial
performance. Due to this weak unit demand the Company closed the former WDC
media operation at the end of June 1999, nearly fifteen months ahead of the
Company's original transition plan.
The Company's acquisition of WDC's media operation was recorded in the
second quarter of 1999 as a business combination using the purchase method of
accounting. Under this method the Company recorded the following (in millions):
Purchase Price Paid:
Common Stock $ 34.6
Note Payable 21.2
-------
Direct Costs $ 55.8
=======
Assets Acquired:
Goodwill $ 79.2
Volume Purchase Agreement 4.7
Equipment 5.3
Inventory 2.1
Liabilties Assumed:
Remaining Lease Obligations
for Equipment Removed
from Service (26.5)
Facility Closure Costs (5.6)
Purchase Order Cancellation
Liabilities (2.6)
Other Liabilities (0.8)
-------
Net Assets Acquired $ 55.8
=======
The Company recognized goodwill and other intangibles in the amount of
$83.9 million in connection with the acquisition of WDC's media operations.
Goodwill typically reflects the difference between the fair value of the assets
acquired and consideration paid. Under purchase accounting rules the Company
also recorded liabilities that increased the amount of goodwill recognized.
These liabilities included estimated costs for the closure of the former WDC
media operation as well as costs related to the remaining lease obligations for
equipment taken out of service due to the closure. The Company is amortizing the
goodwill over the three-year life that coincides
-10-
<PAGE>
with the term of the Company's volume purchase agreement with WDC.
During the second quarter of 1999 the Company paid approximately $2.9
million against these liabilities primarily for equipment lease obligations
($2.4 million) and other liabilities ($0.5 million). Equipment lease obligations
are expected to be paid monthly through mid-2002. At July 4, 1999 the current
portion of the equipment lease obligations was approximately $10.3 million.
Facility closure costs, purchase order cancellation costs and other liabilities
associated with the WDC transaction are expected to be paid by mid-2000.
-11-
<PAGE>
KOMAG, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans," and similar expressions. While this
discussion represents the Company's current judgment on the future direction of
the business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested herein. In particular, the
actions taken to restructure it U.S. operations might disrupt the Company's
ability to execute against customer obligations and operational improvement
plans. Such failures to execute would jeopardize the anticipated improvements in
the Company's financial performance outlined below. Due to the volume purchase
agreement with Western Digital Corporation ("WDC"), the Company's results
continue to remain highly dependent on the relative success of WDC in the data
storage market. Other factors that could cause actual results to differ include
the following: disk consumption per drive based on the relative growth rates of
areal density and overall storage usage; pricing levels determined by the
continuing imbalance between supply and demand for disk products; growth rate of
the merchant disk market as influenced by the level of captive disk production;
structural changes within the disk media industry created by combinations,
failures, and joint venture arrangements; unit volumes derived from new product
qualifications; changes in manufacturing efficiencies, in particular product
yields and material input costs; factory utilization levels; and capital
expenditure levels required to maintain or acquire process equipment with
capabilities to meet more stringent future product requirements. Moreover, the
Company must maintain sufficient cash resources to operate efficiently. The
Company's ability to raise additional funding, if required, will be dependent
upon improvement in the Company's financial performance and the status of the
Company's credit facilities. Improvement in the Company's financial performance
remains highly dependent on macro industry fundamentals. Other risk factors that
may affect the Company's financial performance are listed in the Company's
various SEC filings, including its Form 10-K for the fiscal year ended January
3, 1999 which was filed on April 2, 1999. The Company undertakes no obligation
to publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Overview:
Adverse market conditions, which began in mid-1997, continued to impact
the thin-film media market throughout 1998 and the first half of 1999. Demand
for disk drives grew rapidly during the mid-1990s and industry forecasts were
for continued
-12-
<PAGE>
strong growth. The Company and a majority of its competitors (both independent
disk manufacturers and captive disk manufacturers owned by vertically integrated
disk drive customers) committed to expansion programs in 1996 and substantially
increased their media manufacturing capacity in 1997. In 1997 the rate of growth
in demand for disk drives fell. Disk drive manufacturers abruptly reduced orders
for media from independent suppliers and relied more heavily on internal
capacity to supply a larger proportion of their media requirements. The media
industry's capacity expansion, coupled with the decrease in the rate of demand
growth, has resulted in excess media production capacity. This excess media
production capacity caused sharp declines in average selling prices for disk
products as independent suppliers struggled to utilize their capacity.
In addition to adversities caused by the excess supply of media, 1998
was a year of tremendous transition for the Company and the disk drive industry.
Disk drive programs utilizing newer, more advanced, magnetoresistive ("MR")
media and recording heads replaced older generation programs utilizing inductive
media and heads. By the end of 1998 most disk drives were manufactured with MR
components. The transition to MR disk drives has led to significant,
unprecedented increases in areal density and, therefore, the amount of data that
can be stored on a single disk platter. In the first and second quarters of 1999
the majority of the Company's 3 1/2-inch disks were capable of storing at least
4.3 gigabytes (GB) per platter. This represented a 34% increase in disk capacity
relative to a product mix of predominately 3.2 GB platters in the fourth quarter
of 1998. The Company expects 3 1/2-inch disks capable of storing 6.8 GB per
platter will account for the majority of the Company's unit shipments during the
second half of 1999. Increased disk storage capacity per disk allows drive
manufacturers to offer lower-priced disk drives at given capacity points,
especially in the price-sensitive desktop segment, through the incorporation of
fewer components into their disk drives. The rapid advancement in storage
capacity per disk platter has further slowed disk demand throughout the
industry. According to industry market analysts, this resulting reduction in the
average number of disks per drive will likely slow the growth rate of disk
shipments below the growth rate of disk drives during 1999. The significant
amount of captive capacity employed by certain disk drive manufacturers also
continues to reduce the market opportunities for independent disk suppliers such
as the Company.
In April 1999, the Company acquired the thin-film media operations of
Western Digital Corporation ("WDC"). As part of the acquisition the Company and
WDC also entered into a volume purchase agreement under which the Company agreed
to supply a substantial portion of WDC's thin-film media requirements. Under the
volume purchase agreement WDC began to purchase substantially all of its media
requirements from the Company after the closing date. The Company initially
expected that second quarter 1999 unit sales from the combined operations would
grow sequentially in the range of 20-35% compared to the Company's first quarter
of 1999 results. Actual unit shipments for the second quarter fell considerably
short of these expectations as customer order
-13-
<PAGE>
reductions (including those from WDC) and lower-than-expected volumes on certain
new product programs restricted sequential unit sales growth to approximately
10%. In response to competitive market conditions the Company's customers
reduced the number of disks per drive to support the delivery of lower priced
disk drives to the rapidly expanding, low-cost segment of the PC market. These
customer actions, the continuing imbalance between the supply and demand for
disk products, and the lack of new data-intensive applications continue to
depress the Company's financial performance. Due to this weak unit demand the
Company closed the former WDC media operation at the end of June 1999, nearly
fifteen months ahead of the Company's original transition plan.
Disk industry conditions remain very difficult. Increased storage
capacity per disk is limiting growth in unit volumes while excess production
capacity within the disk industry continues to push average selling prices for
disk products lower. As a result of these negative industry trends the Company
has reduced its expectations for revenue growth in the immediate future. In July
1999, the Company implemented a reorganization of its U.S. operations which will
result in a reduction of approximately one-third of its U.S. employees. The
Company's U.S. operations will focus on activities related to research, process
development, product prototyping, and pilot production. Due to the revised
expectations for slower growth in unit volumes the Company will be able to shift
production to its Malaysian facilities faster than previously planned. The
Company expects that the cost advantages of its Malaysian facilities will
improve its cost structure and ability to respond to the continuing price
pressures for thin-film media.
As part of its reorganization the Company is consolidating the separate
engineering and managerial staffs of its U.S.-based manufacturing and R&D
organizations into a single organization. Staff reductions in these functions
and in selling and administrative functions total approximately 500 people. This
work force reduction, combined with the June 1999 work force reduction of 400
people at the former WDC media operation, is expected to reduce the employment
base at the Company's U.S. operations from 1,950 people in April (subsequent to
the acquisition of WDC's media operation) to 1,050 people by the end of the
third quarter of 1999. The Company employs approximately 2,750 people in its
Malaysian manufacturing operations. The Company expects to record a significant
charge in the third quarter of 1999 for severance pay related to the
reorganization and for the write down of various assets that will be idled due
to the lower production level at its U.S. operations. The Company is in the
process of determining the extent of the charge.
Revenue:
Net sales increased to $93.2 million in the second quarter of 1999, up
18% compared to $78.8 million in the second quarter of 1998. The year-over-year
increase was due to the net effect of a 41% increase in unit sales volume and a
16% decrease in the overall average selling price. Net sales in second quarters
of 1999 and 1998 included $2.2 million and $2.1 million of substrate sales,
respectively. The Company periodically sells
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<PAGE>
substrate products but does not currently anticipate that such sales will become
a significant portion of its revenue. Second quarter 1999 unit sales (excluding
sales of substrate products) increased to 11.1 million disks from 7.8 million
disks in the second quarter of 1998. Unit sales for the second quarter 1998 were
unusually low due to weakened demand for desktop media products as several disk
drive manufacturers sharply reduced their desktop product production during the
first half of 1998 in response to supply/demand imbalances within the industry.
The severe pricing pressures generated by the continuing imbalance in supply and
demand for thin-film media in the second quarter of 1999 resulted in the
significant year-over-year decrease in the overall average selling price. Net
sales in the first half of 1999 also increased 18% relative to the first half of
1998. Net sales in first six months of 1999 and 1998 included $6.1 million and
$4.2 million of substrate sales, respectively. Percentage increases in unit
sales (excluding sales of substrate products) and decreases in the overall
average selling prices were comparable to those percentages discussed in the
quarterly comparison.
In addition to sales of internally produced disk products, the Company
has periodically resold products manufactured by its 50%-owned Japanese joint
venture, Asahi Komag Co., Ltd. (AKCL). Distribution sales of thin-film media
manufactured by AKCL were negligible in both the second quarter of 1999 and
1998. Distribution sales of these products were negligible in the first half of
1999 and accounted for $2.4 million in the first half of 1998. The Company
expects that distribution sales of AKCL product will be minimal for the
remainder of 1999.
During the second quarter of 1999 two customers accounted for
approximately 92% of consolidated net sales: Western Digital Corporation (74%)
and Maxtor Corporation (18%). The Company expects that it will continue to
derive a substantial portion of its sales from relatively few customers. The
distribution of sales among customers may vary from quarter to quarter based on
the match of the Company's product capabilities with specific disk drive
programs of customers. Additionally, as a result of the April 1999 acquisition
of WDC's media operation and related volume purchase agreement, the Company's
sales remain highly dependent upon WDC's performance in the disk drive industry.
Gross Margin:
The Company recorded a negative gross margin percentage of 5.0% in the
second quarter of 1999 compared to a negative gross margin of 45.2% in the
second quarter of 1998. The substantial improvement in the gross margin
percentage resulted from the combination of improvements in manufacturing
efficiencies, higher unit production volumes, and reductions in fixed
manufacturing costs. These favorable manufacturing cost reductions more than
offset the 16% decline in the overall average selling price. Manufacturing
efficiency improvements included both improvements in production yields and
reductions in product input costs. The Company produced 11.3 million units in
the second quarter of 1999 compared to 8.9 million units in the second quarter
of 1998.
-15-
<PAGE>
The higher unit production volume reduced the Company's unit production cost as
fixed costs were spread over more units. Additionally, fixed manufacturing costs
were lower in the second quarter of 1999, compared to the comparable period of
1998, as a result of a $175.0 million asset impairment charge recorded in June
1998. The asset impairment charge effectively reduced asset valuations to
reflect the economic effect of industry price erosion for disk media and the
projected underutilization of the Company's production equipment and facilities.
Due to the reduced asset valuations depreciation expense was approximately 27%
lower in the second quarter of 1999 compared to the second quarter of 1998.
The gross margin improved to a negative 2.1% for the first half of 1999
from a negative 43.4% for the first half of 1998. Unit production increased to
21.4 million disks in the first half of 1999 compared to 15.4 million disks in
the first half of 1998. The Company operated well below capacity in the first
half of 1998 in order to match unit production to the sharply lower demand for
its products. Improvements in manufacturing efficiencies, higher unit production
volumes, and reductions in fixed manufacturing costs favorably impacted the
Company's gross margin in 1999. Depreciation charges in the first half of 1999
were approximately 29% lower than in the first half of 1998 primarily due to the
asset impairment charge recorded in June 1998. The effect of these manufacturing
cost reductions more than offset the effect of the decline in the overall
average selling price on the Company's gross margin.
Operating Expenses:
Research and development ("R&D") expenses decreased to $12.2 million in
the second quarter of 1999 from $18.1 million in the second quarter of 1998. R&D
expenses decreased to $24.2 million in the first half of 1999 from $33.0 million
in the first half of 1998. Decreased R&D staffing and lower facility and
equipment costs (primarily due to the 1998 impairment charge) accounted for most
of the decrease in R&D expenses in both the three- and six-month periods of
1999. Selling, general and administrative ("SG&A") expenses increased to $5.6
million in the second quarter of 1999 from $4.9 million in the second quarter of
1998. SG&A expenses increased to $11.1 million in the first half of 1999 from
$9.6 million in the first half of 1998. The increases for both the three- and
six-month periods of 1999 were primarily due to higher bad debt provisions in
the three- and six-month periods of 1999 relative to the comparable periods of
1998. Excluding provisions for bad debt, SG&A expenses increased less than $0.1
million in both the three- and six-month periods of 1999 compared to the three-
and six-month periods of 1998.
-16-
<PAGE>
Goodwill Amortization:
The Company's acquisition of WDC's media operation was recorded in the
second quarter of 1999 as a business combination using the purchase method of
accounting. Under this method the Company recorded the following (in millions):
Purchase Price Paid:
Common Stock $ 34.6
Note Payable 21.2
-------
Direct Costs $ 55.8
=======
Assets Acquired:
Goodwill $ 79.2
Volume Purchase Agreement 4.7
Equipment 5.3
Inventory 2.1
Liabilties Assumed:
Remaining Lease Obligations
for Equipment Removed
from Service (26.5)
Facility Closure Costs (5.6)
Purchase Order Cancellation
Liabilities (2.6)
Other Liabilities (0.8)
-------
Net Assets Acquired $ 55.8
=======
The Company recognized goodwill and other intangibles in connection
with the acquisition of the WDC media operation in the amount of $83.9 million.
Goodwill typically reflects the difference between the fair value of the assets
acquired and consideration paid. Under purchase accounting rules the Company
also recorded liabilities that increased the amount of goodwill recognized.
These liabilities included estimated costs for the closure of the former WDC
media operation as well as costs related to the remaining lease obligations for
equipment taken out of service due to the closure. The Company is amortizing the
goodwill over the three-year life that coincides with the term of the Company's
volume purchase agreement with WDC.
During the second quarter of 1999 the Company paid approximately $2.9
million against theses liabilities primarily for equipment lease obligations
($2.4 million) and other liabilities ($0.5 million). Equipment lease obligations
are expected to be paid monthly through mid-2002. At July 4, 1999 the current
portion of the equipment lease obligations was approximately $10.3 million.
Facility closure costs, purchase order cancellation costs and other liabilities
associated with the WDC transaction are expected
-17-
<PAGE>
to be paid by mid-2000.
Restructuring Charge:
The Company recorded restructuring charges of $4.3 million in the
second quarter of 1999 and $187.8 million in the second quarter of 1998. The
1999 restructuring charge primarily related to the severance of approximately
400 employees. Approximately $3.4 million was paid to these employees during the
second quarter of 1999 and the remaining $0.9 million is expected to be paid
during the third quarter of 1999. The 1998 restructuring charge consisted
primarily of a $175.0 million non-cash asset impairment charge. The cash
component of the 1998 charge was $12.8 million for employee severance costs,
equipment order cancellations costs, and facility closure costs.
Interest and Other Income/Expense:
Interest income decreased $1.0 million in the second quarter of 1999
relative to the second quarter of 1998 and $2.0 million in the first half of
1999 relative to the first half of 1998 due to lower average cash and short-term
investment balances in the current year periods. Interest expense increased $1.2
million in the second quarter of 1999 compared to the second quarter of 1998 and
increased $1.6 million in the first half of 1999 compared to the first half of
1998. The increases for both the three- and six-month periods were primarily due
to an additional $0.9 million in interest expense under the Company's $21.2
million note payable to WDC in connection with the acquisition of WDC's media
operation. The note payable to WDC has been discounted to the Company's
estimated incremental borrowing rate of 18% for subordinated debt instruments.
Other income increased $1.3 million in the second quarter of 1999 compared to
the second quarter of 1998. The increase was primarily due to lower losses on
disposals of property, plant and equipment in the second quarter of 1999
compared to the second quarter of 1998. Other income decreased $2.4 million in
the first half of 1999 relative to the first half of 1998. Other income in first
half of 1998 included a $3.1 million gain on the March 1998 sale of vacant land
located in Milpitas, California.
Income Taxes:
The Company's income tax provision was approximately $0.4 million and
$0.8 million for the three- and six-month periods of 1999, respectively,
compared to $0.7 million for both the three- and six-month periods of 1998. The
income tax provisions for both the 1999 and 1998 periods primarily represented
foreign withholding taxes. The Company's wholly-owned thin-film media operation,
Komag USA (Malaysia) Sdn. ("KMS"), received an extension of its initial
five-year tax holiday for an additional five years commencing in July 1998. KMS
has also been granted a ten-year tax holiday for its second and third plant
sites in Malaysia. The commencement date for this new tax holiday has not been
determined as of August 4, 1999.
Minority Interest in KMT/Equity in Net Income (Loss) of AKCL:
The minority interest in the net income of consolidated subsidiary
represented
-18-
<PAGE>
Kobe Steel USA Holdings Inc.'s ("Kobe USA's") 20% share of Komag Material
Technology, Inc.'s ("KMT's") net income. KMT recorded net income of $0.4 million
and $1.7 million in the second quarter and first half of 1999, respectively,
compared to $3.0 million and $2.5 million in the second quarter and first half
of 1998, respectively.
The Company owns a 50% interest in AKCL and records its share of AKCL's
net income (loss) as equity in net income (loss) of unconsolidated joint
venture. During the first three months of 1999, the Company's investment in AKCL
was reduced to zero as a result of recording a portion of the Company's share of
AKCL's losses for the first quarter of 1999. Approximately $0.6 million of the
Company's share of AKCL's first quarter loss was not recorded as it would have
reduced the net book value of the investment in AKCL below zero. AKCL recorded
net income of $0.3 million for the second quarter of 1999. The Company has not
recorded its share of this income as the Company's cumulative unrecorded equity
in AKCL is a loss of approximately $0.4 million. Assuming AKCL reports net
income in future periods, the Company will record its share of such income only
to the extent by which the income exceeds the losses incurred subsequent to the
date on which the investment balance became zero.
Year 2000 Issue:
Many computer systems were not designed to properly handle dates beyond
the year 1999. Such systems were designed using two digits rather than four to
define the applicable year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. Disruptions may also occur if key suppliers or
customers experience disruptions in their ability to transact with the Company
due to Year 2000 issues. The Company's global operations rely heavily on the
infrastructures of the countries in which it conducts business. The Year 2000
readiness within infrastructure suppliers (utilities, government agencies such
as customs, shipping organizations) will be critical to the Company's ability to
avoid disruption of its operations. The Company is working with industry trade
associations to evaluate the Year 2000 readiness of infrastructure suppliers.
The Company has completed the assessment phase of its Year 2000 program. The
Company has committed personnel and resources to resolve potential Year 2000
issues and is working with key suppliers and customers to ensure their Year 2000
readiness.
The Company's Year 2000 efforts are focused on three primary areas of
potential impact: internal information technology ("IT") systems, internal
non-IT systems, and the readiness of third parties with whom the Company has
critical business relationships. Testing and remediation of internal IT and
non-IT systems is approximately 90% complete. The Company expects to complete
the testing and remediation for these systems by October 1, 1999.
The Company has developed a process for identifying and assessing Year
2000
-19-
<PAGE>
readiness of its critical suppliers. This process generally involves the
following steps: initial supplier survey, follow-up supplier review, and
contingency planning. The Company is following up with critical suppliers that
either did not respond initially or whose responses were unsatisfactory. To
date, the Company has received responses from a majority of its critical
suppliers, most of whom have responded that they expect to address all of their
significant Year 2000 issues on a timely basis.
Remediation costs of the Year 2000 issue have not been material to the
Company's results of operations or financial position. The Company has
cumulatively incurred remediation costs of approximately $0.5 million. The
Company does not separately track the internal costs incurred for the Year 2000
project (primarily the payroll cost for its information systems group). While
the Company currently expects that the Year 2000 issue will not pose significant
operational problems, a failure to fully identify all Year 2000 dependencies in
the Company's systems and in the systems of its suppliers, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sales of products. Therefore, the Company is
developing contingency plans for continuing operations in the event such
problems arise. These contingency plans are expected to be completed by October
1, 1999.
The Company is working to identify and analyze the most reasonably
likely worst-case scenarios where it may be affected by Year 2000 related
interruptions. These scenarios could include possible infrastructure collapse,
the failure of power and water supplies, major transportation disruptions,
unforeseen product shortages due to hoarding of material and supplies, and
failures of communications and financial systems. Any one of these scenarios
could have a major and material effect on the Company's ability to produce and
deliver products to its customers. While the Company is developing contingency
plans to address issues under its control, an infrastructure problem outside of
its control or some combination of several of these problems could result in a
delay in product shipments depending on the nature and severity of the problems.
The Company would expect that most utilities and service providers would be able
to restore service within days although more pervasive system problems involving
multiple providers could last several weeks or longer depending on the
complexity of the systems and the effectiveness of their contingency plans.
The Company's products are not date sensitive. Additionally, disk drive
manufacturers have generally stated that disk drives as a stand-alone product
are not date sensitive. The Company expects that it will have limited exposure
to product liability litigation resulting from Year 2000 related failures.
-20-
<PAGE>
Liquidity and Capital Resources:
Cash and short-term investments of $94.5 million at the end of the
second quarter of 1999 decreased $33.3 million from the end of the prior fiscal
year. Working capital decreased $35.7 million from the end of the prior fiscal
year. Consolidated operating activities consumed $18.0 million in cash during
the first half of 1999. The $59.8 million operating loss for the first half of
1999, net of non-cash depreciation and amortization charges of $56.0 million,
the non-cash equity loss from AKCL of $1.4 million and other non-cash/deferred
charges totaling $1.9 million, used $0.5 million. Changes in operating assets
and liabilities used $17.5 million. Increases in accounts receivable and
inventories each consumed $8.5 million. The Company spent $17.6 million on
capital requirements during the first half of 1999. Sales of Common Stock under
the Company's stock programs generated $2.3 million.
Total capital expenditures for 1999 are currently planned at
approximately $40 million. Current noncancellable capital commitments total
approximately $5 million. In light of the continuing weak disk industry
conditions the Company plans to closely monitor its capital needs in order to
limit capital spending for the last half of 1999 and future periods. The size of
the Company's second quarter of 1998 net loss has resulted in a default under
certain financial covenants contained in the Company's various bank credit
facilities. The Company currently has $260 million of unsecured bank borrowings
outstanding. No additional borrowing capacity is available as a result of the
technical default. The Company is not in payment default under any of its credit
facilities. The Company is currently negotiating with its lenders for amendments
to the existing credit facilities. The Company's ability to successfully
conclude these negotiations has been delayed during the past year as a result of
changes in the Company's business model due to the acquisition of WDC's media
facility and continuing deterioration in the disk industry. There can be no
assurance that the Company will be able to obtain such amendments to its credit
facilities on commercially reasonable terms. If the Company does not
successfully amend these credit facilities, it would remain in technical default
of its bank loans and the lenders would retain their rights and remedies under
the existing credit agreements. As long as the lenders choose not to accelerate
any principal payments, the Company would continue to operate in default for the
near term. However, the Company will likely need to raise additional funds to
restructure its debt obligations and to operate its business for the long term.
There can be no assurance that the Company will be able to secure such
financial resources on commercially reasonable terms. If the Company is unable
to obtain adequate financing, it could be required to significantly reduce or
possibly suspend its operations, and/or to sell additional securities on terms
that would be highly dilutive to current stockholders.
-21-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings-Not Applicable.
ITEM 2. Changes in Securities-Not Applicable.
ITEM 3. Defaults Upon Senior Securities-
The size of the Company's second quarter of 1998 net loss has
resulted in a default under certain financial covenants contained in
the Company's various bank credit facilities. The Company currently has
$260 million of unsecured bank borrowings outstanding. No additional
borrowing capacity is available as a result of the technical default.
The Company is not in payment default under any of its credit
facilities. The Company is currently negotiating with its lenders for
amendments to the existing credit facilities.
ITEM 4. Submission of Matters to a Vote of Security Holders-Not
Applicable.
(a) The Annual Meeting of Stockholders was held May 25,
1999.
(b) The meeting included the election of the Board of
Directors, submitted as Item No. 1, whose names are
as follows:
Tu Chen
Stephen C. Johnson
Chris A. Eyre
Irwin Federman
George A. Neil
Max Palevsky
Michael R. Splinter
Anthony Sun
Masayoshi Takebayashi
(c) Other matters voted upon at the stockholders meeting
were:
Item No. 2, Approval of an amendment to the Company's
1988 Employee Stock Purchase Plan to increase the
number of shares issuable thereunder by 2,550,000
shares;
Item No. 3, Renewal of authorization to sell and
issue up to $250,000,000 of Common Stock in equity or
equity-linked private transactions from time to time
until October 1, 2000 at a price below book value but
at or above the then current market value of the
Common Stock;
Item No. 4, Approval of an amendment to the Company's
Restated 1987 Stock Option Plan to increase the
number of stock options granted to non-employee Board
members under the Automatic Option Grant Program from
7,500 to 12,000 upon re-election to the Board each
year; and
Item No. 5, Ratification of the Appointment of Ernst
& Young LLP as the Company's Independent Auditors for
the year ended January 2, 2000.
-22-
<PAGE>
Shares of Common Stock voted were as follows:
Item No. 1
(Election of Board of Directors)
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
Tu Chen 49,189,459 1,164,498
Stephen C. Johnson 49,204,927 1,149,030
Chris A. Eyre 49,202,932 1,151,025
Irwin Federman 42,485,102 7,868,855
George A. Neil 49,205,645 1,148,312
Max Palevsky 42,477,516 7,876,441
Michael R. Splinter 49,203,710 1,150,247
Anthony Sun 42,148,308 8,205,649
Masayoshi Takebayashi 49,211,340 1,142,617
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Item No. 2
(Amendment to 1988
Employee Stock Purchase
Plan) 39,490,535 10,778,148 83,374 1,900
Item No. 3
(Renew authorization
to sell up to $250 million
of equity below book
value) 29,726,612 2,407,519 96,951 18,122,875
Item No. 4
(Amendment to 1987
Restated Stock Option
Plan) 37,093,314 13,175,921 82,822 1,900
Item No. 5
(Selection of
Independent Auditors) 50,053,519 257,033 43,405 --
</TABLE>
(d) Not Applicable
-23-
<PAGE>
ITEM 5. Other Information-Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1.13--Asset Purchase Agreement between the Company
and Western Digital Corporation dated April 8, 1999.
