SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
KOMAG, INCORPORATED
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(Name of Registrant as Specified in its Charter)
KOMAG, INCORPORATED
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(Name of Person(s) Filing Proxy Statement)
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[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
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was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 1999
The annual meeting of stockholders (the "Annual Meeting" of Komag,
Incorporated (the "Company")) will be held at Komag, Incorporated, Building 9,
1705 Automation Parkway, San Jose, California, 95131 on Tuesday, May 25, 1999,
at 10:00 a.m. for the following purposes:
1. To elect the Board of Directors for the following year.
2. To approve an amendment to the Company's 1988 Employee Stock
Purchase Plan to increase the number of shares reserved for
issuance thereunder by 2,550,000 shares.
3. To consider and vote upon a proposal to approve the sale and
issuance by the Company from time to time of up to $250
million of Common Stock or securities convertible into Common
Stock in private transactions through October 1, 2000 at a
price below book value but at or above the then current market
price of the Common Stock.
4. To amend the Company's Restated 1987 Stock Option Plan to
increase the number of stock options to be granted to
re-elected non-employee Board members under the Automatic
Option Grant Program from 7,500 to 12,000 shares annually.
5. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending January 2,
2000.
6. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Stockholders of record at the close of
business on March 29, 1999 will be entitled to vote at the Annual Meeting. A
list of stockholders entitled to vote at the Annual Meeting will be available
for inspection at the offices of the Company. If you attend the Annual Meeting
and vote by ballot, your proxy will be revoked automatically and only your vote
at the Annual Meeting will be counted. The prompt return of your proxy will
assist us in preparing for the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting. A
map to Komag's location is included at the end of the Proxy Statement for
reference.
BY ORDER OF THE BOARD OF DIRECTORS
Stephen C. Johnson,
President and Chief Executive Officer
Tu Chen,
Chairman of the Board
San Jose, California
April 16, 1999
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO
VOTE PROMPTLY ON THE ENCLOSED PROXY.
<PAGE>
TABLE OF CONTENTS
General ................................................................... 1
Principal Stockholders .................................................... 2
Stock Ownership Table ..................................................... 3
Item No. 1 - Election of Directors ........................................ 4
Nominees .................................................................. 5
Committees and Meetings of the Board of Directors ......................... 6
Director Remuneration ..................................................... 7
Item No. 2 - Approval of Amendment to the 1998 Employee Stock Purchase Plan 8
Item No. 3 - Financing .................................................... 13
Item No. 4 - Approval of Amendment to the Restated 1987 Stock Option Plan . 15
Item No. 5 - Ratification of Independent Auditors ......................... 22
Executive Compensation and Related Information ............................ 22
Stock Performance Graph ................................................... 26
Summary Compensation Table ................................................ 27
Options Grant Table ....................................................... 29
Option Exercises and Year-End Value Table ................................. 31
Option Regrant Program .................................................... 32
Compliance with Section 16(a) Beneficial Ownership Reporting .............. 34
Other Business ............................................................ 34
Stockholder Proposals ..................................................... 35
Appendices ................................................................ A-1
A copy of the Annual Report to Stockholders of Komag, Incorporated, which
includes financial statements, is being mailed with this Proxy Statement. You
may receive an additional copy of the Annual Report to Stockholders at no charge
upon request directed to:
Komag, Incorporated
Attn: Investor Relations
1704 Automation Parkway
San Jose, California 95131
Financial Information may also be accessed on our Web site at: www.komag.com
<PAGE>
KOMAG, INCORPORATED
1704 Automation Parkway
San Jose, California 95131
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 1999
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Komag, Incorporated, a Delaware corporation (the "Company"), for use at the
Annual Meeting to be held on May 25, 1999. The Annual Meeting will begin at
10:00 a.m. at Komag, Incorporated, Building 9, 1705 Automation Parkway, San
Jose, CA 95131. Stockholders of record on March 29, 1999 will be entitled to
notice of and to vote at the Annual Meeting.
This Proxy Statement and accompanying proxy (the "Proxy") were first
mailed to stockholders on or about May 3, 1999.
Voting
Your vote is important. Because many stockholders cannot attend the
meeting, it is necessary that a large number be represented by proxy. As
described in more detail below, if you are a stockholder of record you may vote
four ways: (1) by attending the meeting, (2) by using the toll-free number
listed on the proxy card, (3) by voting on the Internet at the address listed on
the proxy card, or (4) by marking, signing, dating, and mailing your proxy in
the envelope provided.
On March 29, 1999, the record date for determination of stockholders
entitled to vote at the Annual Meeting, there were 53,920,660 shares of Common
Stock outstanding. Each stockholder is entitled to one (1) vote for each share
of Common Stock held by such stockholder. Directors will be elected by a
plurality vote. Other matters submitted for stockholder approval at this Annual
Meeting will be decided by the affirmative vote of a majority of the shares
present or represented and entitled to vote on each such matter. Abstentions
with respect to any matter other than the election of directors are treated as
shares present or represented and have the same effect as negative votes. If
shares are not voted by the broker who is the record holder of the shares, or if
shares are not voted in other circumstances in which proxy authority is
defective or has been withheld with respect to any matter, these non-voted
shares are not deemed to be present or represented for purposes of determining
whether stockholder approval of that matter has been obtained. Each stockholder
voting for the election of directors may cumulate such stockholder's vote. Under
cumulative voting, a stockholder is allowed one (1) vote per share multiplied by
the number of directors to be elected (nine (9) at this meeting) and may cast
such cumulative total for one (1) nominee or may distribute such number among as
many nominees as such stockholder chooses.
Revocability of Proxies
Any person giving a proxy has the power to revoke it at any time before
its exercise. A proxy may be revoked by filing with the Secretary of the Company
at the Company's principal executive office, 1704 Automation Parkway, San Jose,
California, 95131, a notice of revocation or another signed proxy with a later
date. You may also revoke your proxy by attending the Annual Meeting and voting
in person.
<PAGE>
Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement and any
additional soliciting materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward these solicitation materials to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram or other means by directors, officers, employees or agents
of the Company. No additional compensation will be paid to these individuals for
any such services. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
<TABLE>
Principal Stockholders
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock per Schedule 13G filings
prior to March 29, 1999 for all persons who are known to be beneficial owners of
five percent or more of the Company's Common Stock.