(Confidential treatment requested as to certain portions.)
Exhibit 10.1.14--Volume Purchase Agreement dated as of April
8, 1999 by and between the Company and Western Digital
Corporation. (Confidential treatment requested as to certain
portions.)
Exhibit 27--Financial Data Schedule.
b) Reports on Form 8-K
On July 7, 1999 the Company filed Form 8-K containing the
contents of its press release dated June 30, 1999 entitled
"Komag Updates Second Quarter 1999 Outlook".
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOMAG, INCORPORATED
(Registrant)
DATE: August 4, 1999 BY: /s/ William L. Potts, Jr.
------------------ ---------------------------
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
DATE: August 4, 1999 BY: /s/ Stephen C. Johnson
------------------ ---------------------------
Stephen C. Johnson
President and
Chief Executive Officer
-25-
------------------------------------------
"[***]" INDICATES REDACTED INFORMATION FOR
WHICH CONFIDENTIAL TREATMENT IS REQUESTED
------------------------------------------
ASSET PURCHASE AGREEMENT
BETWEEN
KOMAG, INCORPORATED
AND
WESTERN DIGITAL CORPORATION
April 8, 1999
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................................................1
1.1 Definitions.........................................................................................1
ARTICLE II PURCHASE AND SALE TRANSACTION.............................................................................10
2.1 Purchase and Sale of Acquired Assets...............................................................10
2.2 Assumption of Liabilities..........................................................................10
2.3 Purchase Price for Acquired Assets; Post Closing Adjustment........................................12
2.4 Transfer Taxes.....................................................................................14
2.5 The Closing........................................................................................14
2.6 Taking of Necessary Action; Further Action.........................................................15
2.7 Nonassignability and Consents......................................................................15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................16
3.1 Organization.......................................................................................17
3.2 Media Business Contained in the Company............................................................17
3.3 Authority..........................................................................................17
3.4 No Conflict........................................................................................17
3.5 Consents...........................................................................................18
3.6 Financial Matters..................................................................................18
3.7 No Changes.........................................................................................19
3.8 Tax Matters........................................................................................20
3.9 Restrictions on Business Activities................................................................21
3.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment.....................21
3.11 Intellectual Property..............................................................................23
3.12 Agreements, Contracts and Commitments..............................................................25
3.13 Interested Party Transactions......................................................................27
3.14 Governmental Authorization.........................................................................27
3.15 Litigation.........................................................................................27
3.16 Accounts Receivable................................................................................27
3.17 Inventories........................................................................................27
3.18 Minute Books.......................................................................................28
3.19 Brokers'and Finders'Fees...........................................................................28
3.20 Employees; Employee Plans and Compensation.........................................................28
3.21 Insurance..........................................................................................30
3.22 Environmental Matters..............................................................................31
3.23 Compliance with Laws...............................................................................32
3.24 Complete Copies of Materials.......................................................................32
3.25 Suppliers..........................................................................................32
i
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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3.26 No Insolvency......................................................................................32
3.27 Private Placement..................................................................................32
3.28 Registration Statement Information.................................................................33
3.29 Representations Complete...........................................................................33
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KOMAG...................................................................33
4.1 Organization.......................................................................................33
4.2 Capital Structure of Komag.........................................................................33
4.3 Authority..........................................................................................34
4.4 No Conflict........................................................................................34
4.5 Consents...........................................................................................35
4.6 SEC Documents, Komag Financial Statements..........................................................35
4.7 No Material Adverse Change.........................................................................35
4.8 Litigation.........................................................................................35
4.9 Brokers'Fees.......................................................................................36
ARTICLE V CONDUCT PRIOR TO THE CLOSING...............................................................................36
5.1 Conduct of Business of the Company.................................................................36
5.2 Review of Capital Budget/Spending Plan.............................................................38
5.3 No Solicitation....................................................................................38
ARTICLE VI ADDITIONAL AGREEMENTS.....................................................................................38
6.1 Access to Information..............................................................................38
6.2 Confidentiality....................................................................................39
6.3 Public Disclosure..................................................................................39
6.4 HSR Approval.......................................................................................39
6.5 Consents...........................................................................................39
6.6 Commercially Reasonable Efforts....................................................................40
6.7 Notification of Certain Matters....................................................................40
6.8 Employee Matters...................................................................................41
6.9 NMS Listing........................................................................................43
ARTICLE VII CONDITIONS TO OBLIGATION TO CLOSE........................................................................43
7.1 Conditions to Obligations of each of the Parties...................................................43
7.2 Additional Conditions to Obligation of Komag.......................................................43
7.3 Additional Conditions to Obligation of the Company.................................................45
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW; INDEMNITY...........................................47
8.1 Survival of Representations and Warranties.........................................................47
8.2 Agreement to Indemnify.............................................................................47
8.3 Limits of Liability................................................................................48
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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8.4 Indemnification Procedures; Time Limits............................................................48
8.5 Survival of Environmental Covenants................................................................50
ARTICLE IX TERMINATION...............................................................................................50
9.1 Termination of Agreement...........................................................................50
9.2 Effect of Termination..............................................................................51
9.3 Escrow Agreement; Distribution of Property.........................................................51
ARTICLE X MISCELLANEOUS..............................................................................................51
10.1 No Third-Party Beneficiaries.......................................................................51
10.2 Entire Agreement...................................................................................51
10.3 Succession and Assignment..........................................................................52
10.4 Counterparts.......................................................................................52
10.5 Headings...........................................................................................52
10.6 Notices............................................................................................52
10.7 Governing Law......................................................................................53
10.8 Amendments and Waivers.............................................................................53
10.9 Severability.......................................................................................53
10.10 Expenses...........................................................................................53
10.11 Construction.......................................................................................53
10.12 Incorporation of Exhibits and Schedules............................................................54
10.13 Other Remedies.....................................................................................54
10.14 Submission to Jurisdiction.........................................................................54
10.15 Share Legends......................................................................................54
10.16 California Corporate Securities Law................................................................55
</TABLE>
iii
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------------------------------------------
"[***]" INDICATES REDACTED INFORMATION FOR
WHICH CONFIDENTIAL TREATMENT IS REQUESTED
------------------------------------------
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A List of Acquired Assets
Exhibit B Excluded Assets
Exhibit C Cash Prepaid Assets
Exhibit D Form of Promissory Note
Exhibit E Form of Assignment and Assumption Agreement
Exhibit F Form of Bill of Sale
Exhibit G Form of Volume Purchase Agreement
Exhibit H Form of Joint Development Agreement
Exhibit I Form of License Agreement
Exhibit J Form of Registration Rights Agreement
Exhibit K Form of Transitional Services Agreement
Exhibit L Form of Legal Opinion of Counsel to the Company
Exhibit M Form of Legal Opinion of Counsel to Komag
iv
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"[***]" INDICATES REDACTED INFORMATION FOR
WHICH CONFIDENTIAL TREATMENT IS REQUESTED
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v
<PAGE>
------------------------------------------
"[***]" INDICATES REDACTED INFORMATION FOR
WHICH CONFIDENTIAL TREATMENT IS REQUESTED
------------------------------------------
ASSET PURCHASE AGREEMENT
THIS Asset Purchase Agreement (this "Agreement") is made and entered
into as of April 8, 1999 by and between Komag, Incorporated, a Delaware
corporation ("Komag"), and Western Digital Corporation, a Delaware corporation
(the "Company"). Komag and the Company are referred to collectively herein as
the "Parties."
RECITALS
A. The Boards of Directors of each of the Company and Komag believe it
is in the best interests of each company and their respective stockholders that
Komag acquire (the "Acquisition") substantially all of the assets of the Company
used or useful in connection with the Company's Santa Clara Disk Media
operations (the "Media Business") and, in furtherance thereof, have approved the
Acquisition.
B. The Company and Komag desire to make certain representations,
warranties, covenants and other agreements in connection with the Acquisition.
C. In connection with the Acquisition, the Company and Komag desire to
enter into a Volume Purchase Agreement pursuant to which, inter alia, the
Company shall purchase certain media products from Komag for use in the
Company's disk drive operations.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and as a material inducement to enter into
that certain Volume Purchase Agreement (as defined herein), and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions.
(a) As used in this Agreement, the following terms shall have
the following meanings, respectively:
"AA Net Book Value" means the Net Book Value for all of the
Acquired Assets (other than Finished Goods and Cash Prepaid Assets) as of the
Closing Date.
"Accounts Receivable" means all trade accounts receivable, all
evidences of indebtedness arising out of sales of Inventory (as defined below)
or other property, assets or services of any Person and, to the extent earned by
performance which has occurred, all rights to receive payments arising out of
sales of Inventory or other property, assets or services to any Person.
<PAGE>
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"[***]" INDICATES REDACTED INFORMATION FOR
WHICH CONFIDENTIAL TREATMENT IS REQUESTED
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"Accounts Payable" means all trade accounts payable and all
evidences of indebtedness arising out of purchases of Inventory and other
property, assets or services by any Person.
"Acquired Assets" means all right, title and interest in and
to all of the assets, properties and rights under agreements, contracts,
permits, licenses, leases or otherwise, of any kind and description, wherever
located, whether real, personal or mixed, whether tangible or intangible,
belonging to the Company used in, intended for use in, or required to be used in
connection with, the operation of the Media Business as currently conducted,
other than the Excluded Assets (as defined below), which shall include, without
limitation, those assets and properties listed on Exhibit A attached hereto and
the following:
(1) any and all indentures, leases, subleases,
licenses, permits, authorizations, commitment obligations or other contracts,
agreements or instruments, whether written or oral, and rights thereunder, to
which the Company is a party or by which any of the Acquired Assets are bound
and which relate to the Media Business including, without limitation, the
Contracts (as defined below) marked with an asterisk set forth in Section
3.12(a) of the Company Disclosure Schedule (as defined below) and the Purchase
Orders;
(2) any of the following which relate to the Media
Business: (i) any and all claims, deposits, refunds, causes of action, rights of
recovery, rights of set off and rights of recoupment and (ii) any and all
franchises, approvals, permits, licenses, orders, registrations, certificates,
variances and similar rights obtained from Governmental Entities (as defined
below);
(3) any and all Inventory relating to the Media
Business, wherever located, owned by the Company or subject to open Purchase
Orders consisting of parts or work in progress, including the Finished Goods
(but excluding all other finished media)("Media Inventory");
(4) any and all supplies owned by the Company used in
the Media Business;
(5) any and all tangible personal property and fixed
assets consisting of any equipment, leasehold improvements, fixtures or
fittings, furniture, software, machinery, tooling, dies, instruments, motor
vehicles, computers, spare parts, replacements parts and trade fixtures, owned
or leased by the Company, either (i) located on the Leased Real Property or (ii)
used primarily in or intended for use primarily in, or required to be used
primarily in connection with, the operation of the Media Business (together,
"Fixed Acquired Assets");
(6) any and all business and financial records,
books, ledgers, files, plans, documents, supplier lists, correspondence, lists,
plots, architectural plans, drawings, notebooks, specifications, creative
materials, studies, reports, equipment repair, maintenance or service records
and other proprietary or confidential information or data relating to the Media
Business or any other Acquired Assets, whether written or electronically stored
or otherwise recorded;
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(7) any and all rights under any contracts, licenses
and agreements set forth in Section 3.11(a)(ii) of the Company Disclosure
Schedules;
(8) any and all real property, easements, rights of
way and other appurtenant rights thereto (such as appurtenant rights in and to
public streets), if any, used in, intended for use in, or required to be used in
connection with, the operation of the Media Business;
(9) any and all rights with respect to leasehold
interests and subleases and rights thereunder relating to the real and personal
property, used in, intended for use in, or required to be used in connection
with, the operation of the Media Business;
(10) any and all Transferred Prepaid Assets; and
(11) any and all other tangible property, real,
personal or mixed, which have been historically reflected in the books and
records of the Company and which are either (i) located on the Leased Real
Property or (ii) currently used primarily in the operation of the Media
Business.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
Exchange Act.
"Cash" means cash and cash equivalents (including marketable
securities and short term investments) calculated in accordance with GAAP.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto, and the rules and regulations promulgated
thereunder.
"Collateral Documents" means the Volume Purchase Agreement,
the Joint Development Agreement, the Registration Rights Agreement, the License
Agreement, the Transitional Services Agreement, the Assignment and Assumption
Agreement, the Bill of Sale and the Promissory Note.
"Continuing Environmental Conditions" shall mean (i) any
Release of any Hazardous Materials that occurred at any time on or before the
Closing Date as a result of Pre-Closing Hazardous Materials Activities and which
Release continues to occur after the Closing Date from any pipes, conduits,
structures, equipment or other improvements which are on or about any Media
Business Facility (as defined below), to the extent any of the foregoing are
concealed within or below the improvements, foundation, paving, or subsurface
soils on or about such Media Business Facility; (ii) any Pre-Existing
Contamination (as defined below) present on or about any Media Business Facility
as of the Closing Date which continues to be present on or about such Media
Business Facility after the Closing Date, and (iii) any violation by the Company
of any Environmental Laws applicable to the Pre-Closing Hazardous Materials
Activities conducted on any Media Business Facility which occurs on or before
the Closing Date and which continues to occur after the Closing Date.
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"Employee" means any current, former, or retired employee,
consultant, independent contractor, sales representative, officer or director of
the Company or any ERISA Affiliate employed or retained in connection with the
operation of the Media Business.
"Employee Agreement" means each employment, severance,
consulting, relocation, repatriation and expatriation or similar agreement,
contract or understanding, whether written or oral, between the Company or any
ERISA Affiliate and any Employee.
"Employee Plan" means any plan, program, policy, practice,
contract, agreement or other arrangement providing for compensation, severance,
termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded and whether or not
legally binding, including, without limitation, any "employee benefit plan"
(within the meaning of Section 3(3) of ERISA) which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any ERISA
Affiliate (as defined before) for the benefit of any Employee, and pursuant to
which the Company or any ERISA Affiliate has or may have any material Liability
or obligation, contingent or otherwise.
"Environmental Claim" shall mean any notice, claim, act, cause
of action or investigation by any third party alleging potential Liability
(including potential Liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or resulting from (A)
the presence in the environment, or the Release, of any Hazardous Materials or
(B) any violation, or alleged violation, of any Environmental Laws.
"Environmental Laws" shall mean all federal, state, local and
foreign laws, statutes, ordinances, rules and regulations relating to the
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata) including laws,
statutes, ordinances and regulations relating to the Release of Hazardous
Materials or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor statute thereto, and the rules and
regulations promulgated thereunder.
"ERISA Affiliate" means any other Person (as defined below)
under common control with the Company within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the rules and regulations promulgated thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute thereto, and the rules and regulations
promulgated thereunder.
"Excluded Assets" means (i) Cash and Accounts Receivables (and
refunds due with respect to the Finished Goods) which relate to the Media
Business for sales (or importation with respect to the Finished Goods) of
products prior to the Closing Date, (ii) general and administrative
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management information systems of the Company utilized by the Media Business,
(iii) any of the rights of the Company under this Agreement or the Collateral
Agreements (or under any side agreement between the Company and Komag, entered
into on or after the date of this Agreement), (iv) Non-Transferred Prepaid
Assets, (v) Intellectual Property of the Company (other than rights under any
contracts, licenses and agreements set forth in Section 3.11(a)(ii) of the
Company Disclosure Schedules), (vi) all computers or office equipment owned or
leased by the Company and used in the Media Business by all Employees who are
not Transferred Employees (as defined herein), (vii) all purchase orders of the
Company which are not Purchase Orders set forth in Section 1.1(b) of the Company
Disclosure Schedule and (viii) all other assets and properties set forth on
Exhibit B attached hereto.
"Finished Goods" means any finished media goods specifically
produced by the Company in connection with the Media Business which meet the
standards and specifications for the Company's Hunter disk-drive program.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America.
"Governmental Entity" means any government, or political
subdivisions thereof, court, tribunal, administrative agency or commission or
any other federal, state, province, county, local or foreign governmental or
regulatory authority, instrumentality, agency or commission.
"Hazardous Materials" means chemicals, pollutants,
contaminants, wastes, toxic substances, radioactive and biological materials,
asbestos-containing materials (ACM), hazardous substances, petroleum and
petroleum products or any fraction thereof, including, without limitation, those
listed pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended, and the Resource Conservation and Recovery
Act of 1976, as amended, or the rules or regulations promulgated thereunder.
Hazardous Materials shall not include office and janitorial supplies and
products properly and safely maintained.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, or any successor statute thereto, and the rules and
regulations promulgated thereunder.
"Inventory" means all inventories including all finished
goods, work in progress, stock room inventory, packaging and raw materials of
whatever nature, wherever located.
"Intellectual Property" means any or all of the following and
all rights in, arising out of, or associated therewith: (i) all United States
and foreign patents and applications therefor and all reissues, divisions,
renewals, extensions, provisionals, continuations and continuations-in-part
thereof, and equivalent or similar rights anywhere in the world in inventions
and discoveries ("Patents"); (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information,
know how, technology, technical data and customer lists, and all documentation
embodying or evidencing any of the foregoing; (iii) all copyrights, copyrights
registrations and applications therefor and all other rights corresponding
thereto throughout the world ("Copyrights"); (iv) all mask works, mask work
registrations and applications therefor, and
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any equivalent or similar rights in semiconductor masks, layouts, architectures
or topology ("Mask Works"); (v) all industrial designs and any registrations and
applications therefor throughout the world; (vi) all trade names, logos, common
law trademarks and service marks, trademark and service mark registrations and
applications therefor and all goodwill associated therewith throughout the world
("Trademarks"); (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded; (ix) all World Wide Web
addresses, sites and domain names; and (x) any similar, corresponding or
equivalent rights to any of the foregoing anywhere in the world.
"knowledge" or words of similar import means, (i) with respect
to the Company, the knowledge of Charles A. Haggerty, Michael A. Cornelius, A.
Keith Plant, Joseph R. Carrillo, Ray Bukaty, Leo Young, Keith Goodson, Mark
Schulte, Jack Van Berkel, Duston M. Williams, Thomas Nieto, Terry Hopp, Matt
Massengill, Robert Parmelee, Thomas A. Seche and Russ Krapf, and the knowledge
such Person would have if he or she had performed his or her services and duties
on behalf of such Person in the ordinary course of business, consistent with
past practices, in a reasonably diligent manner, but without additional
investigation or inquiry beyond that required for the discharge of his or her
duties in the ordinary course of business, consistent with past practices, in a
reasonably diligent manner and (ii) with respect to Komag, the knowledge of
Stephen C. Johnson, William L. Potts, Ted Siegler, Ron Allen, Kathy Bayless,
Betsy Lamb, Stacey Layzell, Rick Austin, Chris Bajorek, Ray Martin, Allen
McCarthy, Beth McKone, TH Tan, Eric Tu and Tu Chen, and the knowledge such
Person would have if he or she had performed his or her services and duties on
behalf of such Person in the ordinary course of business, consistent with past
practices, in a reasonably diligent manner, but without additional investigation
or inquiry beyond that required for the discharge of his or her duties in the
ordinary course of business, consistent with past practices, in a reasonably
diligent manner.
"Komag Common Stock" means shares of the shares of the common
stock of Komag, par value $0.01 per share.
"Liability" means any liability, indebtedness, obligation,
expense, loss, damage, cost, claim, contingent liability, deficiency, guaranty
or endorsement (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether direct or indirect, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Liens" means any mortgage, pledge, lien, security interest,
encumbrance, charge, claim, defect in title or other equitable or third-party
interest.
"Media Business Facilities" shall mean the Leased Real
Property listed in Section 3.10(a) of the Company Disclosure Schedule.
"Media Intellectual Property" means any Intellectual Property
that is owned by or licensed to the Company which is necessary to the operation
of the Media Business, including the
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design, manufacture, licensing, sale and use of the products or performance of
the services of the Media Business as it currently is conducted.
"Multiemployer Plan" means any Pension Plan (as defined below)
which is a "multiemployer plan" (within the meaning of Section 3(37) of ERISA).
"Net Book Value" means, as to any assets, an amount equal to
the aggregate cost of such assets less the accumulated depreciation and
amortization of such assets.
"Non-Transferred Prepaid Assets" means all Prepaid Assets
which are not Transferred Prepaid Assets.
"Pension Plan" means each Employee Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA.
"Permitted Liens" means (a) Liens for current taxes not yet
due for which appropriate accruals in accordance with GAAP have been created,
(b) with respect to Leased Real Property only, recorded liens, encumbrances,
easements, rights of way, restrictions and other conditions of record affecting
the Leased Real Property excluding, however, liens recorded against the Leased
Real Property or as a result of any action or inaction by the Company, (c) Liens
evidenced by UCC-1 financing statements recorded with respect to Leased Fixed
Assets by the lessors of such Leased Fixed Assets and which are set forth in
Section 1.1(a) of the Company Disclosure Schedule, and (d) Liens which will be
discharged by the Company prior to or concurrently with the Closing and which
are set forth in Section 1.1(a) of the Company Disclosure Schedule.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a Governmental Entity (or any
department, agency or political subdivision thereof).
"Pre-Closing Hazardous Materials Activities" means the
transportation, transfer, recycling, storage, use, handling, treatment,
manufacture, removal, investigation, remediation, Release, sale, or distribution
of any Hazardous Materials, or any product or waste containing Hazardous
Materials conducted on any Media Business Facility prior to the Closing Date by
or at the direction of the Company or otherwise occurring prior to the Closing
Date in connection with or to benefit the Media Business.
"Pre-Existing Contamination" means the presence on or before
the Closing Date of any Hazardous Materials in the soil, groundwater, surface
water, air or building materials of any Media Business Facility which results
from Pre-Closing Hazardous Materials Activities or for which the Company has
contractually assumed liability.
"Prepaid Assets" means prepaid rentals, security deposits,
lease payments, prepaid sales tax, utilities, payroll obligations paid by the
Company with respect to periods after the Closing Date, and other prepaid
expenses of the Company relating to the Media Business including, without
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limitation, software licenses, software maintenance fees and property taxes
relating to the fixed assets included within the Acquired Assets.
"Purchase Orders" means any purchase orders of the Company
relating to the Media Business identified in Section 1.1(b) of the Company
Disclosure Schedule.
"Release" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment, including, without limitation,
the movement of Hazardous Materials through ambient air, soil, surface water,
groundwater, wetlands, land or subsurface strata.
"Securities Act" means the Securities Act of 1933, as amended,
or any successor statute thereto, and the rules and regulations promulgated
thereunder.
"Seller's Retained Environmental Liabilities" means any
Liability, obligation, judgment, penalty, fine, cost or expense, including
without limitation the cost or expense of fulfilling any Environmental Laws,
duty to investigate, remediate, remove, or take other action with respect to
Hazardous Materials, or duty to indemnify, defend or reimburse any Person with
respect to: (i) Pre-Existing Contamination; (ii) Continuing Environmental
Conditions; (iii) the migration at any time prior to or after the Closing Date
of Pre-Existing Contamination to any other real property, or the soil,
groundwater, surface water, air or building materials thereof; (iv) any
Pre-Closing Hazardous Materials Activities; (v) the exposure of any Person to
Pre-Existing Contamination or to Hazardous Materials in the course of or as a
consequence of any Pre-Closing Hazardous Materials Activities, without regard to
whether any health effect of the exposure has been manifested as of the Closing
Date; (vi) the violation of any Environmental Laws by the Company or its agents,
employees, predecessors in interest, contractors, invitees or licensees prior to
the Closing Date or in connection with any Pre-Closing Hazardous Materials
Activities prior to the Closing Date; and (vii) any actions or proceedings
brought or threatened by any third party with respect to any of the foregoing.
"Transferred Prepaid Assets" means (i) all Prepaid Assets set
forth on the Closing NBV Statement ("NBV Prepaid Assets") and (ii) all Prepaid
Assets listed on Exhibit C attached hereto ("Cash Prepaid Assets").
(b) The following terms are defined in the following sections
of this Agreement:
Terms Sections
----- --------
Acquisition Preamble
Agreement Preamble
Assignment and Assumption Agreement 7.2(g)
Assumed Liabilities 2.2(a)
Auditors' Letter 2.3(b)(iv)
Authorizations 3.14
Balance Sheet Date 3.6(a)
Bill of Sale 7.2(h)
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Terms Sections
----- --------
Cash Prepaid Assets Net Book Value 2.3(a)(ii)
Charter 3.1
Closing 2.5(a)
Closing Date 2.5(a)
Closing AA Net Book Value 2.3(b)(iii)
Closing CPA Net Book Value 2.3(b)(iv)
COBRA 6.8(d)
Company Preamble
Company Disclosure Schedule Article III
Company Indemnifiable Claims 8.2(b)
Company Indemnitees 8.2(b)
Company SEC Documents 3.6(a)
Conflict 3.4
Contract 3.12(b)
Damages 8.2
Disposal Sites 3.22(e)
DOL 3.20(b)
Environmental Covenants 8.5
Environmental Permits 3.22(c)
Escrow Agreement 2.7(b)
Final Closing NBV Statement 2.3(b)(iv)
Indemnifiable Claim 8.4(a)
Indemnifying Party 8.4(a)
Indemnitee 8.3
Joint Development Agreement 7.2(j)
Komag Preamble
Komag Common Stock Preamble
Komag Disclosure Schedule Article III
Komag Financial Statements 4.6
Komag Indemnifiable Claim 8.2(a)
Komag Indemnitee 8.2(a)
Komag SEC Documents 4.6
Labor Representatives 3.12(a)
Leased Fixed Assets 3.10(b)
Leased Real Property 3.10(a)
License Agreement 7.2(k)
Media Business Preamble
NBV Accounting Procedures 2.3(c)(i)
Non-Offered Employees 6.8(c)
Non-Transferable Asset 2.7(a)
Note Amount 2.3(a)(i)
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Terms Sections
----- --------
Offered Employees 6.8(a)
Officer's Certificate 8.4
Original Sale Shares 2.3(c)(ii)
Original Note Amount 2.3(c)(iii)
Outside Auditors 2.3(b)(iv)
Parties Preamble
Preliminary Closing NBV Statement 2.3(b)(iii)
Promissory Note 2.3(a)(i)
Purchase Price 2.3(a)
Registration Rights Agreement 7.2(l)
Rental Fees 2.4
Retained Liabilities 2.2(b)
Revised AA Net Book Value 2.3(b)(iv)
Revised CPA Net Book Value 2.3(b)(iv)
Sale Shares 2.3(a)(i)
Sales Tax 2.2(a)
SEC 3.6(a)
Share Amount 2.3(a)(i)
Share Amount Cap 2.3(a)(i)
Share Price 2.3(a)(i)
Signing NBV Statement 2.3(b)(i)
Tax 3.8(a)
Tax Returns 3.8(b)
Threshold Amount 8.3
Transferred Employees 6.8(a)
Utility Charges 2.4
Volume Purchase Agreement 7.2(i)
WARN Act 6.8(c)
ARTICLE II
PURCHASE AND SALE TRANSACTION
2.1 Purchase and Sale of Acquired Assets. On and subject to the terms
and conditions of this Agreement, Komag agrees to purchase from the Company, and
the Company agrees to sell, transfer, assign, convey and deliver to Komag, at
the Closing, all of the Company's rights, title and interest in and to the
Acquired Assets, free and clear of any and all Liens, other than Permitted
Liens.
2.2 Assumption of Liabilities.
(a) On and subject to the terms and conditions of this
Agreement and except as otherwise set forth herein, Komag agrees to assume and
become responsible for only the following
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Liabilities of the Company: (i) Liabilities under all Leased Real Property only
to the extent the rights of such real property leases have been assigned to
Komag and to the extent such Liabilities first arise or accrue on or after the
Closing Date, (ii) Liabilities under all equipment leases with Comdisco, Leasing
Solutions, Inc. and AT&T Corp. which are used or utilized in connection with the
Media Business only to the extent the rights of such equipment leases have been
assigned to Komag and to the extent such Liabilities first arise or accrue on or
after the Closing Date, (iii) Liabilities under all agreements, contracts or
Purchase Orders with all vendors and suppliers which have been entered into in
the ordinary course of business, consistent with past practices, relating to the
Media Business only to the extent the rights of such agreements, contracts or
purchase orders have been assigned to Komag and to the extent such Liabilities
first arise or accrue on or after the Closing Date, (iv) Liabilities under all
third party licenses or other similar agreements related to the Acquired Assets
only to the extent the rights under such licenses or similar agreements have
been assigned to Komag and to the extent such Liabilities first arise or accrue
on or after the Closing Date, (v) Liabilities under all other agreements,
contracts or Purchase Orders which have been marked with an asterisk in Section
3.12(a) of the Company Disclosure Schedule only to the extent the rights under
such agreements, contracts or purchase orders have been assigned to Komag and to
the extent such Liabilities first arise or accrue on or after the Closing Date,
(vi) Liabilities of any of the Parties for any sales taxes, use taxes, transfer
taxes, recording fees and similar taxes, charges, fees or expenses ("Sales Tax")
that may become payable by reason of or in connection with the Acquisition,
(vii) Liabilities of any of the Parties for any federal, state, local or foreign
Taxes, duties, withholdings or other assessments imposed on any of the Parties
as a result of the movement by Komag or any of its Affiliates of the
manufacturing lines of the Media Business to Malaysia following the Closing,
(viii) Liabilities which may be sustained, suffered or incurred under the WARN
Act as specifically allocated to Komag under Section 6.8(c) and (ix) Liabilities
arising from the operation of the Media Business following the Closing
(together, the "Assumed Liabilities").
(b) Komag will not assume or have any responsibility, however,
with respect to any Liability of the Company not included within the definition
of Assumed Liabilities, and such Liabilities shall be retained by the Company
("Retained Liabilities"). Without limiting the generality of the foregoing, it
is expressly agreed that Komag shall not assume, and the definition of Retained
Liabilities shall include, any and all (i) Liabilities for employee benefits
including, without limitation, vacation pay and similar accruals, COBRA
benefits, severance and termination pay owed to all Employees not employed by
Komag immediately following the Closing Date, (ii) Liabilities under any
agreements, contracts or commitments of which the Company is a party or by which
the Company is bound that are not assigned to Komag, (iii) Liabilities for
indebtedness of the Company, (iv) Liabilities for Taxes due and payable by the
Company including Taxes with respect to the Media Business and the ownership of
the Acquired Assets or otherwise for periods ending on or prior to the Closing
Date (other than Sales Tax that may become payable by reason of or in connection
with the Acquisition, Taxes which are the obligation of Komag pursuant to, and
to the extent set forth in, Section 2.4, and such other Taxes described in
Section 2.2(a)(vii)), (v) Liabilities for Accounts Payable or similar
obligations incurred by the Company in connection with the operation of the
Media Business on or prior to the Closing, (vi) Seller's Retained Environmental
Liabilities, (vii) Liabilities for any claims or litigation (including, without
limitation, those relating to any infringement of Intellectual Property) which
are pending or threatened against the Company or any
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of the Acquired Assets on or prior to the Closing Date or which are brought or
threatened to be brought against the Company or the Acquired Assets after the
Closing Date, but which are based upon facts or circumstances involving the
operation of the Media Business prior to the Closing Date, (viii) Liabilities
which may be sustained, suffered or incurred under the WARN Act as specifically
allocated to the Company under Section 6.8(c); and (ix) Liabilities relating to
the Excluded Assets.
2.3 Purchase Price for Acquired Assets; Post Closing Adjustment.
(a) Purchase Price. In consideration for the purchase of the
Acquired Assets, Komag agrees to pay to the Company at the Closing a purchase
price payable in the following amounts (the "Purchase Price") as follows:
(i) With respect to the purchase of all of the
Acquired Assets (other than the Finished Goods and the Cash Prepaid Assets),
(1) Komag shall deliver to the Company at
the Closing [***] shares of unregistered Komag Common Stock (the "Sale Shares");
and
(2) Komag shall deliver to the Company at
the Closing a promissory note, substantially in the form attached hereto as
Exhibit D (the "Promissory Note"), in the aggregate principal amount equal to
$[***].
(ii) With respect to the purchase of the Cash Prepaid
Assets, Komag shall deliver to the Company at the Closing an amount in cash
equal to the [***].
(iii) With respect to the purchase of the Finished
Goods, Komag shall deliver to the Company no later than [***] (or such earlier
date as the Parties may mutually agree) an amount in cash equal to $[***], which
the parties acknowledge and agree represents [***] as of the Closing Date for
the Finished Goods.
(b) NBV Statements.
(i) The Company has delivered to Komag a statement
summarized by financial statement caption of the Acquired Assets (the "Signing
NBV Statement") as well as supporting detail schedules as of February 20, 1999
which include (A) each item included in the Fixed Assets, the Media Inventory
(excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid
Assets), (B) the cost of each of such items of Fixed Assets, the Media Inventory
(excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid
Assets) when purchased by the Company, (C) the accumulated depreciation and
amortization applicable to each item of the Fixed Assets, the Media Inventory
(excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid
Assets), (D) a detailed listing of the cost of the Finished Goods and the Cash
Prepaid Assets and (E) the AA Net Book Value and the Cash Prepaid Assets Net
Book Value.
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(ii) The Company represents and warrants to Komag
that the Signing NBV Statement has been prepared from the books and records of
the Company in accordance with GAAP, consistent with the accounting principles
used in the preparation of the Company's annual audited financial statements.
The Company has, and has requested its internal accountants to, make available
to Komag and its accountants copies of all customary accounting and other work
papers in their respective possession that were prepared in connection with the
preparation of the Signing NBV Statement.
(iii) On the Closing Date, the Company shall deliver
to Komag an updated version of the Signing NBV Statement ("Preliminary Closing
NBV Statement") setting forth the items identified in subsection (b)(i) above as
of the Closing Date including calculation of the AA Net Book Value ("Closing AA
Net Book Value") and the Cash Prepaid Assets Net Book Value ("Closing CPA Net
Book Value"), revised in each case, if appropriate, to include any adjustments
agreed upon between the Parties since the date of the Signing NBV Statement. The
Preliminary Closing NBV Statement shall be accompanied by a certificate signed
by a duly authorized officer of the Company certifying as to the accuracy and
completeness of the Preliminary Closing NBV Statement as of the Closing Date.
The Preliminary Closing NBV Statement shall be prepared from the books and
records of the Company in accordance with GAAP, consistent with the accounting
principles used in the preparation of the Company's annual audited financial
statements. The Company will, and will request its internal accountants to, make
available to Komag and its accountants copies of all customary accounting and
other work papers in their respective possession that were prepared in
connection with the preparation of the Preliminary Closing NBV Statement.
(iv) Within thirty (30) calendar days following the
Closing, the Company shall submit to Komag in writing any and all changes and
adjustments to the Preliminary Closing NBV Statement necessary to reflect
properly the actual AA Net Book Value and the Closing Prepaid Assets Net Book
Value, each as of the Closing Date (the "Final Closing NBV Statement"), revised
in each case, if appropriate, to include any adjustments agreed upon between the
Parties since the date of the Preliminary Closing NBV Statement, together with a
special purpose report prepared by the Company's outside auditors ("Outside
Auditors") which shall confirm that the calculations of the AA Net Book Value
and the Closing CPA Net Book Value set forth on the Final Closing NBV Statement
have been accurately derived from, and tied to, the books and records of the
Company ("Special Purpose Report"). In preparing the Special Purpose Report, the
Outside Auditors shall use the procedures set forth in that certain letter (the
"Auditors' Letter") from the Outside Auditors to the Company dated April 8,
1999, a copy of which has been provided to Komag. The reasonable fees and
expenses of the Outside Auditors shall be borne by Komag. The revision of the AA
Net Book Value or the Closing CPA Net Book Value, as applicable, set forth on
the Final Closing NBV Statement shall be deemed the "Revised AA Net Book Value"
or the "Revised CPA Net Book Value", as applicable.
(c) Determination of Cash Prepaid Assets Net Book Value;
Adjustment to Cash Portion of Purchase Price. The Cash Prepaid Assets Net Book
Value utilized in calculating the amount of cash to be paid by Komag to the
Company following the Closing shall be deemed to be the Closing CPA Net Book
Value; provided that, following the Closing, if the Cash Prepaid Assets
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Net Book Value is revised pursuant to Sections 2.3(b)(iv) hereof and such
Revised CPA Net Book Value is less than the Closing CPA Net Book Value, then the
Company shall promptly, and in no event more than ten (10) business days after
providing Komag the Final Closing NBV Statement, pay to Komag an amount in cash
equal to the difference between the Closing CPA Net Book Value and the Revised
CPA Net Book Value. No adjustment to the cash portion of the purchase price will
be made if the Revised CPA Net Book Value is equal to or greater than the
Closing CPA Net Book Value.
(d) Acknowledgment regarding AA Net Book Value. The Parties
acknowledge and agree that the AA Net Book Value and Closing AA Net Book Value
set forth on the Signing NBV Statement and the Closing NBV Statement,
respectively, were utilized to determine the portion of the Purchase Price to be
paid in consideration for the Acquired Assets (excluding the Finished Goods and
Cash Prepaid Assets), which the Parties acknowledge to be approximately
$65,000,000. The Parties further acknowledge and agree that, if the actual AA
Net Book Value is less than $65,000,000, Komag will have suffered damages or
losses for which Komag is entitled to seek indemnification pursuant to Article
VIII of this Agreement in such amount that the actual AA Net Book Value is less
than the $65,000,000.
2.4 Transfer Taxes. Komag shall pay and promptly discharge when due any
and all Sales Taxes that may become payable by reason of or in connection with
the Acquisition; provided that the Company shall use commercially reasonable
efforts to assist Komag in minimizing any Liability for such Sales Tax. The
amount of Sales Tax collectible from Komag by the Company shall be reduced by
the amount of the deduction to which the Company is entitled for "Tax-paid
purchases resold" as defined in its California Sales and Use Tax Regulation
Section 1707, with respect to the Acquired Assets. The Company and Komag shall
prorate between them (a) secured and unsecured property Taxes on all Acquired
Assets, (b) sewer and water rentals and utility charges applicable to the Leased
Real Property ("Utility Charges") and (c) rentals, fees, assessments and similar
charges with respect to the agreements, contracts, licenses and permits included
in the Acquired Assets ("Rental Fees"). In the case of taxable or other relevant
payment periods commencing on or before the Closing Date and ending after the
Closing Date, secured and unsecured property Taxes, Utility Charges and Rental
Fees which relate to any period on or before the Closing Date or after the
Closing Date, as applicable, shall be in the case of Utility Charges, Rental
Fees and secured and unsecured property Taxes (that are not based on net income,
gross income, sales, premiums or gross receipts), the total amount of such
Utility Charges, Rental Fees and secured and unsecured Taxes for the period in
question multiplied by a fraction, the numerator of which is the number of days
in the portion of such period through the Closing Date or after such date, and
the denominator of which is the total number of days in such period.
2.5 The Closing.
(a) Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, in Palo Alto, California commencing
at 9:00 a.m. local time on the second business day following the satisfaction or
waiver of all conditions to the obligations of the Parties to consummate
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the transactions contemplated hereby (other than conditions with respect to
actions the respective Parties will take at the Closing itself) or such other
date as the Parties may mutually determine (the "Closing Date").
(b) Deliveries at the Closing. At the Closing, (i) the Company
will deliver to Komag the various certificates, instruments and documents
referred to in Section 7.2 below and will execute and acknowledge (if
appropriate) and deliver such other instruments of sale, transfer, conveyance
and assignment as Komag and its counsel may reasonably request; (ii) Komag will
deliver to the Company the various certificates, instruments and documents
referred to in Section 7.3 below and will execute and acknowledge (if
appropriate) and deliver such other instruments of assumption as the Company and
its counsel may reasonably request; and (iii) Komag will deliver to the Company
stock certificates representing the Sale Shares in the amount determined in
accordance with Section 2.3 above.
2.6 Taking of Necessary Action; Further Action. If, at any time after
the Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Komag with full right, title and
possession to the Acquired Assets, the officers and directors of the Company are
fully authorized in the name the Company or otherwise to take, and will take,
all such lawful and necessary and/or desirable action.
2.7 Nonassignability and Consents.
(a) To the extent that any asset which would otherwise be an
Acquired Asset, or any claim, right or benefit arising thereunder or resulting
therefrom, is not capable of being sold, conveyed, assigned, transferred or
delivered without the approval, consent or waiver of any Person (including any
Governmental Entity) other than the Company, or if such sale, conveyance,
assignment, transfer or delivery or attempted sale, conveyance, assignment,
transfer or delivery would constitute a breach or termination right thereof or a
violation of any law, decree, order, regulation or other governmental edict,
except as expressly otherwise provided herein, this Agreement shall not
constitute a sale, conveyance, assignment, transfer or delivery thereof, or an
attempted sale, conveyance, assignment, transfer or delivery thereof. Any such
assets shall be a "Non-Transferable Asset."
(b) The Company shall not be obligated to sell, assign,
transfer, convey or deliver, or cause to be sold, assigned, transferred,
conveyed or delivered, to Komag, and Komag shall not be obligated to purchase,
any Non-Transferable Asset without first having obtained all such consents,
approvals or waivers or removed or eliminated any such potential breach or
termination of any contract, agreement or other instrument or potential
violation of any law, decree, order, regulation or other governmental edict. To
the extent that at the Closing there are any Non-Transferable Assets, from and
after the Closing, the Parties will cooperate, at the Company's expense, to
effect a lawful and mutually acceptable arrangement under which Komag would
obtain the benefit of such Non-Transferable Asset, including subcontracting,
sub-licensing, or sub-leasing such Non-Transferable Asset to Komag, and Komag,
so long as such benefit is so provided, would satisfy or perform any Liabilities
or obligations under or in connection with such Non-Transferable Asset which may
arise
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following the Closing which would not otherwise be a Retained Liability if such
Non-Transferable Asset were an Acquired Asset. From and after the Closing Date,
the Company will promptly pay to Komag when received all monies received by the
Company under any Acquired Asset or any claim or right or any benefit arising
thereunder, except to the extent the same represents an Excluded Asset.
Notwithstanding the foregoing, nothing contained herein shall in anyway affect
the rights or obligations of the Parties under that certain Escrow Agreement
dated February 19, 1999 ("Escrow Agreement") with respect to the distribution of
the Property (as defined therein) in accordance with the terms thereof.
(c) At any time after Closing, if any Non-Transferable Asset
becomes capable of being sold, assigned, transferred, conveyed or delivered to
Komag, or if the benefit can be provided to Komag without the required consent,
approval or waiver of any third party, and if such sale, assignment, transfer,
conveyance or delivery, or the provision of such benefit would not constitute a
breach or termination of any agreement, contract or other instrument or
violation of law, decree, order, regulation or other governmental edict, then,
at such time, the Company shall sell, assign, transfer, convey and deliver to
Komag or cause to be sold, assigned, transferred, conveyed and delivered to
Komag, or provide to Komag the benefit of such asset and, if such asset is an
agreement, contract, instrument, license or permit, Komag shall assume the
Liabilities and obligations of the Company thereunder to the extent such
Liabilities and obligations arise from the performance of the agreement,
contract, instrument, license or permit from and after the effective date of
such assignment and to the extent such Liabilities and obligations would not
otherwise be Retained Liabilities if such Non-Transferable Asset were an
Acquired Asset.
(d) Notwithstanding anything contained in this Agreement to
the contrary, in addition to (and not in lieu of) any of the other rights,
remedies and obligations of the Parties hereunder, (i) in the event that the
Company is unable to obtain prior to the Closing any of the consents, waivers
and approval referenced in Section 6.5 of this Agreement (including, without
limitation, under any contracts set forth in Section 3.4, 3.5, 3.10(b), 3.10(c),
3.11(a)(ii), 3.12(a) and 3.14 of the Company Disclosure Schedules) as required
pursuant to this Agreement, the Company shall, within thirty (30) days following
the Closing Date, obtain all such consents, waivers and approvals, in form and
substance reasonably acceptable to Komag and (ii) in the event that the Company
is unable to discharge or remove prior to the Closing any of the Liens set forth
in Section 1.1(a) of the Company Disclosure Schedules as required pursuant to
this Agreement, the Company shall, within thirty (30) days following the Closing
Date, have all such Liens discharged and/or removed in a manner reasonably
acceptable to Komag.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Komag as of the date hereof, and
as of the Closing Date, except as specifically set forth in the disclosure
schedule accompanying this Agreement (referring to the appropriate section
numbers) (the "Company Disclosure Schedule"), as follows:
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3.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has the corporate power and authority to own the Acquired Assets and to
carry on the Media Business as now being conducted and as contemplated to be
conducted. The Company is duly qualified to do business and in good standing as
a foreign corporation under the laws of each jurisdiction in which the failure
to be so qualified could have a material adverse effect on the Acquired Assets
or the Media Business. The Company has delivered to Komag and its counsel true
and correct copies of its Certificate of Incorporation and Bylaws, which have
not been amended since November 25, 1998 (together, the "Charter").
3.2 Media Business Contained in the Company. All of the assets,
properties and rights under agreements, contracts, licenses and leases
constituting the Acquired Assets, and used by or utilized in connection with the
Media Business, are owned, leased, held or licensed by the Company and not by
any subsidiary or Affiliate thereof.
3.3 Authority. The Company has all requisite corporate power and
authority to enter into this Agreement and each of the Collateral Documents and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and each of the Collateral Documents by the
Company, and the consummation of the transactions contemplated hereby and
thereby by the Company, have been duly authorized by all necessary corporate
action on the part of the Company. This Agreement has been, and each of the
Collateral Documents will be at Closing, duly executed and delivered by the
Company and, assuming the due authorization execution and delivery by the other
parties hereto and thereto, upon execution, will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies.
3.4 No Conflict. The execution and delivery of this Agreement and each
of the Collateral Documents by the Company does not, and the consummation of the
transactions contemplated hereby and thereby by the Company will not, conflict
with, or result in any violation of, or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation,
modification or acceleration of any obligation or loss of any benefit under (any
such event, a "Conflict") (a) any provision of the Charter, (b) any Contract or
any other mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise or license to which any of the Acquired Assets is
subject or by which any of the Acquired Assets are bound, (c) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which the Company is subject or by which the
Company is bound or (d) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company or the Acquired Assets, assuming,
in each case, compliance with (x) any applicable requirements under the HSR Act,
(y) any applicable requirements under the Exchange Act and (z) such other
matters set forth in Section 3.4 of the Company Disclosure Schedule.
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3.5 Consents. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any Governmental Entity or any
other Person, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or any of the
Collateral Documents or the consummation of the transactions contemplated hereby
or thereby by the Company, except for such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings (a) as may be required
under the HSR Act, (b) as may be set forth in Section 3.5 of the Company
Disclosure Schedule or (c) which, if not obtained or made, would not materially
impair the ability of the Company to consummate the transactions contemplated by
the Agreement and the Collateral Documents.
3.6 Financial Matters.
(a) The Company has furnished or made available to Komag true
and complete copies of all reports or registration statements filed by it with
the U.S. Securities and Exchange Commission (the "SEC") under the Exchange Act,
for all periods subsequent to December 27, 1997, all in the form so filed (all
of the foregoing being collectively referred to as the "Company SEC Documents").
As of their respective filing dates, the Company SEC Documents complied in all
material respects with the requirements of the Exchange Act, and none of the
Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading, except to
the extent corrected by a subsequently filed Company SEC Document.
(b) The Signing NBV Statement has been, and the Preliminary
Closing NBV Statement and Final Closing NBV Statement shall be, prepared from
the accounting books and records of the Company. The Signing NBV Statement has
been, and the Preliminary Closing NBV Statement and Final Closing NBV Statement
shall be, prepared in accordance with GAAP, consistent with the accounting
principles used in the preparation of the Company's annual audited financial
statements. The Signing NBV Statement sets forth, and the Preliminary Closing
NBV Statement and the Final Closing NBV Statement shall set forth, as of the
date indicated therein, a true and accurate summary by financial statement
caption as well as supporting detail schedules which include (A) each item
included in the Fixed Assets, the Media Inventory (excluding Finished Goods) and
the NBV Prepaid Assets (excluding Cash Prepaid Assets), (B) the cost of each of
such items of Fixed Assets, the Media Inventory (excluding Finished Goods) and
the NBV Prepaid Assets (excluding Cash Prepaid Assets) when purchased by the
Company, (C) the accumulated depreciation and amortization applicable to each
item of the Fixed Assets, the Media Inventory (excluding Finished Goods) and the
NBV Prepaid Assets (excluding Cash Prepaid Assets), (D) a detailed listing of
the cost of the Finished Goods and the Cash Prepaid Assets and (E) the AA Net
Book Value and the Cash Prepaid Assets Net Book Value. The balance sheet of the
Company, including the notes thereto, included in the Company's Form 10-Q filed
with the SEC for the period ended December 26, 1998 (the "Balance Sheet Date")
complies as to form in all material respects with applicable accounting
requirements of the Exchange Act, and with the published rules and regulations
of the SEC with respect thereto, has been prepared in accordance with GAAP
(except for
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fiscal year-end adjustments) and presents fairly in all material respects the
financial position of the Company as of the date indicated therein.
3.7 No Changes. Since the Balance Sheet Date, except as set forth in
Section 3.7 of the Company Disclosure Schedule, there has not been, occurred or
arisen any:
(a) transaction related to or otherwise affecting the Media
Business, except in the ordinary course of business, consistent with past
practices;
(b) expenditure or commitment for expenditure by the Company
related to or otherwise affecting the Media Business exceeding $500,000 per
transaction except to the extent such expenditure or commitment for expenditure
has been previously approved in writing by Komag;
(c) labor trouble or claim of wrongful discharge of which the
Company has received written notice or of which the Company is aware or other
unlawful labor practice or action relating to or otherwise affecting the Media
Business;
(d) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company;
(e) revaluation by the Company of any of the Acquired Assets,
other than depreciation and amortization as required by GAAP which is reflected
on the Signing NBV Statement;
(f) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, employees or advisors
engaged in the Media Business or otherwise expected to become any employee of or
advisor to Komag as a result of the Acquisition, or the declaration, payment or
commitment or obligation of any kind for the payment, by the Company of a bonus
or other additional salary or compensation to any such Person, except, in each
case, in the ordinary course, consistent with past practices;
(g) sale, lease, license or other disposition of any of the
assets or properties of any of the Acquired Assets, except sales of Media
Inventory in the ordinary course of business, consistent with past practices;
(h) amendment or termination or violation of any distribution
agreement or any material contract, agreement, Environmental Permit, lease or
license to which the Company is a party which relates to the Media Business or
by which any of the Acquired Assets is bound, other than termination by the
Company pursuant to the terms thereof in the ordinary course of business,
consistent with past practices;
(i) loan by the Company to any Transferred Employees, other
than advances to Transferred Employees for travel and business expenses in the
ordinary course of business, consistent with past practices;
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(j) waiver or release of any material right or claim arising
from or related to the Media Business or the Acquired Assets;
(k) commencement, notice or, to the knowledge of the Company,
threat of commencement of any lawsuit or proceeding against or investigation of
the Company or its affairs arising from or related to the Media Business or any
of the Acquired Assets;
(l) notice of any claim of ownership by a third party of any
Media Intellectual Property or, notice of infringement by the Company in the
operation of the Media Business of any third party's intellectual property
rights;
(m) any event or condition of any character that has or could
be reasonably expected to have a material adverse effect on the Acquired Assets
or the Media Business; or
(n) negotiation or agreement by the Company to do any of the
things described in the preceding clauses (a) through (l) (other than by
negotiations with Komag and their representatives regarding the transactions
contemplated by this Agreement or the Collateral Documents and acts otherwise
permitted by such clauses (a) through (l)).
3.8 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement,
"Tax" or, collectively, "Taxes," means (i) any and all federal, state, province,
local and foreign taxes, assessments and other governmental charges, duties,
impositions and Liabilities, wherever imposed, including, without limitation,
taxes based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, goods and services, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts; (ii) any Liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any Liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other Person or as
a result of any obligations under any agreements or arrangements with any other
Person with respect to such amounts and including any Liability for taxes of a
predecessor entity.
(b) To the extent a failure to do so would adversely impact
Komag, the Media Business, the Acquired Assets or Komag's use of the Acquired
Assets, (a) the Company has timely filed within the time period for filing, or
any extension granted with respect thereto, all required federal, state,
province, local and foreign returns, estimates, information statements and
reports ("Tax Returns") which it is required to file relating or pertaining to
any and all Taxes attributable to or levied upon the Media Business or the
Acquired Assets and (b) paid any and all Taxes it is required to pay in
connection with the taxable periods to which such Tax Returns relate. There are
(and immediately following the Closing there will be) no Liens or similar
encumbrances on the Acquired Assets relating or pertaining to Taxes, except with
respect to Taxes not yet due and payable. The Company has no knowledge of any
basis for the assertion of any claims which, if
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adversely determined, would result in a Lien or other encumbrance on the
Acquired Assets or otherwise adversely effect Komag, the Media Business or the
Acquired Assets.
(c) To the extent relevant to the Acquired Assets and the
Media Business, the Company shall (i) provide Komag with such assistance as may
reasonably be required in connection with the preparation of any Tax Return and
the conduct of any audit or other examination by any Governmental Entity or in
connection with judicial or administrative proceedings relating to any Liability
for Taxes and (ii) retain and provide Komag with all records or other
information that may be relevant to the preparation of any Tax Returns, or the
conduct of any audit or examination, or other tax proceeding. The Company shall
retain all relevant documents, including prior year's Tax Returns, supporting
work schedules and other records or information that may be relevant to such
returns and shall not destroy or otherwise dispose of any such records, without
the prior written consent of Komag, until the expiration of the applicable
statute of limitations.
3.9 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or, to the Company's knowledge, any of its officers is a party
or otherwise binding upon the Company or, to the Company's knowledge, any of its
officers that has or reasonably could be expected to have the effect of
prohibiting or materially impairing the Acquisition, the conduct of the Media
Business by Komag or the performance of the Company's obligations under this
Agreement or the Collateral Documents.
3.10 Title of Properties; Absence of Liens and Encumbrances; Condition
of Equipment.