<CAPTION>
Name and Address of Percent
Beneficial Owner Amount and Nature of Beneficial Ownership of Class
---------------- ----------------------------------------- --------
<S> <C> <C>
Franklin Resources, Inc. 5,135,385 9.5%
777 Mariners Island Boulevard (sole voting power and dispositive power as to
4,557,900 shares by Franklin Advisers, Inc.; sole
San Mateo, CA 94404 voting power as to 90,000 shares and sole dispositive
power as to 485,000 shares by Franklin Advisory
Services, Inc.; sole dispositive power as to 92,485
shares by Franklin Management, Inc. per February 2,
1999 Schedule 13G filing)
First Pacific Advisors, Inc. 2,780,000 5.2%
11400 W. Olympic Blvd., #1200 (sole voting power as to 837,600 shares; sole
dispositive power as to 2,780,000 shares per
Los Angeles, CA 90064 February 12, 1999 Schedule 13G filing).
</TABLE>
2
<PAGE>
Stock Ownership Table
The table below indicates the number of shares of the Corporation's
common stock beneficially owned as of March 29, 1999 by directors, the nominees
recommended by the Nominating Committee and nominated by the Board of Directors
for election as directors, by each of the current executive officers listed in
the Summary Compensation Table below, and by all current directors and executive
officers as a group. Except as otherwise noted, each person has sole investment
and voting powers with respect to the shares shown as beneficially owned.
Ownership information is based upon information furnished by the respective
individuals.
DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS
Shares Beneficially Owned(9)
----------------------------
Name Number Percentage
---- ------ ----------
Tu Chen ............................................. 493,424 *
Stephen C. Johnson (1) .............................. 298,214 *
Craig R. Barrett (2)(3) ............................. 95,500 *
Chris A. Eyre (2) ................................... 54,500 *
Irwin Federman (4) .................................. 115,371 *
George A. Neil (5) .................................. 40,500 *
Max Palevsky (2) .................................... 119,627 *
[Director Nominee] .................................. --
Anthony Sun (2) ..................................... 127,310 *
Masayoshi Takebayashi (6)(7) ........................ 47,750 *
Thian H. Tan ........................................ 35,442 *
Christopher H. Bajorek .............................. 33,392 *
Ray Martin .......................................... --
Current executive officers and directors as
a group (21 persons) (8) ............................ 1,586,870 2.9%
* Less than 1%
3
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(1) Includes 88,150 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(2) Includes 53,500 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(3) Mr. Barrett is a current director and intends to retire from the board by
May 25, 1999.
(4) Includes 24,500 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(5) Includes 39,500 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(6) Includes 27,750 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(7) Excludes shares held by Kobe Steel, Ltd. and Kobe Steel USA Holdings
Incorporated. Mr. Takebayashi is an Executive Officer of Kobe Precision,
Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd., and on such
basis may be deemed, under the 1934 Act, the beneficial owner of the
2,000,002 shares beneficially owned by such corporations with shared voting
and investment power with respect thereto. Mr. Takebayashi disclaims
beneficial ownership of these shares.
(8) Includes 423,336 shares subject to options which are currently exercisable
or which will become exercisable within sixty (60) days after March 29,
1999.
(9) Some of the individuals may share voting power with regard to the shares
listed herein with their spouses.
ITEM NO. 1 --
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall be
comprised of between eight (8) and twelve (12) directors, with the exact number
to be fixed by the Board. During the 1998 fiscal year the Board consisted of
nine (9) members. The Board has set the number of directors as nine (9) for the
coming year. At the Annual Meeting, nine (9) directors will be elected to serve
until the Company's next Annual Meeting and until their successors are elected
and qualified. The Board of Directors has selected nine (9) nominees, eight of
whom are current directors of the Company and one new nominee.
Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unavailable to
serve. Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR the nominees named below. The nine (9) candidates receiving
the highest number of affirmative votes of the shares entitled to vote at the
Annual Meeting will be elected directors of the Company.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote FOR the
election of each of the following nominees to serve as directors of the Company
for the ensuing year until the next Annual Meeting at which time their
successors are elected and qualified.
4
<PAGE>
<TABLE>
Director Nominees
Set forth below is information regarding the director nominees,
including information furnished by them as to principal occupations, business
experience, certain other directorships held by them, any arrangements pursuant
to which they were selected as directors or nominees.
<CAPTION>
Year
First Elected
Nominees Age Director
-------- --- --------
<S> <C> <C> <C>
Tu Chen............................. Chairman of the Board of the Company 64 1983
Stephen C. Johnson.................. President and Chief Executive Officer of the 56 1983
Company
Chris A. Eyre....................... Private Investor 52 1983
Irwin Federman...................... General Partner, U.S. Venture Partners 63 1983
George A. Neil...................... Consultant to Asahi Glass America, Incorporated 61 1994
Max Palevsky........................ Private Investor 74 1984
[Director Nominee].................. --
Anthony Sun......................... General Partner, Venrock Associates 46 1983
Masayoshi Takebayashi .............. President, Chief Executive Officer, 64 1992
Kobe Precision, Incorporated
</TABLE>
Dr. Chen is a founder of the Company and has served as Chairman of the
Board of the Company from its inception in June 1983. From 1971 to June 1983, he
was a Member, Research Staff and principal scientist at Xerox Corporation's Palo
Alto Research Center. From 1968 to 1971, Dr. Chen was employed as a research
scientist for Northrop Corp. Dr. Chen is a director of Asahi Komag Co. Ltd,
Headway Technologies, Incorporated.
Mr. Johnson is a founder of the Company and has served as President,
Chief Executive Officer and a director of the Company since September 1983. From
1977 to 1983, Mr. Johnson was an officer of Boschert Incorporated, a
manufacturer of switching power supplies, initially as Vice President, Marketing
and subsequently as President and Chief Executive Officer. Mr. Johnson is a
director of Asahi Komag Co. Ltd., Dastek Holding Company, Dastek (M) Sdn. Bhd.,
Komag Distribution Company, Komag Asia-Pacific, Incorporated, Komag Technology
(N) B.V., Komag Netherlands Antiles N.V., Exabyte Corporation, and Uniphase
Corporation.
Mr. Eyre has served as a director of the Company since September 1983.
Mr. Eyre is a private investor and from 1980 to 1987 served as a general partner
of Merrill, Pickard, Anderson & Eyre, a general partnership which manages a
series of venture capital partnerships.
Mr. Federman has served as a director of the Company since September
1983. In April 1990, Mr. Federman joined U.S. Venture Partners, a general
partnership which manages a series of venture capital partnerships, as a general
partner. From February 1988 to March 1990, Mr. Federman served as Managing
Director of Dillon, Read & Co. Incorporated, an investment banking and
securities firm. From 1979 until August 1987, Mr. Federman was President and
Chief Executive Officer of Monolithic Memories, Incorporated. Mr. Federman was
elected Vice Chairman of the Board of Directors of Advanced Micro Devices,
Incorporated ("AMD") when
5
<PAGE>
Monolithic Memories merged with AMD, and served in that capacity until January
1988. He is also a director of Western Digital Corporation, SanDisk Corporation,
Checkpoint Software Technologies, Ltd., Neomagic, Incorporated, and MMC
Networks, Inc.
Mr. Neil has served as Consultant to Asahi Glass America, Incorporated
since January 1997. From 1990 through 1996, Mr. Neil served as Senior Vice
President of Asahi Glass America, Incorporated. From March 1989 to January 1990,
Mr. Neil held several executive positions at various ceramic companies. From
August 1986 to July 1990, Mr. Neil was a consultant and President for
Thunderbird Technologies, a company specializing in high-speed, low power
integrated circuits. From October 1961 to May 1986, Mr. Neil served in various
management positions with Corning, Incorporated, including Executive Vice
President of Iwaki Glass and President of Corning Japan. Mr. Neil was selected
as a nominee pursuant to the terms of a Common Stock Purchase Agreement between
the Company and Asahi Glass Co. Ltd.
Mr. Palevsky has served as a director of the Company since November
1984. He was a member of the Governing Board of the Institute for Advanced
Study, Princeton, New Jersey. Mr. Palevsky retired as a director and Chairman of
the Executive Committee of Xerox Corporation in 1972. He is a director emeritus
of Intel Corporation.
[Director Nominee]
Mr. Sun has served as a director of the Company since September 1983.
Since 1979, he has been associated with Venrock Associates, a venture capital
partnership, and has been a general partner since 1980. Mr. Sun is a director of
3Dfx Interactive Corporation, Cognex Corporation, Phoenix Technologies Ltd.,
Worldtalk Communications Corporation, and several privately held companies.
Mr. Takebayashi has served as a director of the Company since May 1992.
Since September 1964, he has served in various positions with Kobe Steel, Ltd.
and its subsidiaries, most recently as President, Chief Executive Officer of
Kobe Precision, Incorporated, a wholly-owned subsidiary of Kobe Steel, Ltd.,
since January 1988. From January 1986 to December 1988, he was the General
Manager, International Marketing and Sales Overseas Department of the Aluminum &
Copper Division of Kobe Steel, Ltd. He is a member of the board of directors for
Kobe Precision Technology Malaysia, Sdn. Bhd., and a member of the Board of
Directors of Komag Material Technology, Incorporated. Mr. Takebayashi was
selected as a nominee pursuant to the terms of a Common Stock Purchase Agreement
between the Company and Kobe Steel USA Holdings Incorporated.
Committees and Meetings of the Board of Directors
During the fiscal year ended January 3, 1999, the Board of Directors
held seven (7) meetings. During this period, each of the directors, except
Messrs. Palevsky, Sun and Federman attended or participated in at least
seventy-five percent (75%) of the aggregate number of Board of Directors
meetings and committee meetings of the Board on which he served. Mr. Palevsky
attended two (2) Board of Directors meetings and four (4) of the six (6)
meetings of committees on which he serves; Mr. Sun attended four (4) Board of
Directors meetings and three (3) of the four (4) meetings of committees on which
he serves; Mr. Federman attended five (5) Board of Directors Meetings and four
(4) of the six (6) meetings of committees on which he serves.
The Company has five standing committees: an Audit Committee, a
Compensation Committee, a Primary Stock Option Plan Committee, a Nominating
Committee, and a Special Stock Option Plan Administration Committee.
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent auditors and reviewing reports of the
Company's auditors regarding the Company's accounting practices
6
<PAGE>
and systems of internal accounting controls. The Audit Committee formally met
four (4) times during the last fiscal year. This Committee currently consists of
Messrs. Eyre, Neil and Sun.
The Compensation Committee reviews and approves the Company's general
compensation policies and sets compensation levels for the Company's executive
officers. This Committee currently consists of Dr. Barrett and Messrs. Federman,
Palevsky and Takebayashi. During fiscal 1998, the Compensation Committee
formally met two (2) times.
The Primary Stock Option Plan Committee administers the discretionary
option grant program of the Company's Restated 1987 Stock Option Plan and the
Company's 1997 Supplemental Stock Option Plan (the "Option Plans") with respect
to the Company officers who are subject to the short-swing profit restrictions
of the federal securities laws. The Committee also administers the Company's
Employee Stock Purchase Plan. This Committee currently consists of Dr. Barrett
and Messrs. Federman and Palevsky. The Primary Stock Option Plan Committee met
three (3) times during the last fiscal year.
The Nominating Committee is responsible for recommending nominees for
members of the Company's Board of Directors. This Committee currently consists
of Dr. Chen, and Messrs. Eyre, Johnson, Neil and Takebayashi, with Dr. Chen
serving as Chairman. This Committee met on March 18, 1998. The Nominating
Committee has not instituted proceedings to consider nominees recommended by
security holders, but may do so in the future.
The Special Stock Option Plan Administration Committee (the "Secondary
Committee") has separate but concurrent jurisdiction with the Primary Stock
Option Plan Committee to administer the discretionary option grant program of
the Option Plans with respect to non-officer employees. The option grants made
by the Secondary Committee will comply with certain guidelines established by
the Primary Stock Option Plan Committee. The Secondary Committee currently
consists of Dr. Chen and Mr. Johnson and performs its duties on an ongoing
basis.
Director Remuneration
Non-employee Board members receive $4,500 per fiscal quarter and a
$1,000 meeting fee for each Board of Directors meeting or Board Committee
meeting attended, including telephonic meetings. Non-employee Board members are
also eligible to receive periodic option grants under the Automatic Option Grant
Program in effect for them under the Option Plans. Each individual who first
becomes a non-employee Board member, whether through election by the
stockholders or appointment by the Board, will receive, at the time of such
initial election or appointment, a stock option grant to purchase 30,000 shares
of Common Stock. On the date of each Annual Stockholders Meeting, each
individual who is re-elected as a non-employee Board member will receive an
option to purchase 12,000 shares of Common Stock assuming stockholder approval
of Item number 4, provided such individual has served on the Board for at least
six months. Each option grant will have an exercise price equal to the fair
market value of the option shares on the grant date and will have a maximum term
of ten years, subject to earlier termination upon the optionee's cessation of
Board service.