(a) Section 3.10(a) of the Company Disclosure Schedule sets
forth a list of all real property currently leased by the Company in which the
Media Business is conducted and which is to be transferred to Komag ("Leased
Real Property") and the name of the lessor, the date of the lease and each
amendment thereto and the aggregate annual rental and a schedule of future
monthly rental and/or other fees payable under any such lease. The leases and
amendments thereto listed on the Company Disclosure Schedule set forth all of
the terms and conditions of each such lease, and there are no other agreements,
written or oral, between lessor and lessee with respect thereto. All such leases
are in full force and effect and are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
material default or event of material default (or event which with notice or
lapse of time, or both, would constitute a material default) by the Company or,
to the Company's knowledge, any other party thereto. Except as set forth in
Section 3.10(a) of the Company Disclosure Schedule or as otherwise expressly set
forth in such leases, there are no restrictions, preconditions, prohibitions or
limitations on the ability to assign, transfer, pledge, hypothecate or otherwise
convey or dispose of the interest of the Company under such leases.
(b) Section 3.10(b) of the Company Disclosure Schedule sets
forth a list of all the Fixed Acquired Assets currently leased by the Company
("Leased Fixed Assets") and the name of the lessor, the date of the lease and
each amendment thereto and the aggregate annual rental and a schedule of future
monthly rental and/or other fees payable under any such lease. The leases and
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amendments thereto listed on the Company Disclosure Schedule set forth all of
the terms and conditions of each such lease, and there are no other agreements,
written or oral, between lessor and lessee with respect thereto. All such leases
are in full force and effect and are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
material default or event of material default (or event which with notice or
lapse of time, or both, would constitute a material default) by the Company or,
to the Company's knowledge, any other party thereto. Except as set forth on
Section 3.10(b) of the Company Disclosure Schedule or as otherwise expressly set
forth in such leases, there are no restrictions, preconditions, prohibitions or
limitations on the ability to assign, transfer, pledge, hypothecate or otherwise
convey or dispose of the interest of the Company under such leases.
(c) Section 3.10(c) of the Company Disclosure Schedule sets
forth all of the Fixed Acquired Assets owned by the Company included within the
Acquired Assets, other than any Fixed Acquired Assets which (i) are not material
to the Media Business and (ii) are, individually, less than $5,000 in value.
Except as set forth in Section 3.10(c) of the Company Disclosure Schedule, there
are no restrictions, prohibitions, or limitations on the ability to transfer,
convey or dispose of any of the Fixed Acquired Assets. All Fixed Acquired Assets
and all Leased Fixed Assets currently being used, or to be used, in the Media
Business, or used in the Media Business within six (6) months prior to the date
hereof, are in good operating condition, subject to normal wear and tear and
have been reasonably maintained.
(d) The Company has good and valid title to, or, in the case
of leased properties and assets, valid and enforceable leasehold interests in,
all of the Acquired Assets, free and clear of any Liens, except for Permitted
Liens or as otherwise reflected in Section 3.10(d) of the Company Disclosure
Schedule. All of the Acquired Assets are reflected on the Signing NBV Statement
or were acquired since the date of the Signing NBV Statement. All of the
properties and assets owned, leased or licensed by the Company included within
the Acquired Assets are adequate to conduct the Media Business as now conducted.
Upon the consummation of the Acquisition, Komag shall have good and valid title
to, or in the case of leased properties and assets, valid and enforceable
leasehold interests in, all of the Acquired Assets, free and clear of any Liens,
other than Permitted Liens (provided, that, any Liens which are Permitted Liens
and which are required to be discharged prior to or concurrently with the
Closing shall have been removed prior to or concurrently with the Closing) or as
otherwise reflected in Section 3.10(d) of the Company Disclosure Schedule.
(e) To the knowledge of the Company, there are no, and at the
time of Closing there will not be, any material physical or mechanical defects
of the Leased Real Property. To the knowledge of the Company, except as set
forth in Section 3.10(e) of the Company Disclosure Schedule, the buildings,
structures and improvements located on the Leased Real Property, including,
without limitation, the roofs, parking lots, plumbing, heating, air
conditioning, water, sewer, gas, electrical and life safety systems are in good
condition and repair and are in compliance in all material respects with
applicable laws. The Company has no outstanding claims or Liabilities in respect
of the construction thereof. All public utilities, including water, electric,
sewage or subsurface disposal systems, required for the normal operation of the
Media Business as currently conducted, connect into the Leased Real Property
through adjoining public roads or, if they pass
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through adjoining private land, do so in accordance with valid permits or
easements, all installation and connection charges due and payable with respect
thereto have been paid in full or are provided for and all such utilities are
sufficient for the operation of the Media Business as currently conducted. To
the knowledge of the Company, all improvements forming a part of any of the
Leased Real Property are located wholly within the boundaries of the Leased Real
Property and do not encroach upon any registered or unregistered easements or
rights of way affecting any of the Leased Real Property except with the
agreement or consent of the owner of the affected property. Except as set forth
in Section 3.10(e) of the Company Disclosure Schedule, there are no pending or,
to the knowledge of the Company, threatened condemnations, eminent domain,
expropriation, environmental, zoning, land-use or similar proceedings that would
affect all or any portion of the Leased Real Property nor has the Company
received notice of any proceedings to impose any new taxes or operating
restrictions upon any of the Leased Real Property. The Company shall notify
Komag promptly of any such proceedings of which the Company becomes aware prior
to the Closing. To the knowledge of the Company, the Leased Real Property
complies in all material respects with any private covenant, conditions,
restrictions, and approvals applicable thereto.
(f) On the Closing Date there will be no outstanding written
or oral contracts made by the Company for any alterations or improvements on or
to the Leased Real Property, which have not been fully paid, and the Company
shall cause to be discharged all mechanics' and materialmen's liens arising from
any labor or materials furnished to the Leased Real Property prior to the
Closing Date.
3.11 Intellectual Property.
(a) Intellectual Property Contracts.
(i) The contracts, licenses, sublicenses and
agreements listed on Section 3.11(a)(i) of the Company Disclosure Schedule
include all material contracts, licenses and agreements pursuant to which any
Person, including any Affiliate of the Company, has licensed or transferred any
Intellectual Property to or from the Company related to magnetic disk
technology, including the design or manufacture of any products of the Media
Business.
(ii) The contracts, licenses, sublicenses and
agreements listed on Section 3.11(a)(ii) of the Company Disclosure Schedule
include all contracts, licenses and agreements pursuant to which any Person,
including any Affiliate of the Company, has licensed any Intellectual Property
to the Company related to magnetic disk technology, including the design or
manufacture of any products of the Media Business, which are to be assigned to
the Company under the terms of this Agreement. All contracts, licenses,
sublicenses and agreements listed on Section 3.11(a)(ii) of the Company
Disclosure Schedule are in full force and effect. Neither the execution nor
delivery of the Agreement or any of the Collateral Documents nor the
consummation of the transactions contemplated hereby or thereby will violate or
result in the breach, modification, cancellation, termination, or suspension of
the contracts, licenses, sublicenses and agreements listed on Section
3.11(a)(ii) of the Company Disclosure Schedule. The Company is in compliance
with, and has not breached any term of, the contracts, licenses and agreements
listed on Section 3.11(a)(ii) of the Company Disclosure Schedule, and, to the
knowledge of the Company, all other parties to the contracts, licenses,
sublicenses and agreements listed on Section 3.11(a)(ii)
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of the Company Disclosure Schedule are in compliance with, and have not breached
any term of, such contracts, licenses, sublicenses and agreements. Following the
Closing Date, Komag will be permitted to exercise all of the Company's rights
under the contracts, licenses, sublicenses and agreements listed in Section
3.11(a)(ii) of the Company Disclosure Schedule without the payment of any
additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
(iii) Except as listed on Section 3.11(a)(iii) of the
Company Disclosure Schedule, there are no contracts, licenses, sublicenses and
agreements between the Company and any other Person with respect to the Media
Intellectual Property, including those listed on Section 3.11(a)(ii) of the
Company Disclosure Schedule, under which there is any dispute known to the
Company regarding the scope of such contract, license, sublicense or agreement,
or performance under such contract, license, sublicense or agreement, including
with respect to any payments to be made or received by the Company thereunder.
(b) Intentionally Omitted.
(c) Infringement of Third Party Intellectual Property. Except
as set forth in Section 3.11(c) of the Company Disclosure Schedule, the Company
has not received notice from any Person claiming that such operation or any act,
product, technology or service of the Media Business infringes or
misappropriates the Intellectual Property of any Person or constitutes unfair
competition or trade practices under the laws of any jurisdiction (nor is the
Company aware of any basis therefor).
(d) Restrictions of Use of Media Intellectual Property. No
Media Intellectual Property, or product, technology or service of the Media
Business, is subject to any proceeding or outstanding decree, order, judgment,
or stipulation restricting in any manner the use, transfer or licensing thereof
by the Company or which may affect the validity, use or enforceability of such
Media Intellectual Property.
(e) Protection of Media Intellectual Property. The Company has
taken all steps that are reasonable under the circumstances to protect the
confidentiality and trade secret status of the Media Business's confidential
information and trade secrets or any trade secrets or confidential information
of third parties provided to the Company related thereto, and, without limiting
the foregoing, the Company has and enforces a policy requiring each Employee and
contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
Employees and contractors of the Company conducting the Media Business have
executed such an agreement. The Company knows of no basis on which it could be
claimed that the Company has failed to protect the confidentiality of any
material confidential information of the Company relating to the Media Business.
(f) No Obligations Resulting from Transaction. Neither this
Agreement nor the transactions contemplated by this Agreement, including the
assignment to Komag by operation of
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law or otherwise of any contracts or agreements to which the Company is a party,
will result in (i) Komag's granting to any third party any right to or with
respect to any Intellectual Property or Intellectual Property right owned by, or
licensed to, either of them, (ii) Komag's being bound by, or subject to, any
non-compete or other restriction on the operation or scope of their respective
businesses or (iii) Komag's being obligated to pay any royalties or other
amounts to any third party in excess of those payable by Komag prior to the
Closing.
(g) Year 2000 Compliant. Section 3.11(g) of the Company
Disclosure Schedule sets forth the Company's Year 2000 Project Schedules with
respect to the Media Business which reflect the current status of the Company's
efforts to address operating and product line issues related to the "Year 2000
Issue".
(h) Effect of Transaction. The consummation of the
transactions contemplated by this Agreement will not result in the loss of, or
otherwise adversely affect, any ownership rights of the Company in any Media
Intellectual Property or result in the breach or termination of any license,
contract or agreement to which the Company is a party respecting any material
Media Intellectual Property.
3.12 Agreements, Contracts and Commitments.
(a) Except as set forth in Section 3.12(a) of the Company
Disclosure Schedule, the Company does not have any continuing obligations under,
is not a party to or is not bound by:
(i) any collective bargaining agreements, or any
contract with or commitment to any trade unions, employee bargaining agent or
affiliated bargaining agent (collectively, "labor representatives") which relate
to Employees employed in connection with, or providing services to, the Media
Business, and the Company has not conducted any negotiations with respect to any
such future contracts or commitments;
(ii) any bonus, deferred compensation, pension,
profit sharing or retirement plans, or any other employee benefit plans or
arrangements which relates to Employees employed in connection with, or
providing services to, the Media Business;
(iii) any employment or consulting agreement,
contract or commitment with an Employee or individual consultant employed by, or
providing services to, the Media Business or consulting agreement, contract or
commitment with a firm or other organization relating to the Media Business;
(iv) any agreement or plan, including any share
option plan, share appreciation rights plan or share purchase plan which relates
to any Employee employed by, or providing services to, the Media Business;
(v) any fidelity or surety bond or completion bond
relating to, or arising in connection with, the Acquired Assets or the Media
Business;
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(vi) any lease of real or personal property relating
to, or arising in connection with, the Acquired Assets or the Media Business;
(vii) any agreement of indemnification, guaranty or
environmental corrective action or clean up obligation relating to, or arising
in connection with, the Acquired Assets or the Media Business;
(viii) any agreement, contract or commitment
containing any covenant limiting the freedom of the Company to engage in any
line of business or to compete with any Person, relating to, or arising in
connection with, the Acquired Assets or the Media Business;
(ix) any agreement, contract or commitment relating
to capital expenditures and involving future payments in excess of $500,000
arising in connection with the Acquired Assets or the Media Business;
(x) any agreement, contract or commitment relating to
the disposition of any Acquired Assets or the acquisition of material assets or
any interest in any business enterprise outside the ordinary course of business,
consistent with past practices, relating to, or arising in connection with, the
Acquired Assets or the Media Business;
(xi) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit arising in connection with, the
Acquired Assets or the Media Business;
(xii) any Purchase Order or contract for the purchase
of raw materials relating to, or arising in connection with, the Acquired Assets
or the Media Business;
(xiii) any distribution, joint marketing or
development agreement relating to, or arising in connection with, the Acquired
Assets or the Media Business;
(xiv) any other agreement, contract or commitment
that involves $100,000 or more relating to, or arising in connection with, the
Acquired Assets or the Media Business; or
(xv) any agreement, contract or commitment that is
not cancelable without material penalty within thirty (30) days relating to, or
arising in connection with, the Acquired Assets or the Media Business.
(b) Except as noted in Section 3.12(b) of the Company
Disclosure Schedule, the Company has not breached, violated or defaulted under,
or received notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any agreement, contract or commitment required
to be set forth in Section 3.12(a) of the Company Disclosure Schedule
(collectively, "Contracts" and each, a "Contract"), nor, to the Company's
knowledge, are there any events or circumstances that would in the Company's
opinion be reasonably likely to give rise to such a breach, violation or default
with the lapse of time, giving of notice or both. Each Contract is in full force
and effect and, except as otherwise disclosed in Section 3.12(b) of the Company
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Disclosure Schedule, is not subject to any default thereunder of which the
Company is aware by any party obligated to the Company pursuant thereto.
3.13 Interested Party Transactions. Except as set forth in Section 3.13
of the Company Disclosure Schedule, to the Company's knowledge, no officer or
director of the Company (nor any spouse or member of the immediate family of any
of such Persons, or any trust, partnership or corporation in which any of such
Persons has or has had a material interest), has or had, directly or indirectly
(a) any legal or beneficial interest in any Person that sells or furnishes to
the Company any goods or services relating to the Media Business or (b) any
legal or beneficial interest in any Contract set forth in Section 3.12 of the
Company Disclosure Schedule; provided, that passive ownership of no more than
five percent (5%) of the outstanding stock of a publicly traded corporation
shall not be deemed an "interest in any entity" for purposes of this Section
3.13.
3.14 Governmental Authorization. Section 3.14 of the Company Disclosure
Schedule accurately lists each material consent, license, permit, grant or other
authorization issued to the Company by a Governmental Entity (a) pursuant to
which the Company currently operates or holds any interest in any of the
Acquired Assets or (b) which is required for the operation of the Media Business
or the holding of any interest in the Acquired Assets (collectively,
"Authorizations"). All Authorizations are in full force and effect and
constitute all Authorizations required to permit the Company to operate or
conduct the Media Business as currently conducted or to hold any interest in the
Acquired Assets.
3.15 Litigation. Except as set forth in Section 3.15 of the Company
Disclosure Schedule, there is no action, suit, claim, proceeding or arbitration
of any nature pending or, to the knowledge of the Company, threatened against
the Media Business, any of the Acquired Assets or any of its officers, directors
or stockholders in respect of the Media Business or the Acquired Assets. There
is no investigation pending or, to the knowledge of the Company, threatened
against the Media Business, the Acquired Assets or any of its officers,
directors or stockholders in respect of the Media Business or the Acquired
Assets by or before any Governmental Entity. No Governmental Entity has
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of the products of the Media Business in the present manner or style
thereof.
3.16 Accounts Receivable. Except as set forth in Section 3.16 of the
Company Disclosure Schedule, the Company has no Accounts Receivable which relate
to the Media Business other than intercompany Accounts Receivable.
3.17 Inventories. All of the Media Inventory are reflected on the
Signing NBV Statement and will be reflected on the Preliminary Closing NBV
Statement and the Final Closing NBV Statement as of the dates indicated therein.
All such Media Inventory was purchased, acquired or produced in the ordinary
course of business, consistent with past practices, and in a manner consistent
with the Company's regular inventory practices and are set forth on the
Company's books and records in accordance with GAAP. The presentation of the
Media Inventory on the Signing NBV Statement was, and on the Preliminary Closing
NBV Statement and the Final Closing NBV Statement will be, thereon in accordance
with GAAP, consistent with the accounting principles used
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in the preparation of the Company's audited financial statements. The Media
Inventory as presented on the Signing NBV Statement is, and on the Preliminary
Closing NBV Statement and the Final Closing NBV Statement will be, stated at the
lower of cost (determined using the first-in, first-out method) or net
realizable value, and such value reflects applicable reserves and write-downs
for defective or obsolete items to the extent GAAP would so provide. The
reserves against such Media Inventory have been established in accordance with
GAAP. Except as set forth in Section 3.17 of the Company Disclosure Schedule,
the Company does not hold any items of Media Inventory on consignment or have
title to any items of Media Inventory in the possession of others, except items
of Media Inventory in shipment to the Company. All of items of such Media
Inventory are and, from the date hereof until the Closing Date will be, of a
quality and quantity that are salable in the ordinary course of business,
consistent with past practices (except for damaged, defective or obsolete
Inventory which, as of the Closing Date, will not exceed $10,000).
3.18 Minute Books. The minutes of the Company provided to counsel for
Komag contain, to the extent applicable to the Media Business or the Acquired
Assets, an accurate summary of all meetings of directors (or committees thereof)
of the Company or actions by written consent of such directors and committees
since March 1, 1998.
3.19 Brokers' and Finders' Fees. The Company has not incurred, nor will
it incur, directly or indirectly, any Liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
3.20 Employees; Employee Plans and Compensation.
(a) Schedule. Section 3.20(a) of the Company Disclosure
Schedule contains an accurate and complete list of each Employee Plan and each
material Employee Agreement. The Company does not have any plan or commitment,
whether legally binding or not, to establish any new Employee Plan or Employee
Agreement, to modify any Employee Plan or Employee Agreement (except to the
extent required by law or to conform any such Employee Plan or Employee
Agreement to the requirements of any applicable law, or to enter into any
Employee Plan or Employee Agreement, nor does it have any intention or
commitment to do any of the foregoing.
(b) Documentation. The Company has made available to Komag (i)
correct and complete copies of all documents embodying each Employee Plan and
each Employee Agreement including all amendments thereto and copies of all forms
of agreement and enrollment used therewith; (ii) the most recent annual
actuarial valuations, if any, prepared for each Employee Plan; (iii) the most
recent summary plan description, together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Employee Plan, (iv) all IRS determination letters and rulings relating to
Employee Plans and copies of all applications and correspondence to or from the
IRS or the Department of Labor ("DOL") with respect to any Employee Plan, (v)
all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any material liability to the Company; and (vi) each
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Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code that has either
received a favorable determination, opinion, notification or advisory letter
from the IRS with respect to each such Plan as to its qualified status under the
Code, including all amendments to the Code effected by the Tax Reform Act of
1986 and subsequent legislation, or has remaining a period of time under
applicable Treasury regulations or IRS pronouncements in which to apply for such
a letter and make any amendments necessary to obtain a favorable determination
as to the qualified status of each such Employee Plan.
(c) Employee Plan Compliance. Except as set forth in Section
3.20(c) of the Company Disclosure Schedule, (i) the Company has performed all
material obligations required to be performed by it under each Employee Plan and
each Employee Plan has been established and maintained in all material respects
in accordance with its terms and in compliance with all applicable laws,
statutes, orders, rules and regulations including, without limitation, ERISA and
the Code; (ii) there are no audits, inquiries or proceedings pending or, to the
knowledge of the Company or any ERISA Affiliate, threatened by the IRS or DOL
with respect to any Employee Plan and (iii) neither the Company nor any ERISA
Affiliate is subject to any penalty or tax with respect to any Employee Plan
under Section 402(i) of ERISA or Sections 4975 through 4980 of the Code.
(d) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in or contributed to, any
Pension Plan affecting any of the Employees which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.
(e) Multiemployer Plans. At no time has the Company
contributed to or been requested to contribute to any Multiemployer Plan.
(f) No Post-Employment Obligations. No Employee Plan provides,
or has any Liability to provide, life insurance, medical or other employee
benefits to any Transferred Employee upon his or her retirement or termination
of employment for any reason, except as may be required by statute, and the
Company has not represented, promised or contracted (whether in oral or written
form) to any Transferred Employee (either individually or to Transferred
Employees as a group) that such Transferred Employee(s) would be provided with
life insurance, medical or other employee welfare benefits upon their retirement
or termination of employment, except to the extent required by statute.
(g) Effect of Transaction. Except as set forth on Section
3.20(g) of the Disclosure Schedule, the execution of this Agreement and the
Collateral Documents and the consummation of the transactions contemplated
hereby and thereby will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any Employee Plan,
Employee Agreement, trust or loan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee. No payment or benefit which will or may
be made by the Company or Komag or any of their respective Affiliates with
respect to any
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Employee will be characterized as a "parachute payment," within the meaning of
Section 280G(b)(2) of the Code.
(h) Employment Matters. The Company (i) is in compliance in
all material respects with all applicable laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours, in each case, with respect to Employees; (ii) has withheld all
amounts required by law or by agreement to be withheld from the wages, salaries
and other payments to Employees; (iii) is not liable for any arrears of wages or
any Taxes or any penalty for failure to comply with any of the foregoing; and
(iv) is not liable for any payment to any trust or other fund or to any
Governmental Entity, with respect to unemployment compensation benefits, social
security or other benefits for Employees (other than routine payments to be made
in the ordinary course of business, consistent with past practices).
(i) Labor. No work stoppage or labor strike against the
Company is pending or, to the knowledge of the Company, threatened with respect
to the Media Business or involving or relating to any of the current Employees.
The Company is not involved in or threatened with any labor dispute, grievance
or litigation relating to labor, safety or discrimination matters involving any
Employee, including charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in Liability to the Company. The Company has not engaged in
any unfair labor practices within the meaning of the National Labor Relations
Act with respect to the Media Business or involving or relating to any of the
current Employees which could, individually or in the aggregate, directly or
indirectly result in a Liability to the Company. The Company is not presently,
nor has it been in the past, a party to, or bound by, any collective bargaining
agreement, contract with or commitment to any labor representatives with respect
to the Media Business or involving or relating to any of the current Employees,
and the Company has not conducted negotiations with respect to any such future
contracts or commitments; no labor representatives hold bargaining rights with
respect to any Employees; and there are no current or, to the knowledge of the
Company, threatened attempts to organize or establish any trade union or
employee association with respect to the Company involving or relating to the
Media Business or any of the current Employees. The Company has provided Komag
with all information Komag has requested with respect to the names, date of hire
or compensation of Employees.
3.21 Insurance. All of the Acquired Assets that are of an insurable
nature are insured in amounts normally insured against by Persons carrying on
the same classes of business as the Media Business, and the Company is
adequately covered against accident, damage, injury, third party public
liability, loss of profits and other risks normally insured against by Persons
carrying on the same classes of business as the Media Business. All such
policies are, and will at Closing be, in full force and effect and nothing has
been done or omitted to be done by the Company which would make any policy of
insurance void or voidable. All of such insurance policies are listed in Section
3.21 of the Company Disclosure Schedule. There is no material claim by the
Company pending under any of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company is
otherwise in material compliance with the terms of such policies and bonds (or
other policies and bonds providing substantially similar insurance coverage).
The Company has no knowledge of any threatened termination of any of such
policies.
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3.22 Environmental Matters.
(a) Underground Tanks. No underground storage tank, dump,
landfill or waste pile containing or used to dispose or store any Hazardous
Materials is present in, on or under any Media Business Facility, including the
land and the improvements, ground water and surface water thereof.
(b) Hazardous Materials Activities. Except as set forth in
Section 3.22(b) of the Company Disclosure Schedule, at no time prior to the
Closing has the Company transported (or arranged for the transport), stored,
used, manufactured, disposed of, released, leaked, emitted or entered into the
atmosphere, ground, soil, surface water, ground water or sewer system or exposed
its employees or others to Hazardous Materials in violation of any Environmental
Law. No Pre-Closing Hazardous Materials Activities have been conducted in
violation of any Environmental Laws.
(c) Permits. The Company currently holds all environmental
approvals, permits, licenses, clearances and consents (the "Environmental
Permits") necessary for the conduct of its Hazardous Material Activities as such
activities are currently being conducted. All such Environmental Permits are
listed in Section 3.22(c) of the Company Disclosure Schedule.
(d) Environmental Liabilities. Except as set forth in Section
3.22(d) of the Company Disclosure Schedule, the Company is not in material
violation of any Environmental Laws applicable to the Media Business, and
neither the Company nor any of its Employees has engaged in any conduct that has
given or will give rise to any Environmental Claims, losses or Liabilities under
any such laws for which Komag may be held responsible. Except as set forth in
Section 3.22(d) of the Company Disclosure Schedule, the Company has not received
any written or oral communication from any Governmental Entity or any other
Person alleging that the Company is not currently in compliance in any material
respect with, or has a Liability under (including being a potentially
responsible party or allegedly liable for costs associated for remediation of
any site), any such laws in connection with the Media Business. Except as set
forth in Section 3.22(d) of the Company Disclosure Schedule, no action,
proceeding, revocation proceeding, amendment procedure, writ, injunction or
claim is pending, or, to the knowledge of the Company, threatened concerning any
Environmental Permit, Hazardous Material or any Pre-Closing Hazardous Materials
Activity of the Company. Except as set forth in Section 3.22(d) of the Company
Disclosure Schedule, the Company is not aware of any fact or circumstance which
could involve the Company in any environmental litigation or impose upon the
Company any material environmental Liability.
(e) Offsite Hazardous Material Disposal. The Company has
transferred or released (or arranged for the transfer or release of) Hazardous
Materials only to those treatment, storage, transfer or disposal sites described
in Section 3.22(e) of the Company Disclosure Schedule ("Disposal Sites") and no
action, proceeding, liability or claim exists or, to the knowledge of the
Company, is threatened against any such listed disposal site or against or
involving the Company with respect to any transfer or release of Hazardous
Materials to such Disposal Sites.
(f) Environmental Reporting. The Company has not, with respect
to any Media Business Facility or Acquired Assets, filed and does not intend to
file any notice or report under any
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Environmental Laws reporting a violation of any Environmental Laws or any
Release of Hazardous Materials to the environment.
(g) Asbestos Containing Material. Any asbestos-containing
material which is known to the Company to be on or part of any Leased Real
Property is in good repair according to the current standards and practices
governing such material, and its presence or condition does not violate any
applicable Environmental Laws.
(h) Environmental Records. The Company has delivered to Komag
or made available for inspections by Komag all records pertaining to the
Pre-Closing Hazardous Materials Activities associated with the Acquired Assets,
the Media Business or any Media Business Facility and all draft or final
non-privileged environmental audits and environmental assessments relating to
the Media Business or of any Media Business Facility conducted at the request
of, or otherwise in the possession or control of the Company.