Each non-employee director re-elected at the 1998 Annual Meeting
(Messrs. Barrett, Eyre, Federman, Neil, Palevsky, Sun and Takebayashi) received
at that time an option to purchase 7,500 shares with an exercise price of
$10.625 per share. Each option will become exercisable for all the option shares
upon the optionee's completion of one year of non-employee director service
measured from the grant date. However, the option will become immediately
exercisable for all of the option shares upon an acquisition of the Company by
merger, consolidation or asset sale or upon certain other changes in control or
ownership of the Company. Upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding Common Stock, each of these
options will automatically be canceled, and each optionee will in return receive
a cash distribution from the Company in an amount per canceled option share
equal to the excess of (i) the highest reported price per share of Common Stock
paid in the tender offer over (ii) the option exercise price payable per share.
7
<PAGE>
ITEM NO. 2 -- APPROVAL OF AMENDMENT
TO 1988 EMPLOYEE STOCK PURCHASE PLAN
Introduction
The stockholders are being asked to vote on a proposal to approve an
amendment to the Company's 1988 Employee Stock Purchase Plan (the "Purchase
Plan") which will increase the number of shares available for issuance by
2,550,000 shares of Common Stock. The Board of Directors believes that the share
increase is necessary to assure that eligible employees of the Company and its
participating affiliates will continue to have the opportunity to acquire an
equity interest in the Company and thereby further align their interests with
those of the stockholders.
The Purchase Plan was adopted by the Board of Directors on January 21,
1988, and was approved by the stockholders on June 7, 1988. On February 4, 1999,
the Board of Directors adopted the amendment to the Purchase Plan to increase
the number of shares available for issuance by 2,550,000 which is the subject of
this Item No. 2.
The terms and provisions of the Purchase Plan, as amended, are
summarized below. This summary, however, does not purport to be a complete
description of the Purchase Plan. A copy of the Plan is attached hereto as
Exhibit A.
Administration
The Purchase Plan is administered by the Primary Stock Option Plan
Committee, which consists of at least two non-employee Board members appointed
by the Board. Such Committee, as Plan Administrator, has full authority to adopt
administrative rules and procedures and to interpret the provisions of the
Purchase Plan. All costs and expenses incurred in the administration of the
Purchase Plan are paid by the Company without charge to participants.
Securities Subject to the Purchase Plan
The maximum number of shares of Common Stock that may be sold to
participants over the term of the Purchase Plan may not exceed 7,400,000 shares,
assuming stockholder approval of this Item No. 2. The shares of Common Stock
issuable under the Purchase Plan may be either shares newly issued by the
Company or shares reacquired by the Company, including shares purchased on the
open market.
In the event any change is made to the Company's outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
combination of shares, or other similar change in the corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
purchasable under the Purchase Plan, (ii) the class and maximum number of
securities purchasable per participant on any one purchase date, and (iii) the
class and number of securities purchasable and the price per share payable under
each outstanding purchase right. Such adjustments will prevent any dilution or
enlargement of participant rights under the Purchase Plan.
8
<PAGE>
Eligibility and Participation
Any individual who is employed on a basis under which he or she is
expected to work more than twenty (20) hours per week for more than five (5)
months per calendar year in the employ of the Company or any participating
parent or subsidiary corporation (including any corporation which subsequently
becomes such at any time during the term of the Purchase Plan) is eligible to
participate in the Purchase Plan upon commencement of employment. Currently,
Komag Material Technology, Incorporated, Komag Asia-Pacific, Incorporated, and
Komag U.S.A. (Malaysia) Sdn. are participating corporate affiliates.
As of March 29, 1999, 4,115,073 shares of Common Stock had been issued
under the Purchase Plan, and 3,284,927 shares were available for future issuance
(assuming stockholder approval of this Item No. 2). As of March 29, 1999,
approximately 3,993 employees (including 13 current executive officers) were
eligible to participate in the Purchase Plan.
Purchase Periods
The Purchase Plan was amended in 1998 from a series of overlapping
quarterly or semi-annual purchase periods over a duration not to exceed
twenty-four (24) months, to a series of successive quarterly or semi-annual
purchase periods not to exceed six (6) months per purchase period, as determined
by the Plan Administrator prior to the commencement date of the purchase period.
Purchase periods may begin, at the Plan Administrator's discretion, on the first
day or the first Monday of each fiscal quarter or each alternate fiscal quarter.
Accordingly, up to four (4) separate purchase periods may commence in each
fiscal year during which the Purchase Plan remains in existence.
Participants are granted a separate purchase right for each purchase
period in which they participate. The purchase right is granted on the first day
of the purchase period and is automatically exercised on the last date of each
successive three (3)-month or six (6)-month period within that purchase period
("Purchase Date"). No employee may participate in more than one purchase period
at a time.
Purchase Price
The purchase price of the Common Stock acquired on each Purchase Date
is equal to eighty-five percent (85%) of the lower of (i) the fair market value
per share of Common Stock on the date on which such purchase right is granted or
(ii) the fair market value on such Purchase Date. The fair market value of
Common Stock on any relevant date will be the closing price per share on such
date as reported on the Nasdaq National Market. The fair market value per share
determined on such basis was $5.3125 on March 29, 1999.
Purchase Rights and Stock Purchases
Each participant may authorize periodic payroll deductions of up to ten
percent (10%) of his or her base pay during the relevant purchase period for the
purchase of Common Stock under the Purchase Plan. On each Purchase Date, the
accumulated payroll deductions of each participant is automatically applied to
the purchase of whole shares of Common Stock at the purchase price in effect for
that Purchase Date. The maximum number of shares purchasable by the participant
on any Purchase Date may not exceed 3,000 shares in the case of quarterly
Purchase Dates or 6,000 shares in the case of semi-annual Purchase Dates. In
addition, no executive officer of the Company may purchase more than 50,000
shares in the aggregate over the term of the Purchase Plan.
9
<PAGE>
Termination of Purchase Rights
The purchase right of a participant terminates upon (i) such
individual's termination of employment or (ii) his or her voluntary withdrawal
from the Purchase Plan. Any payroll deductions that the participant may have
made with respect to the terminated purchase right is refunded. However, should
the participant's employment terminate by reason of death or permanent
disability, then that participant (or the legal representative of his or her
estate) may, in lieu of such refund, elect to have the accumulated payroll
deductions applied to the purchase of Common Stock on the next Purchase Date.
Stockholder Rights
No participant has any stockholder rights with respect to the shares
covered by his or her purchase right until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
Assignability
No purchase rights are assignable or transferable by the participant
except by will or by laws of inheritance. An outstanding purchase right may,
during the participant's lifetime, be exercisable only by that participant.
Merger or Liquidation of Company
In the event the Company or its stockholders enter into an agreement to
dispose of all or substantially all of the assets or outstanding capital stock
of the Company by means of a sale, merger or reorganization in which the Company
will not be the surviving corporation or in the event the Company is liquidated,
then all outstanding purchase rights will, in connection with the consummation
of such transaction, be exercised immediately prior to such transaction by
applying all payroll deductions previously collected from participants during
the purchase period to the purchase of whole shares of Common Stock at a price
per share equal to eighty-five percent of the lower of (i) the fair market value
per share of Common Stock on the start date of the purchase period in which that
transaction occurs or (ii) the fair market value per share at the time of
purchase.
Amendment and Termination
The Purchase Plan will terminate upon the earlier of (i) December 31,
2001 or (ii) the date on which all shares available for issuance thereunder are
sold pursuant to exercised purchase rights. However, the Board may at any time
alter, suspend or discontinue the Purchase Plan. However, the Board may not,
without stockholder approval, (i) increase the number of shares issuable under
the Purchase Plan, except in connection with certain changes in the Company's
capital structure, (ii) alter the purchase price formula so as to reduce the
purchase price or (iii) modify the eligibility requirements for participation in
the Purchase Plan.
10
<PAGE>
<TABLE>
Stock Purchases
The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated groups, the
number of shares of Common Stock purchased under the Purchase Plan between
December 29, 1997 and March 29, 1999, together with the weighted average
purchase price paid per share.
<CAPTION>
PURCHASE PLAN TRANSACTIONS
- ----------------------------------------------------------------------------------------------------------------------
Number of Weighted Average
Name Purchased Shares Purchase Price
- ---- ---------------- --------------
<S> <C> <C>
Stephen C. Johnson 1,818 $4.675
Tu Chen 1,818 $4.675
Christopher H. Bajorek 1,818 $4.675
Thian H. Tan 1,818 $4.675
Ray L. Martin -- --
Willard L. Kauffman 1,818 $4.675
Sonny S. J. Wey 1,818 $4.675
All executive officers as a group (15 persons) 20,407 $4.666
All employees, including current officers who are not 904,769 $4.627
executive officers, as a group (2,672 persons)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Federal Tax Consequences
The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan or in the event the participant should die while still owning the purchased
shares.
If the participant sells or otherwise disposes of the purchased shares
within two (2) years after the start date of the offering period in which such
shares were acquired or within one (1) year after the date on which those shares
were actually purchased, then the participant will recognize ordinary income in
the year of sale or disposition equal to the amount by which the fair market
value of the shares on the purchase date exceeded the purchase price paid for
those shares, and the Company will be entitled to an income tax deduction, for
the taxable year in which such disposition occurs, equal in amount to such
excess.
If the participant sells or disposes of the purchased shares more than
two (2) years after his or her entry date into the offering period in which the
shares were acquired and more than one year after the purchase date of those
11
<PAGE>
shares, then the participant will recognize ordinary income in the year of sale
or disposition equal to the lesser of (i) the amount by which the fair market
value of the shares on the sale or disposition date exceeded the purchase price
paid for those shares or (ii) fifteen percent (15%) of the fair market value of
the shares on the participant's entry date into that offering period. Any
additional gain upon the disposition will be taxed as a long-term capital gain.
The Company will not be entitled to an income tax deduction with respect to such
disposition.
If the participant still owns the purchased shares at the time of
death, the lesser of (i) the amount by which the fair market value of the shares
on the date of death exceeds the purchase price or (ii) fifteen percent (15%) of
the fair market value of the shares on his or her entry date into the offering
period in which those shares were acquired will constitute ordinary income in
the year of death.
Accounting Treatment
Under current accounting rules, the issuance of Common Stock under the
Purchase Plan will not result in a compensation expense chargeable against the
Company's reported earnings provided that prior to the beginning of each
offering period the Company has an authorized share reserve equal to or greater
than the number of shares issued during the offering period. However, the
Company must disclose, in notes to the Company's financial statements, the pro
forma impact which the purchase rights granted under the Purchase Plan would
have upon the Company's reported earnings were the value of those purchase
rights treated as compensation expense.
Recommendation of the Board of Directors
The Company is seeking the affirmative vote of a majority of the issued
and outstanding shares present or represented and entitled to vote at the 1999
Annual Meeting for approval of the amendment to the Purchase Plan. The Board of
Directors believes that the amendment to the Purchase Plan is necessary in order
to continue to provide equity incentives to attract and retain the services of
high quality employees. For this reason, the Board of Directors recommends that
the stockholders vote FOR this proposal. If the stockholders do not approve the
proposal, then no purchase rights will be granted under the Purchase Plan beyond
the currently authorized 4,850,000 shares.
12
<PAGE>
ITEM NO. 3 --
FINANCING
The Company is seeking to renew authorization from stockholders to sell
and issue up to $250 million 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 as defined by the National
Association of Securities Dealers, Inc. (the "NASD") of the Common Stock (the
"Financing Proposal").
Background
The Company expects to enter into a Restructuring Agreement to
restructure its credit facilities. Under the proposed terms of the restructured
credit facilities the Company would be required to repay $15.0 million of
principal during 1999 and another $15.0 million of principal during the first
nine months of 2000. Additional principal payments would be due from portions of
new capital raised, asset sales, and internal cash flow beyond agreed levels.
The amended loans would remain unsecured and would be due and payable in full on
October 7, 2000. The Company would have no additional credit available under the
loan restructure agreement. The Company believes that it will require new
funding prior to the October 2000 maturity of its existing bank debt to
facilitate full repayment of these loans. If the Company is unable to obtain
adequate new funding, the Company will be required to further restructure its
bank credit facilities, and may be required to further reduce its operations and
capital spending which could have a material adverse effect on the Company's
results of operations.
In July 1998, the Company solicited and received authorization from
stockholders to engage in transactions identical to those that would be
authorized by the Financing Proposal in amounts of up to $350 million. The
authority granted by the July 1998 stockholder resolution was limited to one
year. However, because of unfavorable market conditions and other factors,
management elected not to engage in any transactions authorized by the July 1998
stockholder resolution and such authority will expire in late July. Accordingly,
the Company seeks to renew the authority granted by the July 1998 stockholder
resolution for an additional period of time but with the maximum transaction
amount reduced to $250 million.
Reasons For the Financing Proposal
Under the Delaware General Corporation Law and the Company's
Certificate of Incorporation and Bylaws, no action or authorization by the
Company's stockholders is necessary for the Financing Proposal. However, because
the Common Stock is quoted on The Nasdaq Stock Market, the Company is subject to
the rules of the NASD. NASD Rule 4460(i) generally requires stockholder approval
for the issuance by a company of shares of its common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
voting power of all shares of the company if such shares are sold in a
transaction other than a public offering at a price (or with a conversion price
of) less than the greater of book value or market value of such company's common
stock. Approval of the Financing Proposal would not limit the Company from
taking any action for which stockholder approval is not otherwise required.