3.23 Compliance with Laws. The Company and its officers and employees
have complied in all material respects with, are not in violation in any
material respect of, and have not received any notices of violation with respect
to, any foreign, federal, state, province or local statute, law or regulation
with respect to the conduct of the Media Business or the ownership or operation
of the Acquired Assets.
3.24 Complete Copies of Materials. The Company has delivered to Komag
true and complete copies of each agreement, contract, commitment or other
document referred to in the Company Disclosure Schedule and that has been
requested by Komag or its counsel.
3.25 Suppliers. Section 3.25 of the Company Disclosure Schedule sets
forth a true and complete list of the names and addresses of the ten (10)
suppliers which each account for the largest net sales to the Company relating
to the Media Business. There exists no actual termination or cancellation of the
business relationship of the Company with any supplier or group of suppliers
listed in Section 3.25 of the Company Disclosure Schedule.
3.26 No Insolvency. The Company will not be rendered insolvent by the
sale, transfer and assignment of the Acquired Assets pursuant to the terms of
this Agreement.
3.27 Private Placement. The Company is acquiring the Sale Shares for
investment for its own account, not as a nominee or agent, and not with the view
to, or for resale in connection with, any distribution thereof. The Company
acknowledges that the Sale Shares to be received are characterized as
"Restricted Securities" and must be held indefinitely unless subsequently
registered under the Securities Act or an exemption from such registration is
available. The Company is aware of the provisions of Rule 144 promulgated under
the Securities Act. Representatives of the Company have had the opportunity to
ask questions of and receive answers from Komag or a Person acting on the
Company's behalf concerning the terms and conditions of this transaction as well
as to obtain any information requested by such representatives. The Company is
an "Accredited Investor" as that term is defined in Rule 501 of Regulation D,
promulgated by the SEC under the Securities Act.
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3.28 Registration Statement Information. The information supplied by
the Company for inclusion in the registration statement contemplated by the
Registration Rights Agreement, does not contain, and will not contain at the
effective date of such registration statement, any untrue statement of material
fact or omit, and will not omit at the effective date of such registration
statement, to state any material fact necessary in order to make the statements
therein not misleading.
3.29 Representations Complete. To the knowledge of the Company, none of
the representations or warranties made in this Article III (as modified by the
Company Disclosure Schedule), nor any statement made in any Collateral Document
or any Section of the Company Disclosure Schedule furnished by or on behalf of
the Company heretofore pursuant to this Agreement contains any untrue statement
of a material fact, or omits to state a material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading. To the knowledge of the Company, there is no
event, fact or condition that materially and adversely affects the Media
Business or the Acquired Assets that has not been set forth in this Agreement or
in the Company Disclosure Schedule.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF KOMAG
Komag represents and warrants to the Company as of the date hereof, and
as of the Closing Date, except as specifically set forth in the disclosure
schedule accompanying this Agreement (referring to the appropriate section
numbers) (the "Komag Disclosure Schedule") as follows:
4.1 Organization. Komag is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Komag has
the corporate power and authority to own its properties and to carry on its
business as now being conducted and as contemplated to be conducted. Komag is
duly qualified to do business and in good standing as a foreign corporation
under the laws of each jurisdiction in which the failure to be so qualified
could have a material adverse effect on Komag. Komag has delivered to the
Company or its counsel true and correct copies of its Certificate of
Incorporation and Bylaws, which have not been amended since July 22, 1998.
4.2 Capital Structure of Komag.
(a) The authorized capital of Komag consists of 150,000,000
shares of Common Stock, of which 53,920,660 shares are issued and outstanding as
of the date hereof, and 1,000,000 shares of Preferred Stock, none of which
shares are issued and outstanding as of the date hereof. All of the issued and
outstanding capital stock of Komag have been duly authorized and validly issued
and are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right or other rights to subscribe for or purchase
shares created by statute, the Certificate of Incorporation or Bylaws of Komag
or any agreement to which Komag is a party or by which it is bound. Komag has
reserved 18,140,000 shares of Common Stock for issuance to employees and
consultants pursuant to the 1987 Incentive Stock Option Plan, of which 5,754,874
shares are subject
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to outstanding, unexercised options; Komag has reserved 6,100,000 shares of
Common Stock for issuance to employees and consultants pursuant to the 1997
Supplemental Stock Option Plan, of which 5,102,340 shares are subject to
outstanding, unexercised options; and Komag has reserved 7,400,000 shares of
Common Stock for issuance to employees and consultants pursuant to the 1988
Employee Stock Purchase Plan, of which 3,284,927 shares remain available for
sale. Except for the options described in this Section 4.2(a) or as set forth on
Section 4.2(a) of the Komag Disclosure Schedule, there are no options, warrants,
calls, rights, commitments or agreements of any character, written or oral, to
which Komag is a party or by which it is bound obligating Komag to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of Komag or to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement.
(b) The Sale Shares to be issued pursuant to the Acquisition
will be, at the Closing Date, duly authorized, validly issued, fully paid,
nonassessable, and not subject to any call, preemptive or similar rights.
4.3 Authority. Komag has all requisite corporate power and authority to
enter into this Agreement and each of the Collateral Documents to which it is a
party, and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and each of the Collateral Documents to
which it is a party by Komag and the consummation of the transactions
contemplated hereby and thereby by Komag have been duly authorized by all
necessary corporate action on the part of Komag. This Agreement has been, and
each of the Collateral Documents to which it is a party will be at the Closing,
duly executed and delivered by Komag and, assuming the due authorization,
execution and delivery by the other parties hereto and thereto, upon execution,
will constitute valid and binding obligations of Komag, enforceable in
accordance with their respective terms, subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and to
rules of law governing specific performance, injunctive relief or other
equitable remedies.
4.4 No Conflict. The execution and delivery of this Agreement and each
of the Collateral Documents to which it is a party by Komag does not, and, the
consummation of the transactions contemplated hereby and thereby by Komag will
not, Conflict with (a) any provision of the Certificate of Incorporation or
Bylaws of Komag, (b)(i) any material mortgage, indenture, lease, contract or
other agreement or instrument, permit, concession, franchise or license to which
Komag is subject or by which it is bound (other than any mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession, franchise
or license to which Komag is subject or by which it is bound set forth on
Section 4.4(b)(ii) of the Komag Disclosure Schedule) or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which Komag is subject or by which it is
bound set forth on Section 4.4(b)(ii) of the Komag Disclosure Schedule or (c)
any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Komag or its properties or assets, assuming, in each case,
compliance with (x) any applicable requirements under the HSR Act, (y) any
applicable requirements under the
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Exchange Act and (z) such other matters set forth in Section 4.4(z) of the Komag
Disclosure Schedule.
4.5 Consents. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any Governmental Entity or any
other Person, including a party to any agreement with Komag (so as not to
trigger any Conflict), is required by or with respect to Komag in connection
with the execution and delivery of this Agreement or any of the Collateral
Documents to which it is a party or the consummation of the transactions
contemplated hereby or thereby, except for such consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings (a) as may be
required under the HSR Act, (b) as may be required under applicable federal and
state securities laws, (c) as may be set forth in Section 4.5 of the Komag
Disclosure Schedule or (d) which if not obtained or made, would not materially
impair the ability of Komag to consummate the transactions contemplated by this
Agreement or the Collateral Documents.
4.6 SEC Documents, Komag Financial Statements. Komag has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the SEC under the Exchange Act, for all
periods subsequent to December 28, 1997, all in the form so filed (all of the
foregoing being collectively referred to as the "Komag SEC Documents"). As of
their respective filing dates, the Komag SEC Documents complied in all material
respects with the requirements of the Exchange Act, and none of the Komag SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed Komag SEC Document. The financial statements
of Komag, including the notes thereto, included in the Komag SEC Documents (the
"Komag Financial Statements"), comply as to form in all material respects with
applicable accounting requirements of the Exchange Act, and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP (except as may be indicated in the notes thereto), and
present fairly in all material respects the financial position, the results of
operation and, where applicable, the cash flows and changes in financial
position of Komag as of the dates and during the periods indicated therein
(subject, in the case of unaudited statements, to normal audit adjustments).
4.7 No Material Adverse Change. Since September 27, 1998, Komag has
conducted its business in the ordinary course and, other than as disclosed in
the Komag SEC Documents filed with the SEC, there has not occurred (a) any
material adverse change in the business, financial condition or results of
operation of Komag or (b) any damage to or destruction or loss of any assets of
Komag (whether or not covered by insurance) that materially and adversely
affects the financial condition or business of Komag.
4.8 Litigation. Except as set forth in Section 4.8 of the Komag
Disclosure Schedule, there is no action, suit, claim, proceeding or arbitration
of any nature pending or, to the knowledge of Komag, threatened against Komag or
any of its properties or any of its officers, directors or stockholders in
respect of Komag. There is no investigation pending or, to the knowledge of
Komag, threatened against Komag or any of its assets or properties or any of its
officers, directors or stockholders in respect of Komag by or before any
Governmental Entity. No Governmental Entity
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has challenged or questioned the legal right of Komag to manufacture, offer or
sell any of its products in the present manner or style thereof.
4.9 Brokers' Fees. Komag has not incurred, nor will it incur, directly
or indirectly, any Liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
ARTICLE V
CONDUCT PRIOR TO THE CLOSING
5.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of (i) the termination of
this Agreement and (ii) the Closing, the Company agrees (except to the extent
that Komag shall otherwise consent in writing) to carry on the Media Business in
the normal and ordinary course, to pay the debts related thereto including
Accounts Payable and similar obligations in the normal and ordinary course,
consistent with past practice, to use all commercially reasonable efforts to
preserve intact the Media Business organization, to keep available the services
of the present Employees (except Non-Offered Employees) and to preserve its
relationships with suppliers and others having business dealings with it, all
with the goal of preserving unimpaired the Acquired Assets and the Media
Business at the Closing, together with the goodwill associated therewith. The
Company shall promptly notify Komag of any event or occurrence or emergency not
in the ordinary course of business and any material event involving the Acquired
Assets or the Media Business. Except as expressly contemplated by this Agreement
or disclosed in Section 5.1 of the Company Disclosure Schedule, the Company
shall not, without the prior written consent of Komag (which consent shall not
be unreasonably withheld):
(a) Waive or release any material right or claim arising from
or related to the Media Business or the Acquired Assets;
(b) Enter into any commitment or transaction involving,
relating to or affecting the Acquired Assets or the Media Business not in the
ordinary course of business;
(c) Make any expenditures or commitments for expenditures for
the acquisition of Inventory or other assets in excess of $500,000 per
transaction to the extent that such expenditures or commitments for expenditures
involves, relates to or affects the Acquired Assets or Media Business;
(d) Transfer to any Person any rights to the Media
Intellectual Property which are to be included within the Acquired Assets or to
be licensed to Komag pursuant to the License Agreement; provided that the
Company may license any Media Intellectual Property to be licensed to Komag
pursuant to the License Agreement to the extent that so doing would not
materially adversely affect Komag or the operation of the Acquired Assets or the
Media Business following the Closing;
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(e) Enter into or amend any agreements pursuant to which any
other Person is granted marketing, distribution or similar rights of any type or
scope with respect to any products of the Company produced in connection with
the Media Business;
(f) Amend or otherwise modify in any material respect (or
agree to do so), or violate the terms of, any of the agreements, contracts,
licenses, permits, leases or Environmental Permits set forth or described in the
Company Disclosure Schedule;
(g) Commence or settle any litigation that could reasonably be
expected to adversely affect the Acquired Assets or Media Business;
(h) Acquire or agree to acquire by merging or consolidating
with, or by purchasing any assets or equity securities of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof that includes assets that would
constitute Acquired Assets under this Agreement, or otherwise acquire or agree
to acquire any assets that would constitute Acquired Assets under this
Agreement, other than in the ordinary course of business;
(i) Sell, lease, license, grant any Lien on or otherwise
dispose of or encumber any of the Acquired Assets, except for intercompany sale
of Media Inventory in the ordinary course of business;
(j) Adopt or amend any employee benefit plan, or enter into
any employment contract or extend employment offers (in each case only to the
extent affecting Employees), pay or agree to pay any special bonus or special
remuneration to any Employee, or increase the salaries or wage rates of the
Employees, except, in each case, in the ordinary course of business, consistent
with past practices or to the extent required by law or to conform any Employee
Benefit Plan or Employee Agreement to the requirements of applicable law;
(k) Revalue any of the Acquired Assets, except as expressly
required by the Agreement;
(l) To the extent it may affect the Acquired Assets, the Media
Business or the Liability of Komag for Taxes under the terms of this Agreement,
make or change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, enter into any closing agreement, settle
any claim or assessment in respect of Taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in respect
of Taxes;
(m) Enter into any strategic alliance, development or joint
marketing agreement involving, relating to or affecting the Acquired Assets or
the Media Business;
(n) Fail to comply in all material respects with any laws,
rules or regulations applicable to the Acquired Assets or the Media Business; or
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(o) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 5.1(a) through (n) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder or under the Collateral Documents.
5.2 Review of Capital Budget/Spending Plan. The Company has provided to
Komag and its representatives for their review all current capital budgets and
spending plans relating to the Media Business. As reasonably practicable
following the date hereof, the Company shall provide to Komag and its
representatives for their review all updates or amendments to its current
capital budgets and spending plans relating to the Media Business.
5.3 No Solicitation. Until the earlier of (i) the Closing and (ii) the
date of termination of this Agreement pursuant to the provisions of Section 9.1
hereof, the Company will not (nor will the Company permit any of the Company's
officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with any party other than Komag
and its designees: (a) solicit, encourage, conduct discussions with or engage in
negotiations with any Person, other than Komag, relating to the possible
acquisition of all or any part of the Media Business (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise), (b) provide
information with respect to it to any Person, other than Komag, relating to
possible acquisition of all or any part of the Media Business (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise), (c) enter
into an agreement with any Person, other than Komag, providing for the possible
sale of all or any part of the Media Business (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible sale of all or any part of the Media Business (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) to any
Person, other than by Komag.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Access to Information.
(a) Subject to any applicable contractual confidentiality
obligations (which the Company shall use all commercially reasonable efforts to
cause to be waived), the Company shall afford Komag and its accountants, counsel
and other representatives, reasonable access during normal business hours during
the period prior to the Closing to (a) all of its properties, employees, books,
contracts, agreements and records relating to the Media Business or the Acquired
Assets and (b) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law) of it as Komag may
reasonably request for the purpose of conducting a due diligence review of the
Media Business and the Acquired Assets. No information or knowledge obtained in
any investigation pursuant to this Section 6.1(a) shall affect or be deemed to
modify any representation or warranty contained herein.
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(b) Subject to any applicable contractual confidentiality
obligations (which Komag shall use all commercially reasonable efforts to cause
to be waived), Komag shall afford the Company and its accountants, counsel and
other representatives, reasonable access during normal business hours during the
period prior to the Closing to all information concerning the business,
properties and personnel (subject to restrictions imposed by applicable law) of
it as the Company may reasonably request for the purpose of evaluating an
investment in Komag Common Stock. No information or knowledge obtained in any
investigation pursuant to this Section 6.1(b) shall affect or be deemed to
modify any representation or warranty contained herein.
(c) Subject to any required consents or approvals, Komag and
its agents, representatives or consultants shall be permitted reasonable access,
during normal business hours and without material interference to the Media
Business, to all Leased Real Property prior to the Closing Date for the purpose
of performing such investigations of the condition of the Leased Real Property
as Komag shall deem necessary, including, but not limited to, investigation of
the condition of the subsurface soils and groundwater.
6.2 Confidentiality. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of the Confidentiality and Nondisclosure
Agreement between Komag and the Company dated as of April 6, 1999.
6.3 Public Disclosure. Unless otherwise required by law (including,
without limitation, securities laws) or by the rules and regulations of the New
York Stock Exchange, Inc. or the NASDAQ Stock Market or other securities
exchange, prior to the Closing, no disclosure (whether or not in response to an
inquiry) of the subject matter of this Agreement shall be made by any Party
hereto unless approved by Komag and the Company prior to release; provided that
such approval shall not be unreasonably withheld. In the event any such
disclosure is required by law or by the rules and regulations of such exchange
or market, the disclosing Party shall afford the other Party a reasonable prior
opportunity to review the comment on such disclosure.
6.4 HSR Approval. The Parties hereto have filed with the United States
Federal Trade Commission and the United States Department of Justice the
pre-merger notifications and reports required to be filed pursuant to the HSR
Act. The Parties hereto shall provide any supplemental information that may be
requested in connection therewith and shall request early termination of the
waiting period. All such notifications, reports and supplemental information, if
any, at the time so filed or provided, shall comply, in all material respects,
with the requirements of the HSR Act. Each Party shall provide such assistance
to the other as it may reasonably request to assist the other in making such
filings. The Company and Komag shall each bear fifty percent (50%) of the filing
fees required by the HSR Act.
6.5 Consents. The Company shall use all commercially reasonable efforts
to obtain the consents, waivers and approvals under any of the Contracts set
forth in Sections 3.4, 3.5, 3.10(b), 3.10(c), 3.11(a)(ii), 3.12(a) and 3.14 of
the Company Disclosure Schedule as may be required in connection with the
Acquisition so as to assign to Komag all rights of the Company to the Acquired
Assets and the Media Business including, without limitation, the consents,
waivers and approvals of
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all equipment lessors to allow Komag to move all manufacturing equipment
included within the Acquired Assets to Malaysia on terms and conditions
acceptable to the Company and Komag. Komag shall use all commercially reasonable
efforts to obtain the consents and approvals under any contracts set forth in
Sections 4.4 and 4.5 of the Komag Disclosure Schedule. Each Party agrees to pay
all fees and costs necessary to obtain the consents, waivers and approvals
required to be obtained by it; provided that, all fees and costs necessary to
obtain any consents, waivers and approvals of any of the equipment lessors or
landlords pursuant to any equipment leases or real property leases identified on
the Company Disclosure Schedules shall be paid by the Company; provided,
further, however, that if the fees and costs necessary to obtain a particular
consent, waiver or approval of any such equipment lessor or landlord exceeds
$1,500 the parties shall allocate the fees and costs with respect to such
consent, waiver or approval, after good faith negotiations, in a manner mutually
agreeable to the parties. Notwithstanding anything contained herein to the
contrary, if any of the equipment lessors require Komag to issue letter(s) of
credit on behalf of such equipment lessor(s) in connection with any of the
equipment leases identified on the Company Disclosure Schedules, Komag shall use
commercially reasonable efforts to obtain such letter(s) of credit; provided
that, if Komag is unable to obtain the letter(s) of credit in the full amount
required by such equipment lessor(s), the Company shall obtain one or more
letter(s) of credit on behalf of such equipment lessor(s) in the amount of any
such shortfall up to a maximum aggregate amount of the lesser of (i) twenty
percent (20%) of the value of the letter(s) of credit requested by such
equipment lessor(s) and (ii) $5,000,000.
6.6 Commercially Reasonable Efforts; Access to Warehouse. Subject to
the terms and conditions provided in this Agreement, each of the Parties hereto
shall use all commercially reasonable efforts to take promptly, or cause to be
taken, all actions, and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings and to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to the
Parties hereto the benefits contemplated by this Agreement; provided that Komag
shall not be required to agree to any divestiture by Komag or any of Komag's
subsidiaries or Affiliates of shares of capital stock or of any business, assets
or property of Komag or its subsidiaries or Affiliates including, without
limitation, the Media Business or any of the Acquired Assets, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and capital
stock. For a period of thirty (30) days following the Closing Date, the Company
shall provide Komag and its employees and agents with reasonable access, during
normal business hours and with prior notice, from time to time, to enter into
the Five Star Warehouse and the TWI Warehouse in order to determine which
equipment and other items it wishes to include within the Acquired Assets and to
remove from the warehouses such equipment and other items so designated.
6.7 Notification of Certain Matters. The Company shall give prompt
notice to Komag, and Komag shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of
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the Company and Komag, respectively, contained in this Agreement to be
materially untrue or inaccurate at or prior to the Closing except as
contemplated by this Agreement (including the Company Disclosure Schedule) and
(ii) any failure of the Company or Komag, as the case may be, to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 6.7 shall not limit or otherwise affect
any remedies available to the party receiving such notice.
6.8 Employee Matters.
(a) Selection of Employees. Komag has made, and is prepared to
make further, written offers of employment to those Employees at the Company's
Santa Clara, California and San Jose, California facilities as Komag deems
necessary, in its sole discretion, to operate the Media Business efficiently
after the Closing and to meet the Company's volume requirements set forth in the
Volume Purchase Agreement (conditional upon the closing of the Acquisition);
provided, that Komag shall not be obligated to employ, and shall have no
Liability with respect to the continued employment of, any of the Employees. The
Company hereby waives, releases and discharges all Employees who shall accept
employment from Komag ("Transferred Employees") from any and all noncompetition,
confidentiality or employment restrictions, obligations or agreements entered
into by such Transferred Employees with the Company to the extent that such
Transferred Employees are performing services related to the Media Business for
Komag or any of its Affiliates. The Company agrees that any disclosure of
confidential information relating to the Media Business by a Transferred
Employee to Komag or any of its Affiliates shall not constitute a breach of any
confidentiality agreement between such Transferred Employee and the Company.
(b) Employee Plans. Komag shall use all commercially
reasonable efforts to (i) provide all Transferred Employees with employee health
benefits substantially similar in the aggregate in coverage and benefits as to
those provided as of the date hereof by the Company, (ii) waive any pre-existing
condition requirements or waiting period requirements under such Person's
Employee Plans to the extent permitted by the insurance carrier, (iii) credit
previous service by the Transferred Employees with the Company under such
Person's comparable employee benefit plans, including but not limited to a
401(k) savings plan, for purposes of eligibility to participate, early
commencement of benefits and vesting and (iv) apply toward any deductible
requirement or "out-of-pocket" maximum limit under any such Person's employee
benefit plans any amounts paid (or accrued) by each Transferred Employee under
any Employee Plan, to the extent that the plan years of the relevant plan
overlap.
(c) 401(k) Plan Rollovers. The Company and Komag agree to use
their best efforts to enable individual rollovers of Transferred Employees'
account balances in the Company's 401(k) Plan to Komag's 401(k) Plan, which
balances may include plan loans. In furtherance and not in limitation of the
foregoing, provided that Transferred Employees have completed the Company's
401(k) termination distribution request form, the Company shall complete Komag's
standard rollover form for each Transferred Employee electing to rollover his or
her account balance into Komag's 401(k) Plan in a timely manner. In addition,
the Company will provide Komag with a
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discussion of facts in support of the Company's view that the sale of the Media
Business by the Company to Komag is the sale of "substantially all of the
assets" used in a "trade or business" within the meaning of section 401(k)(10)
of the Code.
(d) WARN Act. The Company has sent out a notification pursuant
to the Workers Adjustment and Retraining Notification Act of 1988, as amended
("WARN Act"), to all Employees who are not Offered Employees ("Non-Offered
Employees") to commence the sixty (60) day notification period required under
the WARN Act. All Liabilities relating to the employment, termination or
employee benefits of Employees including, without limitation, all termination
obligations in connection with the WARN Act shall be the responsibility of the
Company; provided that Komag shall be responsible for all such termination
obligations under the WARN Act with respect to (i) Employees who were designated
as Offered Employees by Komag but whose offers of employment were revoked by
Komag prior to the Closing and (ii) Offered Employees who are hired by Komag
following the Closing to the extent such obligations under the WARN Act arise
from actions of Komag following the Closing; provided, further, however, that
Komag shall not be responsible for termination obligations under the WARN Act
with respect to Offered Employees who do not accept offers of employment from
Komag. In addition, the Company shall give advance notice to all Non-Offered
Employees under any state statute analogous to the WARN Act.
(e) COBRA. The Company shall be solely responsible for
providing continuation health coverage, to the extent required under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), to
all Offered and Non-Offered Employees and their eligible dependents who have
experienced a qualifying event before or on the Closing Date and who (i) elect
continuation coverage within the time period prescribed by COBRA and (ii) who
are otherwise qualified beneficiaries (as defined in Section 4980B(g)(1) of the
Code), and the Company shall indemnify Komag for any and all loss, cost or
expense relating to any and all outstanding obligations, Liabilities and claims
arising under COBRA.
(f) Nonsolicitation of Employees. Notwithstanding anything
else contained herein to the contrary, (a) unless this Agreement is terminated
prior to the Closing for any reason, the Company shall not solicit the continued
employment of any of the Transferred Employees for a period of twelve (12)
months following the date Komag designated such Employees as Offered Employees
and (b) in the event that this Agreement is terminated prior to Closing for any
reason, Komag shall not continue to solicit the employment of any of the Offered
Employees for a period of twelve (12) months following the date of the
termination of the Agreement; provided that, the foregoing restrictions shall
not prohibit any of the parties from making general solicitations of employment
not specifically directed to the Employees.
(g) No Third Party Beneficiary Rights. Notwithstanding
anything contained herein to the contrary, no provision in this Section 6.8
shall create any third party beneficiary or other rights to any Employee
(including any beneficiary or dependent thereof) in respect of continued
employment (or resumed employment) with the Company, Komag or any of their
Affiliates, and no provision in this Section 6.8 shall create any rights in any
such Person in respect of any benefits that may be provided, directly or
indirectly, under any Employee Plan or arrangement
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established by Komag or its Affiliates. No provision of this Agreement shall
constitute a limitation on the rights of Komag or its Affiliates to amend,
modify or terminate after the Closing Date any such plans or arrangements.
6.9 NMS Listing. Komag shall authorize for listing on the Nasdaq
National Market the Sale Shares issuable in connection with the Acquisition,
upon official notice of issuance.
ARTICLE VII
CONDITIONS TO OBLIGATION TO CLOSE
7.1 Conditions to Obligations of each of the Parties. The respective
obligations of each Party to this Agreement to consummate the Acquisition shall
be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) HSR Approval. The waiting period applicable to the
consummation of the Acquisition under the HSR Act shall have been terminated or
shall have expired without the threat of litigation by a Governmental Entity.
(b) No Injunctions or Restrains on the Conduct of the
Business. No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal or
regulatory restraint or provision challenging the Acquisition shall be in effect
nor shall any proceeding brought by a Governmental Entity seeking the foregoing
be pending.
7.2 Additional Conditions to Obligation of Komag. The obligation of
Komag to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions, any of which
may be waived in writing exclusively by Komag:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement. In addition,
the representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the Closing
Date, except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct in all material
respects as of such particular date), with the same force and effect as if made
on and as of the Closing Date, except in such cases (other than Sections 3.1
through 3.3 and 3.27 through 3.29) where the failure to be so true and correct
would not, in the aggregate, have a material adverse effect on the Media
Business or the value of the Acquired Assets. Komag shall have received a
certificate with respect to the foregoing signed on behalf of the Company by the
Vice President, Business Operations and the Chief Financial Officer of the
Company.
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(b) Agreements and Covenants. The Company shall have performed
and complied in all material respects with all agreements and covenants required
by this Agreement to be performed and complied with by it on or prior to the
Closing Date, and Komag shall have received a certificate to such effect signed
on behalf of the Company by the Vice President, Business Operations and the
Chief Financial Officer of the Company.