If the Financing Proposal is approved at the Annual Meeting and if the
Company issues securities in a transaction subject to approval under Rule
4460(i), then the Company will mail to stockholders certain information about
the transaction prior to issuing the securities.
The market price of the Common Stock has been highly volatile in recent
periods. If the Financing Proposal is approved at the Annual Meeting, the
Company will be authorized to issue up to $250 million of Common Stock in equity
or equity-linked private transactions from time to time until October 1, 2000 at
a price below book
13
<PAGE>
value but at or above the then current market value of the Common Stock. At
March 29, 1999, the closing price of the Common Stock on The Nasdaq Stock Market
was $5.3125 and the book value per share of the Common Stock on January 3, 1999
was $6.01.
If stockholders approve the Financing Proposal at the Annual Meeting,
no further authorization by stockholders for the issuance of securities pursuant
to this authorization will be obtained. The terms of the securities to be
authorized, including dividend or interest rates, conversion prices, voting
rights, redemption prices, maturity dates and similar matters will be determined
by the Board of Directors.
Risk Factors
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROXY STATEMENT,
STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE ACTING ON
THE FINANCING PROPOSAL.
Dilution to Existing Stockholders; Impact on Market Value of Common Stock
The sale of a significant amount of Common Stock or securities
convertible into Common Stock could cause substantial dilution to the voting
power, earnings per share and interests of current stockholders. In addition,
the sale of a significant number of securities convertible into shares of Common
Stock could cause a decline in the market value of the Common Stock.
Consequences If the Financing Proposal Is Not Approved
If the Financing Proposal is not approved by the Company's stockholders
at the Annual Meeting, the consequences could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company is considering sources of funding, including equity or equity-linked
financings that are dependent, in part, on approval of the Financing Proposal.
As discussed above, the Company believes that it will require new funding prior
to the October 1, 2000 maturity of its existing bank debt to facilitate full
repayment of these loans. If the Company is unable to obtain adequate new
funding, the Company will be required to further restructure its bank credit
facilities, and may be required to further reduce its operations and capital
spending which could have a material adverse effect on the Company's results of
operations.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
FINANCING PROPOSAL. ABSTENTIONS AND BROKER NON-VOTES WILL HAVE NO EFFECT ON THE
OUTCOME OF THE FINANCING PROPOSAL. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED
"FOR" THE FINANCING PROPOSAL.
14
<PAGE>
ITEM NO. 4 -- APPROVAL OF AMENDMENTS TO THE
RESTATED 1987 STOCK OPTION PLAN
Introduction
The stockholders are being asked to approve an amendment to the
Company's Restated 1987 Stock Option Plan (the "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. The Board of Directors approved the amendment on April 15,
1999, subject to stockholder approval at the Annual Meeting. Accordingly, if
such stockholder approval is obtained, each of the six (6) non-employee Board
members re-elected at the 1999 Annual Meeting will receive an option to purchase
12,000 shares of Common Stock with an exercise price equal to the fair market
value of the Company's Common Stock on that date.
The Automatic Option Grant Program aligns the interests of the Board
members directly with those of stockholders. Non-employee directors contribute
significantly to the well-being of the Company. Based on market data, the
previously authorized 7,500 shares approximates the median of peer group annual
grants to non-employee directors. The proposed share increase is intended to
enable the Company to attract and retain non-employee directors of above average
capabilities.
The following is a summary of the principal features of the amended
Option Plan, together with the tax and accounting implications of transactions
effected under the Option Plan. The summary, however, is not intended to be a
complete description of all the terms of the Option Plan. A copy of the Option
Plan is attached hereto as Exhibit B.
Structure
The Option Plan is divided into two (2) separate components: the
Discretionary Option Grant Program and the Automatic Option Grant Program. Under
the Discretionary Option Grant Program, options may be issued from time to time
to key employees (including officers), non-employee Board members, and
consultants of the Company (or its parent or subsidiary companies) who
contribute to the management, growth and financial success of the Company (or
its parent or subsidiary companies). Under the Automatic Option Grant Program, a
series of automatic option grants will be made to the non-employee Board members
over their continued period of service on the Board.
As of March 29, 1999, approximately 3,993 employees (including thirteen
(13) executive officers), and seven (7) non-employee Board members were eligible
to participate in the Discretionary Option Grant Program. The seven (7)
non-employee Board members were also eligible to participate in the Automatic
Option Grant Program.
Administration
The Option Plan (other than the Automatic Option Grant Program) is
administered with respect to the Company's executive officers subject to the
short-swing profit liabilities of Section 16 of the Securities Exchange Act of
1934 ("Section 16 Insiders") by the Primary Stock Option Plan Committee of the
Board. With respect to all other participants, the Option Plan may be
administered by either the Primary Stock Option Plan Committee or the Special
Stock Option Plan Administration Committee, a committee of one or more
employee-Board members appointed by the Board. Each of the committees will be
referred to in this summary as the Plan Administrator, and each Plan
Administrator will have complete discretion (subject to the provisions of the
Option Plan) to authorize option grants under the Option Plan within the scope
of its administrative jurisdiction. However, all grants under the Automatic
Option Grant Program are to be made in strict compliance with the provisions of
that program, and no administrative discretion will be exercised by the Plan
Administrator with respect to the grants made under that program.
15
<PAGE>
Share Reserve
The total number of shares of Common Stock issuable over the term of
the Option Plan may not exceed 18,140,000 shares. However, no individual
participating in the Option Plan may be granted stock options for more than
3,000,000 shares in the aggregate over the term of the Option Plan, exclusive of
any option grants made to that individual prior to January 1, 1994. Should any
option terminate prior to exercise in full, the shares subject to the
unexercised portion of that option will be available for subsequent option
grants. In addition, any unvested shares issued under the Plan and subsequently
repurchased by the Company at the original exercise price paid per share
pursuant to the Company's repurchase rights under the Plan will be added back to
the number of shares of Common Stock reserved for issuance under the Plan and
will accordingly be available for reissuance through one or more subsequent
option grants made under the Plan.
As of March 29,1999, 5,755,435 shares were subject to outstanding
option grants under the Option Plan, 3,714,569 shares remained available for
future grant and 8,669,996 shares have been issued under the Option Plan.