(c) Consents and Approvals of the Company. The Company shall
have furnished evidence to Komag satisfactory, in its reasonable discretion,
that all of the third party consents, approvals and waivers referenced in
Section 6.5 have been obtained including, without limitation, (i)
acknowledgements and waivers from the landlords under each of the real property
leases to be assigned to Komag stating that, among other things, there is no
default (and the Acquisition has not caused a default) under such real property
lease, (ii) the consents of all equipment lessors of the Leased Fixed Assets to
allow Komag to move all manufacturing equipment included within the Acquired
Assets to Malaysia on terms and conditions acceptable to Komag and the Company
and (iii) the consent of Bank of Boston under the Company's senior credit
facility and the removal of all Liens granted to the Bank of Boston with respect
to any of the Acquired Assets.
(d) Consents and Approvals of Komag. Komag shall have received
the written consents, approvals and/or waivers of each of those Persons set
forth in Sections 4.4 and 4.5 of the Komag Disclosure Schedule.
(e) No Litigation. No action, suit, or proceeding shall be
pending or threatened before any Governmental Entity wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A) prevent
consummation of any of the transactions contemplated by this Agreement or the
Collateral Documents, (B) cause any of the transactions contemplated by this
Agreement or the Collateral Documents to be rescinded following consummation of
the Acquisition, or (C) materially affect in an adverse manner the right of
Komag to own the Acquired Assets, and to operate the Media Business (and no such
injunction, judgment, order, decree, ruling, or charge shall be in effect).
(f) No Material Adverse Effect. Since the date of this
Agreement, there shall not have occurred any material adverse effect on the
Media Business, any of the Acquired Assets or the financial condition, results
of operation or business of the Company.
(g) Assignment and Assumption Agreement. The Company shall
have entered into an Assignment and Assumption Agreement, in the form set forth
in Exhibit E attached hereto (the "Assignment and Assumption Agreement").
(h) Bill of Sale. The Company shall have executed a Bill of
Sale, in the form set forth in Exhibit F attached hereto ("Bill of Sale").
(i) Volume Purchase Agreement. The Company shall have entered
into a Volume Purchase Agreement with Komag and/or Komag USA (Malaysia) Sdn., in
the form set forth in Exhibit G attached hereto (the "Volume Purchase
Agreement").
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(j) Joint Development Agreement. The Company shall have
entered into a Joint Development Agreement with Komag in the form set forth in
Exhibit H attached hereto (the "Joint Development Agreement").
(k) License Agreement. The Company shall have entered into a
License Agreement with Komag and/or Komag USA (Malaysia) Sdn. in the form set
forth in Exhibit I attached hereto (the "License Agreement").
(l) Registration Rights Agreement. The Company shall have
entered into a Registration Rights Agreement with Komag, in the form set forth
in Exhibit J attached hereto (the "Registration Rights Agreement").
(m) Transitional Services Agreement. The Company shall have
entered into a Transitional Services Agreement with Komag, in the form set forth
in Exhibit K attached hereto (the "Transitional Services Agreement").
(n) Preliminary Closing NBV Statement. The Company shall have
delivered to Komag the Preliminary Closing NBV Statement.
(o) Legal Opinion of Company's Counsel. Komag shall have
received from counsel to the Company and the general counsel of the Company
opinions, in the form set forth in Exhibit L attached hereto, addressed to
Komag, and dated as of the Closing Date.
(p) Environmental Audit. Komag shall have obtained,
investigated and approved, in its sole discretion, no later than five (5) days
prior to the Closing Date, a report of any consultant selected by Komag
regarding the Pre-Closing Hazardous Materials Activities; the exposure of the
Company's employees or customers to Hazardous Materials arising out of the
operation of the Media Business prior to the Closing Date; the presence or
absence of Hazardous Materials on any real property as a result of the operation
of the Media Business; or the likelihood that Hazardous Materials will migrate
onto any Leased Real Property.
7.3 Additional Conditions to Obligation of the Company. The obligation
of the Company to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions, any of which may be waived in writing exclusively by the Company:
(a) Representations and Warranties. The representations and
warranties of Komag contained in this Agreement shall have been true and correct
in all material respects as of the date of this Agreement. In addition, the
representations and warranties of Komag contained in this Agreement shall be
true and correct in all material respects on and as of the Closing Date, except
for those representations and warranties which address matters only as of a
particular date (which shall remain true and correct in all material respects as
of such particular date), with the same force and effect as if made on and as of
the Closing Date, except in such cases (other than Sections 4.2 and 4.3) where
the failure to be so true and correct would not, in the aggregate, have a
material adverse effect on the financial condition, results of operation or
business of Komag. The Company shall have
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received a certificate with respect to the foregoing signed on behalf of Komag
by its President and Chief Financial Officer.
(b) Agreements and Covenants. Komag shall have performed and
complied in all material respects with all agreements and covenants required by
this Agreement to be performed and complied with by it on or prior to the
Closing Date, and the Company shall have received a certificate to such effect
signed on behalf of Komag by its President and Chief Financial Officer.
(c) Consents and Approvals of the Company. The Company shall
have obtained the following consents, approvals and waivers: (i)
acknowledgements and waivers from the landlords under each of the real property
leases to be assigned to Komag stating that, among other things, there is no
default (and the Acquisition has not caused a default) under such real property
lease, (ii) the consents of all equipment lessors of the Leased Fixed Assets to
allow Komag to move all manufacturing equipment included within the Acquired
Assets to Malaysia on terms and conditions acceptable to Komag and the Company
and (iii) the consent of Bank of Boston under the Company's senior credit
facility.
(d) No Litigation. No action, suit, or proceeding shall be
pending before any Governmental Entity wherein an unfavorable injunction,
judgment, order, decree, ruling or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement or the Collateral Documents
or (B) cause any of the transactions contemplated by this Agreement or the
Collateral Documents to be rescinded following consummation of the Acquisition
(and no such injunction, judgment, order, decree, ruling, or charge shall be in
effect).
(e) Assignment and Assumption Agreement. Komag shall have
entered into the Assignment and Assumption Agreement.
(f) Volume Purchase Agreement. Komag shall have entered into
the Volume Purchase Agreement.
(g) Joint Development Agreement. Komag shall have entered into
the Joint Development Agreement.
(h) License Agreement. Komag shall have entered into the
License Agreement.
(i) Registration Rights Agreement. Komag shall have entered
into the Registration Rights Agreement.
(j) Transitional Services Agreement. Komag shall have entered
into the Transitional Services Agreement.
(k) No Material Adverse Effect. There shall not have occurred
any material adverse change in the business, results of operation or financial
condition of Komag since the date hereof; provided that, a reduction in the
trading price of Komag Common Stock, whether occurring
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at any time or from time to time, as reported by the Nasdaq National Market
shall not constitute a material adverse change.
(l) Promissory Note. Komag shall have delivered to the Company
the Promissory Note.
(m) Legal Opinion of Komag's Counsel. The Company shall have
received from counsel to Komag an opinion, in form set forth in Exhibit M
attached hereto, addressed to the Company, and dated as of the Closing Date.
(n) Value of Sale Shares. The Share Amount Cap shall not have
been applied to determine the Share Amount.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW; INDEMNITY
8.1 Survival of Representations and Warranties. Except as set forth in
Section 8.5 hereof, all of the representations and warranties in this Agreement
or in any certificate delivered pursuant to this Agreement shall survive the
Acquisition and continue for a period ending on the [***] anniversary of the
Closing.
8.2 Agreement to Indemnify.
(a) The Company agrees to indemnify and hold Komag and each of
its Affiliates, officers, directors, employees and shareholders (collectively,
the "Komag Indemnitees") harmless against any and all losses, claims, damages,
costs, expenses or other liabilities (including reasonable attorneys' fees and
expenses and expenses of investigation and defense) (collectively, "Damages")
resulting from (i) any breach of or inaccuracy in any representations and
warranties of the Company set forth in this Agreement, the Company Disclosure
Schedule or in any other certificate delivered by or on behalf of the Company
pursuant to this Agreement, (ii) any breach or default by the Company of any
covenant, obligation or other agreement of the Company set forth in this
Agreement, the Company Disclosure Schedule or any other certificate delivered by
or on behalf of the Company pursuant to this Agreement and (iii) any of the
Retained Liabilities (each, a "Komag Indemnifiable Claim").
(b) Komag agrees to indemnify and hold the Company and each of
its Affiliates, officers, directors, employees and shareholders (collectively,
the "Company Indemnitees") harmless against any and all Damages resulting from
(i) any breach of or inaccuracy in any representations and warranties of Komag
set forth in this Agreement, the Komag Disclosure Schedule or in any other
certificate delivered by or on behalf of
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the Company pursuant to this Agreement, (ii) any breach or default by Komag of
any covenant, obligation or other agreement of Komag set forth in this
Agreement, the Komag Disclosure Schedule, or any other certificate delivered by
or on behalf of the Company pursuant to this Agreement and (iii) any of the
Assumed Liabilities (each, a "Company Indemnifiable Claim").
8.3 Limits of Liability. In no event shall any Komag Indemnitee or
Company Indemnitee, as applicable ("Indemnitee"), be reimbursed for any Damages
under this Article VIII until the aggregate of all Damages incurred by all Komag
Indemnitees or Company Indemnitees, as the case may be, exceeds $[***]
("Threshold Amount") (after which the amount of all Damages, including such
$[***], shall become payable in accordance with the provisions of this Article
VIII); provided that, (i) the Threshold Amount shall not apply to [***] or (ii)
the Threshold Amount shall not apply to [***]. Notwithstanding anything else
contained in this Agreement to the contrary, the maximum aggregate amount which
Komag Indemnitees or the Company Indemnitees, as the case may be, may recover
pursuant to this Article VIII is $[***]; provided that, the indemnities provided
in Sections 8.2(a)(iii) and 8.2(b)(iii) shall not be limited by the foregoing
$[***] maximum.
8.4 Indemnification Procedures; Time Limits.
(a) If any Indemnitee shall incur any Damages, there shall be
delivered to the Company or Komag, as the case may be (the "Indemnifying
Party"), a certificate signed in good faith by the Company or Komag, as the case
may be, on behalf of such Indemnitee (an "Officer's Certificate") stating that
such Indemnitee has paid, properly accrued or reasonably anticipates that it
will have to pay or accrue Damages in an amount specified in such Officer's
Certificate, specifying in reasonable detail the individual items of Damages
included in the amount so stated, the date each such item was paid or properly
accrued, or the basis for such anticipated Liability, and the nature of Komag
Indemnifiable Claim or Company Indemnifiable Claim, as the case may be (the
"Indemnifiable Claim"), to which such item is related. The Indemnifying Party
shall, within thirty (30) days after receipt of the Officer's Certificate,
subject to the provisions of Section 8.4(c) hereof, deliver to such Indemnitee
in immediately available funds (U.S. Dollars) an amount equal to such Damages.
(b) For a period of thirty (30) days after the receipt of such
Officer's Certificate by the Indemnifying Party, the Indemnifying Party shall be
entitled to review the Officer's Certificate and the basis of the Indemnifiable
Claim. If the Indemnifying Party desires to dispute the Indemnifiable Claim or
the Damages set forth in the Officer's Certificate, the Indemnifying Party may
do so by providing written notice of such dispute to the Company or Komag, as
the case may be, on behalf of the Indemnitee prior to the expiration of such
thirty (30) day period.
(c) If the Indemnifying Party shall so object in writing to
any claim or claims made in any Officer's Certificate, the Indemnifying Party
and the Company or Komag, as the case may be, on behalf of the Indemnitee shall
attempt in good faith to agree upon the rights of the respective parties with
respect to each of such claims. If the Indemnifying Party and the Company or
Komag, as the case may be, on behalf of the Indemnitee, should so agree, a
memorandum setting forth such agreement shall be prepared and signed by Komag,
the Company and the Indemnitee and the parties shall resolve the dispute in
accordance with such memorandum. If no such agreement can be reached after good
faith negotiation, either the Indemnifying Party or the Company or Komag, as
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the case may be, on behalf of the Indemnitee, may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or the Indemnifying Party and Komag or the Company, as the
case may be, on behalf of the Indemnitee, agree to arbitration; and in either
such event the matter shall be settled by arbitration conducted by three
arbitrators. The Indemnifying Party and Komag or the Company, as the case may
be, on behalf of the Indemnitee, shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator, each of which
arbitrators shall be independent. The arbitrators shall set a limited time
period and establish procedures designed to reduce the cost and time for
discovery while allowing the parties an opportunity, adequate in the sole
judgment of the arbitrators, to discover relevant information from the opposing
parties about the subject matter of the dispute. The arbitrators shall rule upon
motions to compel or limit discovery and shall have the authority to impose
sanctions, including attorneys fees and costs, to the extent as a court of
competent law or equity, should the arbitrators determine that discovery was
sought without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of a majority of the
three arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement
and all other Indemnitees. Such decision shall be written and shall be supported
by written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(d) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the Judicial
Arbitration and Mediation Services, Inc. For purposes of this Section 8.4, in
any arbitration hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, the Indemnitee shall be deemed to be the
non-prevailing party of the arbitration in the event that the arbitrators award
the Indemnitee less than the sum of one-half (1/2) of the disputed amount plus
any amounts not in dispute; otherwise, the Indemnifying Party shall be deemed to
be the non-prevailing party. The non-prevailing party to an arbitration shall
pay its own expenses, the fees of each arbitrator, the administrative costs of
the arbitration, and the expenses, including without limitation, reasonable
attorneys' fees and costs, incurred by the other party to the arbitration.
(e) In the event any Indemnitee becomes aware of a third-party
claim which such Indemnitee believes may result in an Indemnifiable Claim, such
Indemnitee shall promptly notify the Indemnifying Party of such claim, and,
provided that the Indemnifying Party acknowledges that such claim is an
Indemnifiable Claim, the Indemnifying Party shall be entitled, at the
Indemnifying Party's expense, to participate in any defense of such claim. The
Indemnitee shall have the right in its sole discretion to settle any such claim;
provided, however, that, except with the consent of the Indemnifying Party, no
settlement of any such claim with third-party claimants shall alone be
determinative of the amount of any Indemnifiable Claim. In the event that the
Indemnifying Party has consented to any such settlement and acknowledged that
the claim is a Indemnifiable Claim, the Indemnifying Party shall have no power
or authority to object under any provision of this Article VIII to the amount of
any Indemnifiable Claim by such Indemnitee with respect to such settlement.
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8.5 Survival of Environmental Covenants. The obligations and rights of
Komag and Company with respect to (i) Seller's Retained Environmental
Liabilities and (ii) the representations made in Section 3.22 hereof
(collectively the "Environmental Covenants") are in addition to, independent
from, and severable from the rights and obligations of the Parties under all
other provisions of this Agreement. It is expressly acknowledged by all Parties
hereto that neither the acts or omissions of any Party hereto, nor any failure
of any condition or breach of a representation contained in the Agreement or any
related agreements, shall impair the right of Komag to enforce the Environmental
Covenants for their benefit, it being understood that the Environmental
Covenants are being given consideration of the closing of the transactions
contemplated by the Agreement and not in consideration of future performance or
any representation, and are intended to allocate risk of loss and to create
rights and obligations with respect to the matters covered by the Environmental
Covenants between the Parties without regard to the conduct of any Person. No
failure of any Person to exercise its rights under the Environmental Covenants
and no delay in exercising any right or remedy hereunder, at law or in equity,
shall operate as a waiver of the agreements contained in the Environmental
Covenants; nor shall the Parties be estopped from exercising any right or remedy
at any future time because of any such failure or delay; nor shall any single or
partial exercise of any such right or remedy preclude any other or future
exercise thereof or the exercise of any other right or remedy. The Environmental
Covenants shall survive the sale, transfer, assignment, or hypothecation of any
ownership interest in a party benefited hereby or obligated hereunder and the
sale, transfer, assignment, or hypothecation of the Acquired Assets or any Media
Business Facility, or any portion thereof or interest therein, by Komag to any
Person.
ARTICLE IX
TERMINATION
9.1 Termination of Agreement. This Agreement may be terminated at any
time prior to the Closing as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Closing;
(b) Komag may terminate this Agreement by giving written
notice to the Company at any time prior to the Closing if Komag is not in
material breach of its obligations under this Agreement and there has been a
breach of any representation, warranty, covenant or agreement contained in this
Agreement on the part of the Company and as a result of such breach the
condition set forth in Section 7.2(a) or 7.2(b), as the case may be, would not
then be satisfied; provided, however, that if such breach is curable by the
Company within thirty (30) days through the exercise of its commercially
reasonable efforts, then for so long as the Company continues to exercise such
commercially reasonable efforts Komag may not terminate this Agreement under
this Section 9.1 unless such breach has not been cured within thirty (30) days
(but no cure period shall be required for a breach which by its nature cannot be
cured);
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(c) the Company may terminate this Agreement by giving written
notice to Komag at any time prior to the Closing if the Company is not in
material breach of its obligations under this Agreement and there has been a
breach of any representation, warranty, covenant or agreement contained in this
Agreement on the part of Komag and as a result of such breach the condition set
forth in Section 7.3(a) or 7.3(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Komag within
thirty (30) days through the exercise of its commercially reasonable efforts,
then for so long as Komag continues to exercise such commercially reasonable
efforts the Company may not terminate this Agreement under this Section 9.1
unless such breach has not been cured within thirty (30) days (but no cure
period shall be required for a breach which by its nature cannot be cured); or
(d) either Party may terminate this Agreement at any time, if
there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Acquisition by any
Governmental Entity, which would: (i) prohibit Komag's ownership or operation of
all or any material portion of the Media Business or the Acquired Assets, (ii)
compel Komag to dispose of or hold separate all or a material portion of the
Media Business or the Acquired Assets or other businesses or assets of Komag as
a result of the Acquisition or (iii) materially limit the benefits accruing to
such Party under the Volume Purchase Agreement.
9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become
void, and there shall be no liability or obligation on the part of Komag or the
Company, or their respective officers, directors or shareholders; provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; and provided further that, the provisions of Sections 6.2, 6.3,
6.8(e), 10.10 and 10.14 and Article VIII of this Agreement shall remain in full
force and effect and survive any termination of this Agreement.
9.3 Escrow Agreement; Distribution of Property. Notwithstanding
anything contained in this Agreement to the contrary, upon consummation of the
Acquisition, the Property (as defined in the Escrow Agreement) shall immediately
be distributed to Komag; provided, however, that, if this Agreement is
terminated prior to the consummation of the Acquisition, the Property shall be
distributed in accordance with Section 14(b) of the Escrow Agreement.
ARTICLE X
MISCELLANEOUS
10.1 No Third-Party Beneficiaries. Except as expressly provided in this
Agreement, this Agreement shall not confer any rights or remedies upon any
Person other than the Parties, their respective successors and permitted assigns
and, with respect to Sections 7.2(i) and 7.2(k) Komag USA (Malaysia) Sdn.
10.2 Entire Agreement. This Agreement (including the Disclosure
Schedules and other documents referred to herein) constitutes the entire
agreement between the Parties with respect to the
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subject matter hereof and supersedes any prior understandings, agreements or
representations by or between the Parties, written or oral, to the extent they
related in any way to the subject matter hereof.
10.3 Succession and Assignment. Except as expressly provided in this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
Parties named herein and their respective successors and permitted assigns. No
Party may assign either this Agreement or any of its rights, interests, or
obligations hereunder by operation of law or otherwise without the prior written
approval of each other Party; provided, however, that Komag may (i) assign any
or all of its rights and interests hereunder to one or more of its Affiliates
and (ii) designate one or more of its Affiliates to perform its obligations
hereunder (in any or all of which cases Komag nonetheless shall remain
responsible for the performance of all of its obligations hereunder).
10.4 Counterparts. This Agreement may be executed, including by
facsimile signature, in one or more counterparts, each of which shall be deemed
an original but all of which together will constitute one and the same
instrument.
10.5 Headings. The Section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.6 Notices. All notices and other communications required or
permitted under this Agreement shall be deemed to have been duly given and made
if in writing and if served either by personal delivery or by facsimile (with
telephonic confirmation of receipt) to the Party for whom intended (which shall
include delivery by Federal Express or similar nationally recognized service) or
three business days after being deposited, postage prepaid, certified or
registered mail, return receipt requested, in the United States mail bearing the
address shown in this Agreement for, or such other address as may be designated
in writing hereafter by, such Party:
If to the Company: Western Digital Corporation
8105 Irvine Center Drive
Irvine, California 92618
Attn: Michael A. Cornelius
Telephone: (949) 932-5000
Facsimile: (949) 932-3820
With a Copy to: Gibson, Dunn & Crutcher LLP
1520 Page Mill Road
Palo Alto, California 94304-1125
Attn: Gregory T. Davidson, Esq.
Telephone: (650) 849-5300
Facsimile: (650) 849-5333
If to Komag: Komag, Incorporated
1704 Automation Parkway
San Jose, CA 95131
Attn: Chief Financial Officer
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Telephone: (408) 576-2200
Facsimile: (408) 944-9255
With a Copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Attn: Steven V. Bernard, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
Any Party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
10.7 Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the internal laws of the State of Delaware.
10.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by Komag
and the Company. No waiver of any provisions of this Agreement shall be valid
unless the same shall be in writing and signed by the waiving party. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
10.9 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of such void or unenforceable provision.
10.10 Expenses. Whether or not the Acquisition is consummated, all fees
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the Collateral Documents and the transactions contemplated hereby and thereby,
shall be the obligation of the respective party incurring such fees and
expenses; provided that the accounting fees and expenses of the Company in
connection with the preparation of audited financial statements with respect to
the Media Business, if audited financial statements are requested by Komag,
shall be borne by Komag.
10.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this
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Agreement shall be construed as if drafted jointly by the Parties and no
presumption or burden of proof shall arise favoring or disfavoring any Party by
virtue of the authorship of any of the provisions of this Agreement. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. The word "including" shall mean "including
without limitation." The word "agreement" when used herein shall be deemed in
each case to mean any contract, commitment or other agreement, whether oral or
written, which is legally binding. Words using the singular or plural number
also include the plural or singular number, respectively.
10.12 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
10.13 Other Remedies. Except as otherwise expressly provided herein,
any and all remedies herein expressly conferred upon a Party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such Party, and the exercise by a Party of any one remedy
will not preclude the exercise of any other remedy.
10.14 Submission to Jurisdiction. Each of the Parties irrevocably
consents to the exclusive jurisdiction and venue of any state or federal court
sitting in Santa Clara County, California, in any action or proceeding arising
out of or relating to this Agreement and agrees that, except as otherwise
provided in Section 8.4, all claims in respect of the action or proceeding may
be heard and determined in any such court. Each of the Parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety, or other security that might be required of
any other party with respect thereto. Each Party agrees that a final judgment in
any action or proceeding so brought shall be conclusive and may be enforced by
suit on the judgment or in any other manner provided by law or in equity.
10.15 Share Legends. All certificates representing any of the shares of
Komag Common Stock to be issued pursuant to this Agreement shall have endorsed
thereon a restrictive legend substantially as follows:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED."
(b) Any legend required to be placed thereon by applicable
blue sky laws of any state.
(c) "THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER
AND MAY NOT BE EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL OF THE TERMS AND
CONDITIONS OF THAT CERTAIN
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REGISTRATION RIGHTS AGREEMENT DATED AS OF APRIL 8, 1999 BY AND BETWEEN KOMAG,
INCORPORATED AND WESTERN DIGITAL CORPORATION, A COPY OF WHICH KOMAG,
INCORPORATED WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND
WITHOUT CHARGE."
10.16 California Corporate Securities Law. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
KOMAG, INCORPORATED
By: _______________________________
Name:
Title:
WESTERN DIGITAL CORPORATION
By: _______________________________
Name:
Title:
The undersigned, Komag USA (Malaysia) Sdn., agrees to be bound by the
terms contained in Sections 7.2(i), 7.2(k) and 10.1 of this Agreement.
KOMAG USA (MALAYSIA) SDN.
By: _______________________________
Name:
Title:
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VOLUME PURCHASE AGREEMENT
This Volume Purchase Agreement, dated as of April 8, 1999, is made by
and between Komag, Incorporated, a Delaware corporation ("Komag") and Western
Digital Corporation, a Delaware corporation ("WDC").
BACKGROUND
A. Komag and WDC are entering into an Asset Purchase Agreement of even
date herewith pursuant to which Komag is acquiring certain assets used in the
production of certain product components (the "Asset Purchase Agreement").
B. The parties acknowledge that this Volume Purchase Agreement is part
of a significant strategic relationship, in which Komag is purchasing assets
from WDC to produce media and WDC is agreeing to purchase certain of its
requirements of media from Komag, and Komag is agreeing to supply such
requirements to WDC, to enable Komag to spread costs for media over a greater
volume, and to enable Komag to incur the significant research and development
costs associated with the historically rapid technology advances and short
product cycles for media, and to enable WDC to obtain favorable pricing on a
consistent supply of high-quality, state-of-the-art media, all to the mutual
benefit of Komag and WDC.
C. WDC desires to purchase, and Komag desires to sell to WDC, certain
products manufactured using such acquired assets as well as other products
manufactured by Komag, all in accordance with the terms of this Volume Purchase
Agreement.
NOW THEREFORE, for and in consideration of the covenants, conditions,
and undertakings hereinafter set forth, as well as a portion of the stock issued
pursuant to the Asset Purchase Agreement, the parties agree as follows:
ARTICLE 1: DEFINITIONS
For the purposes of this Volume Purchase Agreement, unless the context
otherwise requires, the following terms will have the respective meanings set
out below and grammatical variations of such terms will have corresponding
meanings:
1.1 "A-Build" of a WDC product has the meaning assigned thereto in
WDC's classifications as of the Effective Date, and is the product "build" (e.g.
A-0 build, A-1 build), developed before the Pilot Build or PMT Build has been
developed.
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1.2 "Active Program" means a Program for a Product that is being
purchased and sold under this Agreement that has not yet undergone an End of
Life.
1.3 "Actual Media Requirements" shall have the meaning set forth in
Section 4.2.
1.4 "Affiliate" of a party means any entity that directly or indirectly
controls, is under common control with, or is controlled by, such party. As used
in this definition, "control" means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
beneficial ownership of securities or other ownership interests, by contract or
otherwise).
1.5 "Component" means a component of a WDC product.
1.6 "Days" means consecutive calendar days.
1.7 "Delivery Date" or "Scheduled Delivery Date" means the agreed date
of delivery of Products as specified in Pull Requests.
1.8 "Disentanglement" means a period of no more than [***] Days after
termination of this Agreement to allow for (a) the transfer by Komag to WDC of
any non-proprietary documentation of work processes and data that would be
needed to allow WDC to continue to obtain Media comparable to the Products from
alternate manufacturers; (b) the prompt and orderly conclusion of all work under
this VPA, including without limitation the acknowledgment of Purchase Orders and
the fulfillment of any Pull Requests during such [***]-Day period; (c) [***];
and (d) the prompt ramp-up to full volume production by an alternative provider
or alternative providers of Media for WDC's requirements; provided, however,
that nothing in (a) through (d) will be construed to require Komag to disclose
or license any proprietary information or other intellectual property to any
third party.
1.9 "Effective Date" means the Closing Date, as such term is defined in
the Asset Purchase Agreement.
1.10 "End of Life" has the meaning set forth in Exhibit D.