Several important features of the outstanding options should be noted:
* No outstanding option has an exercise price per share less
than the fair market value per share of the Common Stock on the grant date.
* Approximately 70% of the outstanding options are special
"evergreen" options which are intended to maintain the optionee's holdings at a
sufficient level to provide a meaningful incentive for such individual to
continue in the Company's employ. These evergreen options are accordingly
granted to individuals who already hold one or more outstanding options under
the Option Plan and utilize a special vesting schedule under which these options
will not become exercisable for any of the option shares until the
thirty-seventh (37th) month from the date of grant. Once the evergreen option
does become exercisable, that option will vest in a series of twelve (12)
successive equal monthly installments over the optionee's period of continued
employment with the Company. Accordingly, a substantial portion of the
outstanding options will provide no value or benefit to the option holders
unless those individuals make a long-term commitment to continue in the
Company's employ.
Changes in Capitalization
If any change is made to the Common Stock issuable under the Option
Plan (by reason of any merger, consolidation or reorganization of the Company or
any recapitalization, stock split, stock dividend, combination of shares,
exchange of shares or other similar change affecting the outstanding Common
Stock without the Company's receipt of consideration), then appropriate
adjustments will be made to the maximum number and/or class of securities
available for issuance under the Option Plan, the number and/or class of
securities and price per share in effect under each outstanding option under the
Discretionary Option Grant Program, and the maximum number and/or class of
securities for which stock options may be granted to any one participant after
December 31, 1993. Under the Automatic Grant Program, the number and/or class of
securities for which automatic option grants are subsequently to be made to
newly-elected or re-elected non-employee Board members and the number and/or
class of securities and price per share in effect under each automatic grant
outstanding would be similarly adjusted. All such adjustments will be designed
so as to preclude the enlargement or dilution of participant rights and benefits
under the Option Plan.
Valuation
The fair market value per share of Common Stock on any relevant date
under the Option Plan will be the closing sales price per share on the day prior
to the date in question, as such price is reported on the Nasdaq National Market
or any successor system. If there is no closing sales price for the Common Stock
on the day prior to the date in question, then the fair market value shall be
the closing sales price on the last preceding date for which such quotation
exists. On March 29, 1999, the closing sales price per share was $5.3125.
16
<PAGE>
Automatic Option Grant Program
Terms
Under the Automatic Option Grant Program, non-employee Board members
will receive option grants at specified intervals over their period of Board
service. The terms and conditions of these special grants may be summarized as
follows:
1. Each individual who becomes a non-employee Board member, whether
through election by the stockholders or appointment by the Board, will
automatically be granted, at the time of such initial election or appointment, a
non-statutory stock option to purchase 30,000 shares of Common Stock to become
exercisable in a series of four (4) successive equal annual installments upon
the optionee's completion of each year of Board service over the four (4)-year
period measured from the grant date.
2. On the date of each Annual Stockholders Meeting, each individual who
is re-elected as a non-employee Board member with at least six (6) months of
Board service will receive a non-statutory stock option to purchase an
additional 12,000 shares of Common Stock, assuming stockholder approval of this
Item number 4, to become 100% exercisable upon the optionee's completion of one
(1) year of Board service measured from the grant date.
3. The exercise price per share will be equal to 100% of the fair
market value per share of Common Stock on the automatic grant date, and each
automatic option is to have a maximum term of ten (10) years measured from such
grant date.
4. Each automatic option will remain exercisable for a six (6) month
period following the optionee's termination of service as a Board member.
However, should the optionee die while serving as a Board member or during the
six (6)-month period following his or her cessation of Board service, then such
option will remain exercisable for a twelve (12)-month period following such
optionee's death and may be exercised by the personal representative of the
optionee's estate or the person to whom the grant is transferred by the
optionee's will or the laws of inheritance. In no event, however, may the option
be exercised after the expiration date of the option term. During the applicable
post-service exercise period, the option may not be exercised for more than the
number of shares (if any) for which the option is exercisable at the time of the
optionee's cessation of Board service.
5. Each automatic option will become immediately exercisable for all of
the option shares as fully-vested shares of Common Stock in the event the
Company is acquired by merger, consolidation or asset sale or should there occur
certain other changes in control or ownership of the Company.
6. Each automatic option will automatically be canceled upon the
successful completion of a hostile tender offer, and the optionee will in return
be entitled to a cash distribution from the Company in an amount per canceled
option share equal to the excess of (i) the highest reported price per share of
Common Stock paid in the tender offer over (ii) the option price payable per
share. Stockholder approval of this Item No. 4 will constitute pre-approval of
each option subsequently granted with such an automatic cancellation provision
and the subsequent cancellation of that option in accordance with such
provision.
7. The remaining terms and conditions of each automatic option grant
will in general conform to the terms summarized above for option grants made
under the Discretionary Option Grant Program and will be incorporated into the
option agreement evidencing the automatic grant.
17
<PAGE>
Discretionary Option Grant Program Grants
Under the Discretionary Option Grant Program, the Plan Administrator
has complete discretion to determine the eligible individuals who are to receive
discretionary option grants, the time or times when those grants are to be made,
the number of shares subject to each such grant, the vesting schedule applicable
to the grant, the status of that grant as an incentive stock option or
non-statutory option under the Federal tax laws and the remaining terms of each
such grant, subject to the provisions of the Option Plan and applicable Federal
tax laws. All expenses incurred in administering the Option Plan will be paid by
the Company.
Price and Exercisability
The exercise price per share for options granted under the
Discretionary Option Grant Program may not be less than 100% of the fair market
value per share of Common Stock on the grant date. No granted option will have a
term in excess of ten (10) years, and each option will become exercisable in a
series of installments over the optionee's period of service with the Company.
The exercise price may be paid in cash or in shares of the Common Stock
of the Company. Outstanding options may also be exercised through a same-day
sale program pursuant to which a designated brokerage firm is to effect an
immediate sale of the shares purchased under the option and pay over to the
Company, out of the sales proceeds available on the settlement date, sufficient
funds to cover the exercise price for the purchased shares plus all applicable
withholding taxes.
No optionee has any stockholder rights with respect to the option
shares until such optionee has exercised the option and paid the exercise price
for the purchased shares. Options are generally not assignable or transferable
other than by will or the laws of inheritance and, during the optionee's
lifetime, the option may be exercised only by such optionee. However, the Plan
Administrator may allow non-statutory options to be transferred or assigned
during the optionee's lifetime to one or more members of the optionee's
immediate family or to a trust established exclusively for one or more such
family members, to the extent such transfer or assignment is in furtherance of
the optionee's estate plan.