1.11 "Exhibit" means an attachment to this VPA. Exhibits are
incorporated herein by reference thereto.
1.12 "FGI" has the meaning set forth in Section 5.1.
1.13 "Fiscal Quarter" means the fiscal quarters of WDC set forth on
Exhibit A.
1.14 "Force Majeure Event" means an act of nature, civil disruption,
power outage, public enemy, government action, or freight embargo beyond the
control of a party.
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1.15 "Inactive Program" means a Program that has undergone an End of
Life.
1.16 "JIT Hub Inventory Watermark" means a quantity of Units equal to
the product of two times the quotient of (a) WDC's most recent forecasted
requirements for the four full calendar weeks following the week in which the
computation is made, divided by (b) four.
1.17 "JIT Hubs" has the meaning set forth in Section 5.3.
1.18 "Lead Time" means, for purposes of this VPA, the minimum length of
time prior to a specific Delivery Date that Komag must receive a Pull Request to
ensure delivery by such date.
1.19 "Material Default" shall mean the occurrence of any of the
following:
1.19.1 Failure of Komag to deliver (subject to Section 6.6) in
a given Fiscal Quarter the lesser of (a) [***]% of the WDC Actual Media
Requirements during such Fiscal Quarter; (b) [***]% of the Units in the Purchase
Order for such Fiscal Quarter delivered by WDC under Section 5.2; (c) the number
of Units of "Fiscal Quarterly Purchase Requirements" in the chart below for the
year in which such Fiscal Quarter falls; and (d) the number of Units equal to
(i) Units [***] in such Fiscal Quarter; plus (ii) Units [***]. However, any such
failure prior to [***], will not be deemed a Material Default to the extent such
failure is attributable to the failure of any Acquired Assets (as such term is
defined in the Asset Purchase Agreement) to be year 2000 compliant;
- --------------------------------------------------------------------------------
FISCAL QUARTERLY
PERIOD PERIOD PURCHASE
BEGINNING ENDING REQUIREMENTS
- --------------------------------------------------------------------------------
Effective Date Effective Date plus [***] [***] Units
months
- --------------------------------------------------------------------------------
Effective Date plus [***] Effective Date plus [***] [***] Units
months months
- --------------------------------------------------------------------------------
Effective Date plus [***] Effective Date plus [***] [***] Units
months months
- ----------------------------- ----------------------------- --------------------
1.19.2 A material breach by either party (other than breach of
a payment obligation of WDC under Section 6.5) of any obligation, covenant, or
condition under this Agreement that is susceptible of cure, and the failure by
the breaching party to cure such breach within 30 Days after the breaching party
has received notice of such default (which notice must explicitly assert a
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Material Default under Section 1.19.2 of this VPA), provided that if the cure
requires more than 30 Days, the breaching party fails to (i) promptly take
action to cure such breach as quickly as reasonably possible; or (ii) cure such
breach within 60 Days after the breaching party has received notice of such
default;
1.19.3 A failure of WDC to meet its payment obligations under
Section 6.5, and the failure by WDC to meet such obligations within 30 Days
after WDC has received notice of Komag's intent to discontinue shipping Product
pursuant to Section 6.6; or
1.19.4 An assignment or attempted assignment in violation of
Section 12.4.
1.20 "Matrix Build" of a WDC product has the meaning assigned thereto
in WDC's classifications as of the Effective Date, and is a request by WDC for
Media samples with a specified combination or combinations of coercivity and Mrt
values.
1.21 "Media" means recording disks, manufactured by any entity, as used
in data storage devices.
1.22 "Pilot Build" of a WDC product has the meaning assigned thereto in
WDC's classifications as of the Effective Date, and is typically the large build
of a new WDC product in development before it is released to a WDC production
facility.
1.23 "PMT Build" of a WDC product has the meaning assigned thereto in
WDC's classifications as of the Effective Date, and is typically the first large
build of a new WDC product after it has been released to a WDC production
facility.
1.24 "Price" means the amount charged for Products, as specified in
Section 6.1.
1.25 "Product" means the Media manufactured by Komag.
1.26 "Program" means a WDC product classification, currently including,
for example, "Hunter" and "Rebel" disk drives. A Program may include various
capacities, numbers of disks per drive, drive performance specifications, or
drive interfaces (such as SCSI or ATA).
1.27 "Pull Request" means a request made by WDC to Komag for delivery
of Products from a JIT Hub.
1.28 "Purchase Order" means a purchase order placed by WDC to Komag for
Products as contemplated by this VPA.
1.29 "Purchase Requirements" means the number of Units WDC is required
to purchase and Komag is required to sell under Section 4.1.
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1.30 "Replacement Products" has the meaning set forth in Exhibit D.
1.31 "RMA" means returned material authorization.
1.32 "Section" means a numbered section of this VPA.
1.33 "Specifications" means designs, drawings, prints and written
descriptions, specification reviews and requirements for Products that have been
developed by WDC and Komag as of the date of this VPA, or which may be developed
by WDC and Komag during the term of this VPA.
1.34 "Stop Ship Order" means a stop ship order under WDC's established
stop ship procedure 80-005447-000, resulting from a Product failing quality
parameters.
1.35 "Subcontract" means an arrangement through which a disk drive
supplier has disk drives made or assembled by a subcontractor, and such
subcontractor provides such drives to the supplier for sale to third parties.
1.36 "Target FGI" has the meaning set forth in Section 5.3.
1.37 "Unit" means a single Product.
1.38 "VPA" means this Volume Purchase Agreement, including the
Exhibits.
1.39 "WIP" means work in process, as such term is generally understood
in the Media industry.
ARTICLE 2: AGREEMENT STRUCTURE
2.1 Background. Komag and WDC agree that this VPA creates a high degree
of mutual dependence between Komag and WDC. Each party agrees to diligently
cooperate with the other party to accomplish the objectives of this VPA.
2.2 Agreement Components. This VPA consists of this VPA (including its
Exhibits), Purchase Orders and Pull Requests. If there is a conflict among the
terms and conditions of the various documents or an ambiguity created by
differences therebetween, the order of precedence will be (i) this VPA
(excluding its Exhibits), (ii) Exhibits, and (iii) Purchase Orders and Pull
Requests.
2.3 Purchase Order. Purchase Orders will be used to convey the Purchase
Orders Price and number of Units, and accordingly Purchase Orders must contain
the following: part number, Price, Units ordered, customer name, ship to address
(destination), bill to address, and Purchase Order number. Delivery Dates shall
be determined in accordance with Section 5.2. The parties acknowledge that such
Purchase Orders, as well as confirming documents, acknowledgments, forms,
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invoices and the like used in the ordinary course of business may contain other
terms and conditions. The parties agree that this VPA will take precedence over
any such document or other communication, representation or understanding
whether oral or written and that any term or condition relating to the subject
matter of this VPA that is inconsistent with this VPA (whether in contradiction
to, in addition to, or that would result in any ambiguity with respect to any
term or condition in this VPA) will be deemed deleted and be of no force,
including, but not limited to, any term or condition purporting to supersede
this VPA in whole or in part or purporting to make any offer, acceptance, term,
condition or other action conditional upon acceptance of, or indicating
agreement to, any inconsistent term or condition. The foregoing may not be
modified or waived except by written agreement of the parties, specifically
referencing this VPA, and signed by officers of both parties. The parties agree
that, without limiting Section 12.1, the foregoing shall not be superseded,
altered, or overridden by any provision in the Uniform Commercial Code as it may
have been adopted by any competent jurisdiction.
2.4 Exhibits. The following Exhibits are incorporated into this VPA by
reference and deemed to be a part hereof:
Exhibit A: WDC Fiscal Quarters
Exhibit B: Initial Prices
Exhibit C: Qualification Sample Prices
Exhibit D: Supplier Warranty and Replacement Product Terms
ARTICLE 3: PRODUCT QUALIFICATION AND DEVELOPMENT
3.1 Qualification Process. Each of the parties shall use commercially
reasonable efforts to qualify Komag's Products on all Programs. Such efforts
will require qualification of Products in combination with other Components
(such as multiple combinations of Media and recording heads), as well as the
subsequent qualification of WDC's disk drives incorporating such combinations at
each WDC customer. Subject to Section 4.3, WDC agrees that Product
qualifications must include sufficient WDC Programs, Component combinations and
customers to allow WDC to meet its Purchase Requirements for Products under this
VPA, taking into account that a Product may fail to qualify in a Program or
Components combination, or for a customer, from time to time.
3.2 Qualification Locations. Following the Effective Date, Komag
intends to manufacture Products under this Agreement using in-line and static
sputtering processes at factory locations in Santa Clara and San Jose,
California, and in Penang, Malaysia. Both parties recognize that WDC must
qualify Products for its Programs specifically by process and factory location
in accordance with industry practice.
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3.2.1 Initial Period. To permit a consolidation of WDC's Santa
Clara facilities into Komag's manufacturing operations in the most expeditious
manner, (i) WDC and Komag each agree during an initial transition period, not to
exceed [***] months following the Effective Date, to use commercially reasonable
efforts to [***]
3.2.2 Subsequent Period. After the initial transition period
described in Section 3.2.1, (i) WDC and Komag each shall use commercially
reasonable efforts to [***]
3.3 Qualification Samples. The prices for qualification sample Products
during the first three years of the term of this VPA are indicated in Exhibit C.
3.4 Cure of Failure. In the event the parties fail to qualify Products
pursuant to Section 3.1, or to resolve a Stop Ship Order, the parties will use
their best efforts to cure such failure until the midpoint of life of the Active
Program. Thereafter, the parties will be obligated to continue to exert such
efforts only as mutually agreed.
ARTICLE 4: PRODUCT PURCHASE AND SALE COMMITMENTS
<TABLE>
4.1 Minimum Purchases and Sales. WDC shall purchase Media from Komag,
and Komag shall sell Media to WDC, in the amounts and for the periods specified
in the following table:
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERIOD BEGINNING PERIOD ENDING PURCHASE REQUIREMENTS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Effective Date Effective Date plus [***] The lesser of [***] Units and
months [***]% of WDC's Actual Media
Requirements.
- ------------------------------------------------------------------------------------------------
Effective Date plus [***] Effective Date plus [***] The lesser of [***] Units and
months months [***]% of WDC's Actual Media
Requirements.
- ------------------------------------------------------------------------------------------------
Effective Date plus [***] Effective Date plus [***] The lesser of [***] Units and
months months [***]% of WDC's Actual Media
Requirements.
- ------------------------------------------------------------------------------------------------
</TABLE>
4.2 Actual Media Requirements. For the avoidance of doubt,
4.2.1 "Actual Media Requirements" when used in Section 4.1
includes [***]
4.2.2 "Actual Media Requirements" when used in Section 4.1
does not include [***]
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4.2.3 "Actual Media Requirements" when used in Section 4.1
includes [***]
4.3 Composition of Demand. [***].
4.4 Quarterly Milestones. The Purchase Requirements are annual
requirements. However, without limiting either party's obligations under Section
4.1, WDC shall use commercially reasonable efforts to purchase, and Komag shall
use commercially reasonable efforts to sell to WDC, in each Fiscal Quarter, a
number of Units consistent with WDC's forecast referenced in Section 5.1.
4.5 Additional Demand. WDC may, but will not be obligated to, request
that Komag provide Units in excess of the Purchase Requirements. Purchase Orders
for such additional Units may be issued at any time by WDC, but will be subject
to acceptance by Komag in its sole discretion. Pricing and other terms for such
excess Units shall be separately negotiated and not subject to the Prices and
terms set forth in this VPA.
ARTICLE 5: PURCHASE OF PRODUCTS BY WDC
5.1 Forecasts and Planning Schedules. By the Effective Date, WDC shall
provide to Komag a current written forecast of demand for Products WDC expects
to purchase during the first twelve months of the term of this VPA. Thereafter
during the term of this VPA, on a monthly basis, WDC shall provide an updated
forecast for any quantities of such Product WDC expects to purchase in the
following twelve months. The most recently issued forecast will supersede all
previous forecasts. No less than five Days from receipt of each of the monthly
WDC forecasts, Komag shall confirm supply for a rolling three month period
(current month plus two). During the term of this VPA on a monthly basis, Komag
shall provide to WDC a current written summary of the Product finished goods
inventory ("FGI") intended for WDC. This summary shall list by Komag
manufacturing site and JIT Hub location the amounts and types of FGI being held
by Komag for each of WDC's Programs.
5.2 Issuing Purchase Orders and Pull Requests. WDC shall, at least 30
Days before the beginning of each Fiscal Quarter, submit to Komag a Purchase
Order for such Fiscal Quarter for all Units WDC has forecasted it may require
during such Fiscal Quarter. No less than two Business Days after receipt of each
Purchase Order, Komag shall issue an acknowledgement confirming the quantity and
other terms thereof. WDC shall transmit a Pull Request by facsimile or other
agreed upon means to communicate to Komag, at the applicable JIT Hub, the part
number, quantity and Delivery Date and time of each Product required. WDC's
transmission of a Pull Request is authorization for Komag to ship and invoice
WDC against the Purchase Order for the part numbers and quantities set forth in
the Pull Request. Komag shall deliver Product from the JIT Hub upon receipt of
the Pull Request, in accordance with Lead Times. WDC and Komag shall, prior to
the commencement of each Fiscal Quarter, establish mutually acceptable Lead
Times for Pull Requests, which Lead Times shall in no event exceed eight hours.
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5.3 Komag Production and Inventory. During the term of this VPA, WDC
will be issuing forecasts and Purchase Orders and Komag will be producing FGI to
meet WDC's needs shown in the Purchase Orders. WDC's forecast for a certain
Fiscal Quarter are not commitments by WDC to buy a specific amount of Product in
a specific period of time. Komag will use WDC's forecast for planning of its
production capacity to support WDC. Unless given written authorization by a WDC
Materials manager to make a temporary exception, Komag shall manage and limit
its production of FGI so that on any given date FGI does not exceed WDC's most
current forecasted requirements of FGI for the subsequent four week period (the
"Target FGI"). Komag shall maintain Products in inventory for WDC at locations
close to WDC factories ("JIT Hubs"). Provided WDC has issued a relevant Purchase
Order, Komag shall, promptly after the Effective Date, use commercially
reasonable efforts to establish a level of Product inventory for each Program at
each JIT Hub equal to the JIT Hub Inventory Watermark and to replenish each
reduction requested by WDC from such inventory within four weeks from the date
of such reduction.
5.4 End of Life. WDC shall use commercially reasonable efforts to
notify Komag as soon as possible before the termination of each Program.
5.5 Liability on Cancellation. Subject to WDC's obligations under
Section 4, WDC shall have the right to cancel Purchase Orders for Products
(except the final Purchase Order issued under Section 9.1) , in whole or in
part, placed in accordance with the provisions of this VPA upon written notice
to Komag. WDC's maximum liability to Komag for FGI upon such cancellation shall
be limited to [***].
Notwithstanding the foregoing, during the ramp period of any Product,
not to exceed six weeks, the parties shall first meet and agree on the number
equal to "IW" for the purpose of calculating liability under this Section 5.5
for any cancellation of a Purchase Order which occurs during any portion of such
a ramp period. Komag shall (i) use all commercially reasonable efforts to find a
substitute buyer and mitigate any potential loss; (ii) participate in an audit
of lead time efficiency as reasonably requested by WDC; and (iii) negotiate with
WDC to adjust the above formula for reductions in the lead time to fabricate
Media that are achieved by Komag.
ARTICLE 6: PRICE AND PAYMENT TERMS FOR PRODUCTS
6.1 Product Pricing. The initial Unit Prices WDC will pay for Products
purchased during the first [***] months of the term of this VPA are set forth in
Exhibit B. Commencing with the first [***] after such [***] period, the parties
shall, beginning no later than [***] Days before the beginning of such [***],
negotiate Prices for the Products on a [***] basis (the "Prices"). The parties
shall conclude such negotiations no later than [***] Days before the beginning
of such [***]. Komag shall, no later than [***] Days before the beginning of
each such [***], notify WDC of the agreed-upon Prices applicable to such [***]
by means of a pricing letter. [***] Notwithstanding the foregoing, the parties
agree that the review of such prices and terms shall not require the parties
[***]. [***].
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6.2 Pricing Disputes. In the event the parties cannot agree upon
pricing as described in Section 6.1, either party may, upon written notice to
the other, submit such dispute to the Chief Executive Officer of Komag; and the
Chief Executive Officer of WDC, or their respective designees, who shall meet to
attempt to resolve the dispute by good faith negotiations. In the event the
parties are unable to come to agreement upon Prices within 5 Days after such
notice is given, either party may proceed with arbitration as follows. The
parties will submit the matter of pricing to binding arbitration in San
Francisco, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association ("AAA"). Each party shall appoint one
arbitrator, and the two arbitrators thus appointed will appoint a third
arbitrator. The parties shall instruct the arbitrators to make a determination
of pricing using the standards set forth in Section 6.1, but in no event outside
of the range of the "bid" and "asked" prices established by the respective
positions of the parties in the last good faith negotiations prior to referral
to arbitration. The parties shall also instruct them to come to a decision
within 20 Days after submission of the dispute to arbitration. During the
pendency of such arbitration, the Prices in effect immediately before the
arbitration shall remain in effect. If a price change is awarded, the party, if
any, which owes a balance shall pay such balance; and in the event such party
fails to pay such balance within ten Days after the date of the award, interest
will accrue beginning ten Days after the date of the award, at the maximum rate
permitted by law in California. Each party shall bear its own arbitration costs
and expenses; provided, however, that the arbitrators may modify the allocation
of fees, costs and expenses in the award in those cases where fairness dictates
other than each party bearing its own fees, costs and expenses. The award shall
be final and binding on the parties, and judgment on the award may be entered in
and enforced by any court of competent jurisdiction.
6.3 Taxes and Duties. Unless otherwise specifically provided herein,
the amount of any present or future sales, revenue, excise or other tax
applicable to the Products, will be added to the Price and will be paid by WDC,
or in lieu thereof WDC shall provide Komag with a tax exemption certificate
acceptable to the taxing authorities. In the event Komag is required to pay any
such tax, fee, or charge, at the time of sale or thereafter, WDC shall reimburse
Komag therefor. Notwithstanding the foregoing, WDC will not be responsible for
any taxes on Komag's income.
6.4 Tax Minimization. The parties acknowledge that Komag's Malaysian
manufacturing operations, including the tax holiday status of such operations,
provide a path to the industry's lowest cost structure. To ensure that both
parties derive benefit from this advantageous manufacturing location, the
parties shall adopt business practices (e.g. sales terms, title passage,
importer of record, and warehousing practices) that maximize the benefits of
Komag's tax holiday position in Malaysia to the extent not inconsistent with
WDC's reasonable business objectives.
6.5 Payment Terms. For shipments through Komag's designated JIT Hub,
Komag shall invoice WDC upon delivery of Product to the receiving dock of WDC's
manufacturing locations in Malaysia and Singapore. For shipments direct to WDC,
Komag will invoice upon shipment. Terms for payment of all invoices will be net
[***] Days from date of invoice. In the event payment is not received by Komag
within such period, Komag shall notify WDC and WDC shall make prompt
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payment of the amount due. WDC will be liable for interest on any overdue
payment under any such invoice, up to the maximum legal rate in California.
Notwithstanding the foregoing, payment terms shall be payment in advance in the
event of the bankruptcy or insolvency of WDC or in the event any proceeding is
brought (a) voluntarily by WDC under the bankruptcy or insolvency laws; or (b)
involuntarily against WDC under the bankruptcy or insolvency laws, and not
dismissed within 90 Days.
6.6 Late Payments. If (a) WDC's account with Komag is past due in any
amount, by more than [***] Days; (b) WDC does not make payment in advance as
required under Section 6.5; or (c) if WDC's account with Komag is past due in
any amount in excess of the greater of (i) $[***]; and (ii) [***]% of WDC's
total accounts receivable balance under this Agreement; by more than [***] Days;
then Komag may discontinue shipping Products upon [***] Days' advance written
notice to WDC and opportunity for WDC to cure within such [***]-Day period.
Units that Komag does not ship in accordance with this Section 6.6 shall not
count towards the Units purchased by WDC to fulfill its Purchase Requirements,
until such Units are shipped by Komag. The parties agree that a senior officer
designated by each party will meet to resolve any issues relating to overdue
amounts.
ARTICLE 7: SHIPMENT AND DELIVERY OF PRODUCTS
7.1 Shipment of Product. Except as otherwise specified with respect to
direct shipments under Section 6.5, Delivery will be made DDU (i.e., the ICC
standard shipping term for delivery duty unpaid), and liability for loss or
damage to Products will pass to WDC upon Komag's delivery of the Products to
WDC. As between the parties, Komag will bear the cost for insurance relating to
delivery of the Products. For deliveries within Malaysia or Singapore, Western
Digital Malaysia SDN. BHD. or Western Digital (Singapore Pte. Ltd.),
respectively, will be the "importer of record" for GST purposes. The Products
shall be delivered to WDC from a Komag JIT Hub to a WDC factory. Komag may
deliver the Products in installments subject to Section 5.2. Unless otherwise
agreed, all Products will be packaged, and packed in accordance with Komag's
normal practices. All Product packages shall be labeled in accordance with
applicable customs regulations. Komag may ship, determine freight forwarder, and
provide delivery support by the method it deems most advantageous. WDC shall
ensure that the freight forwarder selected by Komag may use WDC's
"Manufacturer's Export Status" for shipments on behalf of WDC to Singapore, so
long as the parties mutually agree. Transportation charges are included in the
Unit Price. Komag shall deliver, upon request from WDC, appropriate import
certificates for duties paid on Media purchased from Komag, imported by Komag
into the United States and delivered to WDC in the United States.
7.2 On Time Delivery. Komag shall use commercially reasonable efforts
to maintain 100% on-time delivery of each Pull Request from a JIT Hub.
7.3 Late Delivery. Komag shall notify WDC immediately if for any reason
Komag fails to comply or anticipates that it may fail to comply with the terms
of a Pull Request (including, but not limited to, failure to meet a Delivery
Date or delivery of less than the ordered Units). In the event of
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a late delivery, the parties will cooperate in good faith to minimize the
disruption caused to WDC by such late delivery.
7.4 Export Regulations. WDC and Komag shall comply with all export
control laws and regulations applicable to the export or reexport of Products or
any related technology. The party undertaking such export or reexport shall be
responsible for obtaining any required documents, authorizations and approvals
prior to any such export or reexport.
ARTICLE 8: WARRANTIES AND INTELLECTUAL PROPERTY INFRINGEMENT
8.1 WDC General Warranties. WDC has the corporate power and authority
to own its properties and to carry on its business as now being conducted and as
contemplated to be conducted. WDC is duly qualified to do business and in good
standing as a foreign corporation under the laws of each jurisdiction in which
the failure to be so qualified would have a material adverse effect on WDC.
8.2 Product Limited Warranty. Komag's warranty for Products under this
Agreement, and the remedies for breach of such warranty, will be as set forth in
Exhibit D.
8.3 Disclaimer. THE WARRANTIES AND OBLIGATIONS OF THIS SECTION 8 AND
EXHIBIT D WILL BE EXCLUSIVE AND IN LIEU OF ANY AND ALL OTHER WARRANTIES,
EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGMENT, ALL OF
WHICH ARE HEREBY EXPRESSLY DISCLAIMED.
8.4 Infringement Indemnity
8.4.1 Indemnification. Komag shall defend any claim, suit or
proceeding brought against WDC to the extent such suit or proceeding is based on
a claim that any Product furnished hereunder, alone and not in combination with
any other product, constitutes an infringement of any U.S. patent or U.S.
copyright, provided WDC gives Komag prompt notice of any such claim, suit or
proceeding, in writing and authorizes Komag to settle or defend any such claim,
suit or proceeding and assists Komag in so doing (at Komag's expense) upon
request by Komag. Komag shall pay WDC's reasonable attorneys fees and all
damages and costs awarded against WDC arising out of such claim, suit or
proceeding.
8.4.2 Limited Remedies. If the use of a Product is enjoined,
Komag shall, in its sole discretion and at its own expense, either (a) procure
for WDC the right to continue using such Product; (b) replace same with a
noninfringing product; (c) modify the Product so that it becomes noninfringing;
or (d) if Komag is unable to reasonably do any of the above, refund the Price
for such Product.
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8.4.3 Exclusions. Komag shall not be liable for, and WDC shall
indemnify, defend and hold Komag harmless from, any expenses, damages, costs or
losses resulting from any suit or proceeding based upon a claim arising from (a)
compliance with WDC's designs, specifications, or instructions; (b) a
modification of the Product by a party other than Komag; (c) the use of any
Product or part thereof furnished hereunder in combination with any other
product;; or (d) intellectual property infringements to the extent arising out
of the use of the Acquired Assets (as such term is defined under the Asset
Purchase Agreement), or any technology or intellectual property licensed or
otherwise provided to Komag in connection with the Acquired Assets under the
Asset Purchase Agreement, if such infringements would not have arisen using the
assets, technology and intellectual property used by Komag prior to the
Effective Date. WDC shall pay Komag's reasonable attorneys fees and all damages
and costs awarded against Komag arising out of such claim, suit or proceeding.
8.4.4 License. Sale of any Product or any part thereof by
Komag does not confer upon WDC any license under any patent rights or
copyrights.
8.4.5 SOLE LIABILITY. THIS PROVISION 8.4 IS IN LIEU OF ALL
OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTIES AGAINST INFRINGEMENT AND WILL BE
THE SOLE AND EXCLUSIVE REMEDY FOR INTELLECTUAL PROPERTY INFRINGEMENT OF ANY
KIND. IN NO EVENT SHALL KOMAG'S TOTAL LIABILITY FOR SUCH INFRINGEMENT EXCEED THE
AGGREGATE SUM PAID BY WDC FOR THE ALLEGEDLY INFRINGING PRODUCTS.
ARTICLE 9: TERM AND TERMINATION
9.1 Term. This VPA will continue in force for an initial term of three
years after the Effective Date, and will terminate at the end of such initial
term unless otherwise agreed by the Parties in writing. In the event WDC does
not wish to renew the term of this Agreement after such initial term, WDC shall
notify Komag no later than 30 Days before the beginning of the final Fiscal
Quarter of such initial term, and issue to Komag a binding final Purchase Order
for such Fiscal Quarter.
9.2 Termination for Cause. Either party may terminate this VPA in the
event of a Material Default of this VPA by the other party, upon notice to such
other party, which notice must describe the reason for such termination and must
specify the termination date, which termination date must be no earlier than 5
Days after the date of such notice. The parties acknowledge that neither party
will have the right to terminate this Agreement due to any breach of this
Agreement other than a Material Default; and in the case of such other breach,
subject to Sections 10.2 and 11.6, the non-breaching party's only remedy under
this Agreement will be an action for damages.
9.3 Termination for Insolvency. This VPA may be terminated by either
party by notice to the other party upon (i) the commencement by the other party
of a voluntary or involuntary
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proceeding under any federal, state, provincial or foreign bankruptcy law or
similar law which is not dismissed within 90 Days; (ii) the appointment for the
other party of a receiver, trustee or similar official or a general assignment
for the benefit of such party's creditors; (iii) the winding up or liquidation
of the other party; or (iv) a party becomes unable to pay its debts either
because it is subject to a Suspension of Payments order, bankruptcy, or other
insolvency proceeding. In the case of (i) to (iv) above, termination may also be
effected by serving notice on the liquidator, administrator, or receiver, as the
case may be.
9.4 Rights Upon Termination. Upon termination, Komag shall complete and
WDC shall pay for all Products in accordance with Section 6.5 and Komag shall
continue to perform its obligations with respect to Replacement Products under
Exhibit D. Komag and WDC shall cooperate to perform an orderly Disentanglement
following termination.
9.5 Survival. The following provisions will survive the termination or
expiration of this VPA: Articles 1, 2, 8, 9.4, 10, 11, and 12, as well as any
obligations arising before the effective date of termination or expiration.
ARTICLE 10: LIMITATION OF LIABILITY
10.1 Limitation of Liability. EXCEPT FOR ARTICLE 11 (CONFIDENTIALITY),
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INDIRECT,
INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES EVEN IF ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
10.2 Performance. Notwithstanding the foregoing, in light of the fact
each of the parties entered into the Asset Purchase Agreement and this VPA in
reliance on the full and faithful performance by the other party of its
obligations (including but not limited to purchase and sale obligations)
hereunder, the parties agree that damages would be an inadequate compensation
for the breach by the parties of such obligations and accordingly, upon any such
breach, in addition to monetary damages, a party shall be entitled to obtain an
order for specific performance of such obligations at any court having
jurisdiction over the other party.
10.3 Year 2000 Liability. Except for WDC's right to purchase from other
suppliers as provided under Section 4.3, in no event shall Komag have any
liability for any failure to provide Products hereunder prior to July 1, 2000,
if such failure is attributable to the failure of any Acquired Assets (as such
term is defined in the Asset Purchase Agreement) to be year 2000 compliant.
ARTICLE 11: CONFIDENTIALITY
11.1 "Confidential Information" means any information disclosed by one
party (the "Disclosing Party") to the other (the "Receiving Party") in relation
to this VPA, which, if in written, graphic, machine-readable or other tangible
form is marked as "Confidential" or "Proprietary," or which, if disclosed orally
or by demonstration, is identified at the time of initial
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disclosure as confidential and reduced to a writing marked "Confidential" and
delivered to the Receiving Party within 30 Days of such disclosure.
11.2 Exclusions. Notwithstanding Section 11.1, Confidential Information
will exclude information that the Receiving Party can demonstrate:
11.2.1 was independently developed by the Receiving Party
without any use of the Disclosing Party's Confidential Information or by the
Receiving Party's employees or other agents (or independent contractors hired by
the Receiving Party) who have not been exposed to the Disclosing Party's
Confidential Information;
11.2.2 becomes known to the Receiving Party, without
restriction, from a source other than the Disclosing Party without breach of
this VPA and that had a right to disclose it;
11.2.3 was in the public domain at the time it was disclosed
or becomes in the public domain through no act or omission of the Receiving
Party; or
11.2.4 was rightfully known to the Receiving Party, without
restriction, at the time of disclosure.
11.3 Compelled Disclosure. If a Receiving Party believes that it will
be compelled by a court or other authority to disclose Confidential Information
of the Disclosing Party, it shall give the Disclosing Party prompt written
notice so that the Disclosing Party may take steps to oppose such disclosure,
and the Receiving Party shall assist in opposing such disclosure at the
Disclosing Party's expense.
11.4 Confidentiality Obligation. During the term of this VPA and for a
period of five years thereafter, the Receiving Party shall keep such
Confidential Information in strict confidence and shall not disclose such
Confidential Information to any third party without prior written consent of the
Disclosing Party.
11.5 Confidentiality of Agreement. Each party agrees that the terms and
conditions, but not the existence, of this VPA will be treated as the other's
Confidential Information and that no reference to the terms and conditions of
this VPA or to activities pertaining thereto can be made in any form of public
or commercial advertising without the prior written consent of the other party;
provided, however, that each party may disclose the terms and conditions of this
VPA: (i) subject to the provisions of Section 11.3 as required by any court or
other governmental body; (ii) as otherwise required by law; (iii) to legal
counsel of the parties; (iv) in connection with the requirements of a public
offering, secondary offering, debt offering, or securities filing of the
parties, or otherwise as obligated by law; (v) in confidence, to accountants,
banks, and financing sources and their advisors; or (vi) in confidence, in
connection with the enforcement of this VPA or rights under this VPA.
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11.6 Remedies. Unauthorized use by a party of the other party's
Confidential Information will diminish the value of such information. Therefore,
if a party breaches any of its obligations with respect to confidentiality or
use of Confidential Information hereunder, the other party will be entitled to
seek equitable relief to protect its interest therein, including injunctive
relief, as well as money damages.
11.7 Non-disclosure Agreements. Each party shall obtain the execution
of proprietary nondisclosure agreements with its Affiliates, including but not
limited to the party's and/or Affiliates' respective agents and consultants
having access to Confidential Information of the other party, shall diligently
enforce such agreements with respect to the Confidential Information, and shall
exercise due care to control the actions of such Affiliates, employees, agents
and consultants in this respect so long as they have a working relationship with
the party obligated hereunder to obtain such nondisclosure agreements.
ARTICLE 12: GENERAL
12.1 Governing Law and Jurisdiction. This VPA will be interpreted, and
the rights and liabilities of the parties hereto determined, in accordance with
the laws of the State of California applicable to agreements executed, delivered
and performed within such State, without regard to the principles of conflicts
of laws thereof. Each of the parties hereby consents to the jurisdiction of any
state or federal court located within the county of Santa Clara in the State of
California (except for resolution of pricing disputes as described in Section
6.2), and each of the parties hereby: (i) waives any objection to venue of any
action instituted under this VPA, and (ii) consents to the granting of such
legal or equitable relief as is deemed appropriate by any aforementioned court.
12.2 Force Majeure. A defaulting party shall provide the nondefaulting
party immediate notice of any anticipated delay or failure of compliance due to
a Force Majeure Event; provided, however, that any such act will not relieve the
defaulting party's obligations hereunder.
12.3 Trademarks. Nothing in this VPA gives either party a right to use
the other party's name, trademark(s), or trade name(s), directly or indirectly,
without the other party's prior written consent, except as may be required by
applicable law or court order. In such a case, the party required to disclose
such information shall provide prompt notice of such requirement in order that
the other party may seek appropriate protective orders.
12.4 Assignment. Except as set forth in this Section 12.4, neither this
Agreement, nor any of the rights or obligations hereunder, may be assigned,
transferred, subcontracted or delegated by a party hereto to any third party,
including without limitation, by operation of law or pursuant to a Change of
Control (as defined below). Notwithstanding the foregoing, (a) Komag may assign
this Agreement, and the rights and obligations hereunder, without the prior
consent of WDC, in connection with a Change of Control, except to a Prohibited
Assignee (as defined below); (b) Komag may assign all or part of this Agreement,
or the rights and obligations hereunder, without
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the prior consent of WDC, to Komag USA (Malaysia) SDN; and (c) WDC may assign
this Agreement, and the rights and obligations hereunder, without the prior
consent of Komag, to a third party in connection with a Change of Control; so
long as WDC assigns all obligations under this Agreement to any party that
succeeds to all or substantially all of WDC's disk drive production business.
For purposes of this Section 12.4, "Change of Control" shall mean (i) any sale,
lease, exchange or other transfer (in one transaction or series of transactions)
of all, or substantially all, of the assets of such party, (ii) any
consolidation or merger or other combination of a party in which such party is
not the continuing or surviving corporation or pursuant to which shares of such
party's common stock would be converted into cash, securities or other property
(other than a merger of such party in which the holders of such party's common
stock immediately prior to the merger hold at least a majority of the
outstanding securities of the combined entity), or (iii) any transaction (or
series of related transactions) pursuant to which any person (as defined in
Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of [***]% or more of such party's outstanding
common stock. For purposes of this Section 12.4, "Prohibited Assignee" shall
mean any third party who (x) [***] Any purported assignment of this VPA or the
rights or obligations of a party under this VPA in violation of this Section
12.4 shall be null, void and of no further force or effect and shall constitute
a Material Default.
12.5 Severability. If any of the provisions of this VPA are held by a
court or other tribunal of competent jurisdiction to be unenforceable, the
remaining portions of this VPA will remain in full force and effect.
12.6 Failure to Enforce. The failure of either party to enforce at any
time or for any period of time the provisions of this VPA will not be construed
to be a waiver of such provisions or of the right of such party to enforce each
and every provision of this VPA in the future.
12.7 Agency. This VPA does not create a principal to agent, employer to
employee, partnership, joint venture, or any other relationship except that of
independent contractors between Komag and WDC.
12.8 Request in Writing. All requests such as Pull Requests,
acceptances/rejections, notices, must be made or confirmed in writing. Such
writings must take the form of electronic mail (receipt confirmed), facsimile
(receipt-confirmed) and/or posted letter (return-receipt).
12.9 Counterparts. This VPA may be executed in one or more
counterparts, each of which will be deemed to be an original, but all of which
will be considered one and the same instrument.
12.10 Notices. Except as otherwise provided herein, all notices
hereunder will be deemed given if (a) in writing and delivered personally; or
(b) sent by facsimile transmission that is
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confirmed by return facsimile or e-mail; to the parties at the following
addresses (or at such other addresses as will be specified by like notice):
(i) if to WDC, to:
Western Digital Corporation
8105 Irvine Center Drive
Irvine CA 92618
Attention: Michael A. Cornelius, VP, Law & Administration,
Secretary
Fax No.: (949) 932-7837
(ii) if to Komag to:
Komag, Incorporated
1704 Automation Parkway
San Jose, California 95131
Attention: Chief Financial Officer
Fax No.: 408 944-9234
Any notice given by mail will be effective when received. Any notice given by
electronic mail or facsimile transmission will be effective when the appropriate
electronic mail or facsimile transmission acknowledgment is received.
12.11 Amendments. This VPA may only be amended in writing signed by
authorized representatives of each of the parties. To be effective, such
amendments must specifically reference this VPA.
12.12 Complete Agreement. This VPA, Exhibits, and specific Purchase
Orders and Pull Requests set forth the complete agreement between the parties
regarding their subject matter and replace all prior or contemporaneous
communications, understandings or agreements, written or oral, about this
subject.
12.13 Performance During Pendency of Disputes. If a dispute arises
between the parties, regardless of whether such dispute requires the use of the
arbitration procedures described in Section 6.2, subject to the terms and
conditions of this Agreement, (a) in no event nor for any reason shall Komag
interrupt the provision of Products to WDC, delay manufacture or delivery of
Products or perform any other action that prevents, slows down, or reduces in
any way the provision of Products or WDC's ability to conduct its business; and
(b) each party shall continue to perform its obligations under this Agreement,
unless: (x) authority to do so has been granted by the other party or conferred
by a court of competent jurisdiction; or (y) this Agreement has been terminated
pursuant to Section 9.2 or 9.3 and a Disentanglement has occurred.
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IN WITNESS WHEREOF, the parties have caused this VPA to be signed and
accepted by their duly authorized representatives, effective as of the Effective
Date.
Western Digital Corporation, Komag, Incorporated,
a Delaware corporation. a Delaware corporation
___________________________ ___________________________
Name:______________________ Name:______________________
Title:_____________________ Title:_____________________
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EXHIBIT A
WDC FISCAL QUARTERS
FY'99
MONTH Start Date End Date Weeks in Qtr.
-----------------------------------------------------------------
Q4 14
April 03/28/99 04/24/99 4
May 04/25/99 05/29/99 5
June 05/30/99 07/03/99 5
FY'00
MONTH Start Date End Date Weeks in Qtr.
-----------------------------------------------------------------
Q1 13
July 07/04/99 07/31/99 4
August 08/01/99 08/28/99 4
September 08/29/99 10/02/99 5
Q2 13
October 10/03/99 10/30/99 4
November 10/31/99 11/27/99 4
December 11/28/99 01/01/00 5
Q3 13
January 01/02/00 01/29/00 4
February 01/30/00 02/26/00 4
March 02/27/00 04/01/00 5
Q4 13
April 04/02/00 04/29/00 4
May 04/30/00 05/27/00 4
June 05/28/00 07/01/00 5
FY'01
MONTH Start Date End Date Weeks in Qtr.
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Q1 13
July 07/02/00 07/29/00 4
August 07/30/00 08/26/00 4
September 08/27/00 09/30/00 5
Q2 13
October 10/01/00 10/28/00 4
November 10/29/00 11/25/00 4
December 11/26/00 12/30/00 5
Q3 13
January 12/31/00 01/27/01 4
February 01/28/01 02/24/01 4
March 02/25/01 03/31/01 5
Q4 13
April 04/01/01 04/28/01 4
May 04/29/01 05/26/01 4
June 05/27/01 06/30/01 5
FY'02
MONTH Start Date End Date Weeks in Qtr.
-----------------------------------------------------------------
Q1 13
July 07/01/01 07/28/01 4
August 07/29/01 08/25/01 4
September 08/26/01 09/29/01 5
Q2 13
October 09/30/01 10/27/01 4
November 10/28/01 11/24/01 4
December 11/25/01 12/29/01 5
Q3 13
January 12/30/01 01/26/02 4
February 01/27/02 02/23/02 4
March 02/24/02 03/30/02 5
Q4 13
April 03/31/02 04/27/02 4
May 04/28/02 05/25/02 4
-21-
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June 05/26/02 06/29/02 5
Note: WDC's fiscal year is reported in a 52/53-week period and will
end on the Saturday closest to June 30. Each fiscal year will
be divided into four quarters. Each quarter will consist of
three months, the first and second of which will be four weeks
long and the last, five weeks. Each week will begin on Sunday
and end on Saturday.
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EXHIBIT B
Initial Unit Prices
WD Fiscal Quarter:
Fiscal Quarter ending [***] Fiscal Quarter Ending [***]
Double Sided Disks ("DSD"):
[***]
Single Sided
[***]
Notes:
1. Above prices are based on WDC specification and Komag specification reviews
that exist as of 3/5/99.
2. The above prices are dependent on terms listed herein.
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EXHIBIT C
Prices for Qualification Sample Products
Year 1999 2000 2001
[***] [***] [***] [***]
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EXHIBIT D
SUPPLIER WARRANTY AND REPLACEMENT PRODUCT TERMS
This Exhibit D sets forth the terms of warranty for Products sold by Komag to
WDC under the VPA. Further, this Exhibit D sets forth certain of the terms for
Komag's supply to WDC of Products used by WDC to replace Product which may have
failed, or which may be required due to failure of WDC disk drives, or
Components of WDC's disk drives other than the Products. All terms not defined
in this Exhibit D will have the meaning assigned them in the VPA. The terms and
conditions of this Exhibit D will supersede any conflicting terms in the VPA,
but only with respect to Replacement Products.
ARTICLE I: DEFINITIONS
1.1 "Replacement Product" means a Unit ordered by WDC, to replace
another Unit, which is identical to the Unit being replaced in design, process,
and location, and either (a) due to a defect in manufacture or workmanship, did
not, at the time of delivery to WDC, conform to the Specifications in effect at
the time the Purchase Order for such Unit was issued; or (b) due to any other
cause, including without limitation a failure of or damage by WDC disk drives or
any Components thereof, fails or no longer conforms to the Specifications in
effect at the time the Purchase Order for such Unit was issued.
1.2 "End of Life" of a WDC Program means the earlier of (a) the
beginning of the first of two sequential Fiscal Quarters when WDC discontinues
high volume purchasing of a Product for such Program, where high volume is
defined as greater than [***] Units per Fiscal Quarter; or (b) when WDC first
begins to purchase a Product used in such Program primarily for disk drive
repair purposes.
1.3 "Replacement Product Period" means the relevant Replacement Product
Period as set forth in Section 3.3.
ARTICLE II: LIMITED WARRANTY
2.1 Limited Warranty. Komag warrants that during the period of one year
after the WDC disk drive build date (but in no event later than 15 Days after
the date of Komag's invoice) for a Unit of a Product ("Warranty Term"), each
such Unit shall (a) be new and conform to the Specifications in effect at the
time the Purchase Order for such Unit is issued; and (b) be free from defects in
materials, workmanship and title under normal use and operation (the "Limited
Warranty"). WDC's sole remedy for a breach of the foregoing warranty will be
limited to Komag issuing a credit to WDC in accordance with the terms set forth
in Section 3.8. OTHER THAN AS SET FORTH IN THIS SECTION 2.1, KOMAG DISCLAIMS ANY
WARRANTY, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
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PURPOSE. THE WARRANTY IN THIS SECTION 2.1 NEITHER ASSUMES NOR AUTHORIZES ANY
OTHER PERSON TO ASSUME FOR KOMAG ANY OTHER LIABILITIES IN CONNECTION WITH THE
SALE OF THE PRODUCTS. The aforesaid warranty and WDC's remedies thereunder are
solely for the benefit of WDC and its subsidiaries and will not be extended or
construed to extend to any other entity whatsoever.
2.2 Limitation of Liability. EXCEPT AS SPECIFICALLY PROVIDED IN SECTION
5.2 OF THIS EXHIBIT D, INDEPENDENTLY OF ANY OTHER REMEDY LIMITATION HEREOF AND
NOTWITHSTANDING ANY FAILURE OF THE ESSENTIAL PURPOSE OF ANY SUCH LIMITED REMEDY,
KOMAG WILL NOT BE LIABLE FOR ANY LIABILITY UNDER THIS EXHIBIT D, INCLUDING
WITHOUT LIMITATION LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS OR FOR
ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING WITHOUT
LIMITATION LOSS OF DATA HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY
RESULTING FROM THIS EXHIBIT D OR FROM THE USE OF THE PRODUCTS IN ANY MANNER, AND
WHETHER OR NOT KOMAG HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
2.3 Warranty Procedure. The parties agree to use the process described
in the Warranty Verification and Disposition flow chart set forth in Attachment
1 to manage and dispose of the Products returned to WDC under warranty.
ARTICLE III: REPLACEMENT PRODUCTS
3.1 Prices. On a quarterly basis, the parties shall agree to
Replacement Product prices for the upcoming Fiscal Quarter, within the
parameters set forth in Attachment 2 hereto.
3.2 Procedure for Returns. WDC shall return or destroy, according to
Komag's instruction, all Units for which WDC seeks replacement by Komag, whether
or not such Units are covered by the Limited Warranty. Komag shall issue an RMA
for all Units WDC wishes to return.
3.3 Replacement Product Period. During the Replacement Product Period
for each Product, Komag shall make available Replacement Products to WDC under
the terms of this Exhibit D. The Replacement Product Periods for the Products
and Programs listed on Attachment 2 will be as indicated therein. For any
Products or Programs whose Replacement Product Period is not listed therein,
Komag shall provide Replacement Products for two years following the End of Life
of the applicable Program. Notwithstanding the foregoing, (a) upon the occasion
of a major process change, or a change that requires Komag to maintain a set of
equipment which is not being used for volume production of other Komag products;
or (b) if Komag intends to discontinue operation of a factory or production line
for such Product or Program; then (w) Komag shall notify WDC as soon in advance
as reasonably practical; (x) the parties shall meet
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and agree on a one-time, firm, non-cancelable purchase order for such
Replacement Products; (y) notwithstanding the provisions of Section 4.2 of this
Exhibit D, such purchase order may be for less than the minimum of Units
required in Section 4.2 of this Exhibit D, but the maximum prices and maximum
price increases of Attachment 2 will nevertheless apply; and (z) WDC shall
purchase all the Units ordered thereunder within an agreed-upon period of time.
Thereafter, Komag shall have no obligation to supply such Replacement Products.
The parties acknowledge that for the Products listed in Attachment 2, there may
be occasions which, due to material changes in Komag's production process (such
as the shift from Tucson / Phase 0 to Chandler / ILE; or aluminum substrate to
glass substrate) may require a change in the Replacement Product Period, and if
so, the parties shall negotiate in good faith a Replacement Product Period that
reflects such material change.
3.4 Tracking. The parties acknowledge that pursuant to the Asset
Purchase Agreement, at Closing (as such term is defined in the Asset Purchase
Agreement), Komag will take over from WDC production of certain Product
inventory and WIP. On or before Closing, WDC shall develop a method to track
Media made by those processes used by WDC at its "Santa Clara Media Operation"
prior to the Closing ("WDC Processes"), sufficient to differentiate between
Media made by the WDC Processes prior to Closing (such units, "Santa Clara
Pre-Closing Units") and Product made by the WDC Processes after Closing. Such
method will include [***] Until WDC establishes such method of tracking, all
Units that Komag and WDC reasonably determine are made using WDC Processes will
be deemed Santa Clara Pre-Closing Units.
3.5 Supply of Replacement Product for Santa Clara Pre-Closing Units.
For Santa Clara Pre-Closing Units of Products included in Attachment 2, Komag
will supply Replacement Product as indicated therein. The terms of this Exhibit
D with respect to forecasting, placement of purchase orders and pricing will
apply to such Replacement Product. Notwithstanding the foregoing, nothing in
this VPA shall require Komag to supply the following Products to WDC: [***].
3.6 Calculating the Percentage of WDC Liability. The parties
acknowledge that Units may not conform to the Specifications due to various
causes, including without limitation (a) defects covered by the Limited Warranty
and occurring within the Warranty Term; (b) damage to such Units caused by WDC
disk drives or by Components thereof other than the Products; and (c) defects or
damage not occurring within the Warranty Term. For Units that do not conform to
the Specifications, for whatever reason, during the Replacement Product Term,
WDC shall provide reasonably sufficient data on Units that are removed from
failed drives to assess (x) cause of failure and (y) whether the Units are
within the Warranty Term. By mutual engineering analysis of such data, WDC and
Komag shall agree on the percentage of WDC's liability ("%BL") for such
failures. Such determination will be based on a percentage equal to the number
of Units of a Product that fail, due to all causes other than failure of the
Units to conform to the Limited Warranty during the Warranty Term, divided by
the total Units of a Product that fail. %BL will be determined for each Program
through the use of the Media Warranty Verification and Disposition Process
specified in Attachment 1. Any Unit that is
-3-
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modified, misused, or damaged after delivery of such Unit to WDC will be
included in the numerator of fraction that determines the %BL.
3.7 Pricing for Replacement Product. Prices for Replacement Products
("Base Line Price" or "BP"), whether such Products are subject to the Limited
Warranty or not, will be [***].
3.8 Credit Value. The credit value ("CV") will be calculated for each
Product and Program as shown below. [***]
3.9 Issuance of Credit Voucher. No later than seven days after the end
of each month, Komag shall issue to WDC a credit voucher in the amount of the CV
for Units returned during such month.
ARTICLE IV: FORECASTING, PURCHASE ORDERS AND FULFILLMENT
4.1 Replacement Product Forecast. Each month commencing on the
Effective Date, for each Product, WDC shall provide Komag with a forecast of
WDC's requirements for each Replacement Product during the Replacement Product
Period, which forecast must be based on an estimated failure rate for the
relevant Product. WDC's Replacement Product forecast will include weekly
requirements for the first 13 weeks, monthly requirements for the 14th to 26th
weeks, and Fiscal Quarterly requirements for the balance of the Replacement
Product Period. This Replacement Product forecast does not constitute a purchase
order. Within five Business Days of receiving WDC's forecast, Komag shall
provide feedback to WDC to support or challenge the validity of the forecast,
including a tentative delivery schedule.
4.2 Purchase Orders. WDC shall, no later than 60 Days before the
beginning of each Fiscal Quarter, submit to Komag a firm, non-cancelable
purchase order for Replacement Products for such Fiscal Quarter. Komag will not
be obligated to supply Units of Replacement Products ordered for each Program by
WDC for any Fiscal Quarter, in excess of 25% over the Units of Replacement
Products forecasted by WDC for such Program for such Replacement Product for
such Fiscal Quarter, but Komag shall use commercially reasonable efforts to
supply such Replacement Products. Except as otherwise expressly provided herein,
each purchase order for a particular Product shall be for at least (a) [***]
Units for Products made using in-line sputtering; and (b) [***] for Products
made using static sputtering. Except as otherwise provided in Section 3.3
following Komag's notice as required therein, in the event that WDC desires to
place an order for a last-time buy of fewer than such number of Units, the
parties shall first agree to an appropriate Price for such purchase order, which
Price shall not be limited by the maximum percentage price increases and maximum
prices set forth in Attachment 2.
4.3 Liability Limitation. WDC's liability for cancellation of purchase
orders for Replacement Products shall not exceed the quantities and Prices
specified in the applicable purchase order.
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ARTICLE V: DELIVERY OBLIGATIONS
5.1 Komag Failure Analysis Obligations. Komag shall use commercially
reasonable efforts to ensure that Komag is capable of executing failure analysis
for Products corresponding to the relevant Replacement Products during the
Replacement Product Period.
5.2 [***]
5.3 Increased Forecasts. If WDC's Replacement Product requirements
forecasted under Section 4.1 of this Exhibit D for a Fiscal Quarter increases by
more than [***]% from the previous Fiscal Quarter's forecast, then [***]
5.4 [***] Exception. Section 5.2 of this Exhibit D will apply to the
[***] Program for only so long as WDC places purchase orders for and purchases
[***] Units or more of Replacement Product for the [***] in each Fiscal Quarter.
In the event that WDC does not do so, Komag will notify WDC that WDC may make a
last-time buy and will not be obligated to reimburse WDC under Section 5.2 of
this Exhibit D for forecasts based on sales of disk drives in the [***] for any
cost in or after the first Fiscal Quarter in which WDC fails to do so. In the
event that WDC desires to place an order for a last-time buy of fewer than [***]
of such Units, the parties shall first agree to an appropriate Price for such
purchase order, which Price shall not be limited by the maximum percentage price
increases and maximum prices set forth in Attachment 2.
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ATTACHMENT 1
Warranty verification and disposition flow chart
[***]
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ATTACHMENT 2
Media-Pricing Table
<CAPTION>
- ---------------- -------------------- ---------------- ----------------------------------------------- -------------------
Program Price at Start of Maximum % Start of Replacement Product Period Maximum Price
End of Life Period Price Increase End of Replacement Product Period During
per Fiscal Replacement
Quarter Product Period
- ---------------- -------------------- ---------------- ----------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] [***] [***] [***] [***] [***]
- ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
</TABLE>
[***]
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> APR-05-1999
<PERIOD-END> JUL-04-1999
<CASH> 30,506
<SECURITIES> 63,965
<RECEIVABLES> 50,728
<ALLOWANCES> 3,076
<INVENTORY> 44,266
<CURRENT-ASSETS> 204,732
<PP&E> 939,714
<DEPRECIATION> 495,734
<TOTAL-ASSETS> 728,599
<CURRENT-LIABILITIES> 333,265
<BONDS> 0
0
0
<COMMON> 654
<OTHER-SE> 300,221
<TOTAL-LIABILITY-AND-EQUITY> 707,413
<SALES> 93,226
<TOTAL-REVENUES> 93,226
<CGS> 97,857
<TOTAL-COSTS> 97,857
<OTHER-EXPENSES> 29,443
<LOSS-PROVISION> 194
<INTEREST-EXPENSE> 5,935
<INCOME-PRETAX> (37,795)
<INCOME-TAX> 350
<INCOME-CONTINUING> (28,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,234)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