Termination of Service
Upon the optionee's cessation of employment or service, the optionee
will have a limited period of time in which to exercise his or her outstanding
options for any shares in which the optionee is vested at that time. However, at
any time while the options remain outstanding, the Plan Administrator will have
complete discretion to extend the period following the optionee's cessation of
employment or service during which his or her outstanding options may be
exercised. The Plan Administrator will also have complete discretion to
accelerate the exercisability or vesting of those options in whole or in part at
any time.
Corporate Transaction
Each outstanding option under the Discretionary Option Grant Program
will become immediately exercisable for all of the shares of Common Stock
subject to that option in the event of an acquisition of the Company by merger,
consolidation or asset sale, unless the option is assumed by the successor
corporation. Immediately following the consummation of such acquisition, all
outstanding options will terminate, except to the extent assumed by the
successor corporation (or its parent company).
Limited Stock Appreciation Rights
Officers and non-employee Board members of the Company subject to the
short-swing profit restrictions of the Federal securities laws may be granted
limited stock appreciation rights in tandem with their outstanding options. Any
option with such a limited stock appreciation right will automatically be
canceled upon the completion of a hostile tender offer for more than 50% of the
Company's outstanding shares, and the optionee will in return be
18
<PAGE>
entitled to a cash distribution from the Company in an amount per canceled
option share equal to the excess of (i) the highest reported price per share of
Common Stock paid in the tender offer over (ii) the option exercise price
payable per share.
<TABLE>
Options Granted
The table below shows, as to each of the Named Executive Officers and
each of the indicated groups, the following information with respect to stock
options granted under the Restated 1987 Stock Option Plan during the period from
December 29, 1997 through March 29, 1999, excluding options regranted under the
July 1998 Option Cancellation and Regrant Program (see "Report of the
Compensation and Primary Stock Option Committees on Executive Compensation");
(i) the number of shares of Common Stock subject to options granted under the
Option Plan during that period and (ii) the weighted average option price per
share for such options. Typically options held by the Named Executive Officers
and other current executive officers do not become exercisable for any of the
option shares until the thirty-seventh (37th) month following the date of grant.
Each option will thereupon become exercisable in a series of twelve (12)
successive equal monthly installments over the optionee's period of continued
employment with the Company. However, of the 1,859,299 new option shares granted
to executive officers during the period from December 29, 1997 through March 29,
1999: (i) 1,200,505 shares will become exercisable per the schedule noted above;
(ii) 217,703 shares granted to new and promoted officers will vest incrementally
over the next four (4) years of their continued service; and (iii) 441,091
special retention grant shares will become exercisable at twelve (12) month
intervals over a three to four year period. Over 70% of the options held by
employees who are not executive officers of the Company have the same vesting
schedule (beginning in the 37th month) as applied to the executive officers. In
addition, Messrs. Eyre, Federman, Neil, Palevsky, Sun and Takebayashi, as
non-employee Board members, will, upon re-election to the Board at the Annual
Meeting, receive at that time an automatic option grant for 12,000 shares,
assuming stockholder approval of this Item number 4, with an exercise price per
share equal to the fair market value of Common Stock on the grant date and
vesting as specified in the Automatic Option Grant Program.
<CAPTION>
------------------------------------------ ---------------------- ----------------------
Number of Option Weighted Average
Name Shares Granted (1) Option Price
---- ------------------ ------------
<S> <C> <C>
Stephen C. Johnson 263,500 11.4125
Tu Chen 263,500 11.4125
Christopher H. Bajorek 169,870 11.4125
Ray L. Martin 139,570 9.6800
Thian H. Tan 172,867 11.4125
Willard L. Kauffman 46,067 12.5625
Sonny S. J. Wey 37,628 12.5625
All current executive officers as a
group (13 persons) 1,859,299 10.6931
All current directors (other than
executive officers) as a group (7 52,500 10.6250
persons)
All employees, including current
officers who are not executive officers, 65,220 12.5625
as a group
------------------------------------------ ---------------------- ----------------------
19
<PAGE>
<FN>
(1) Excludes options regranted under the July 1998 Option Cancellation and
Regrant Program. See "Report of the Compensation and Primary Stock
Option Committees on Executive Compensation".
</FN>
</TABLE>
Amendment and Termination of the Plan
The Board may amend or modify the Option Plan in any or all respects
whatsoever. However, certain amendments to the Option Plan may require
stockholder approval pursuant to applicable laws or regulations.
The Board may terminate the Option Plan at any time, but in all events
the Option Plan will terminate upon the earlier of January 22, 2002 or the date
all shares available for issuance under the Option Plan are issued or canceled
pursuant to the exercise or surrender of options granted under the Option Plan.
Any options outstanding at the time of the termination of the Option Plan will
remain in force in accordance with the provisions of the instruments evidencing
such grants.
Federal Tax Consequences
Options granted under the Option Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to satisfy such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition.
For Federal tax purposes, dispositions are divided into two (2)
categories: qualifying and disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or disposition is made more than
two (2) years after the grant date of the option and more than one (1) year
after the exercise date. If the optionee fails to satisfy either of these two
holding periods prior to sale or disposition, then a disqualifying disposition
of the purchased shares will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be taxable
as ordinary income to the optionee. Any additional gain or loss recognized upon
the disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased
shares, the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the date the option was exercised over (ii) the
exercise price paid for such shares. If the optionee makes a qualifying
disposition of the purchased shares, the Company will not be entitled to any
income tax deduction.
20
<PAGE>
Non-statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price, and the optionee will be required to satisfy the tax withholding
requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee in connection with the
exercise of the non-statutory option. The deduction will in general be allowed
for the taxable year in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights. If an option granted under the Option Plan
is canceled for an appreciation distribution paid in cash, the recipient will
generally realize ordinary income, equal in amount to the cash received, and the
Company will be entitled to a corresponding income tax deduction.
Deductibility of Executive Compensation. The Company anticipates that
any compensation deemed paid by it in connection with disqualifying dispositions
of incentive stock option shares or exercises of non-statutory options will
qualify as performance-based compensation for purposes of Code Section 162(m)
and will not have to be taken into account for purposes of the one (1) million
dollar limitation per covered individual on the deductibility of the
compensation paid to certain executive officers of the Company. Accordingly, all
compensation deemed paid under the Option Plan will remain deductible by the
Company without limitation under Code Section 162(m).
Accounting Treatment
The Company's earnings per share is computed using the weighted average
number of shares of Common Stock outstanding and dilutive common stock
equivalents. Common stock equivalents include shares issuable upon the assumed
exercise of outstanding options reflected under the treasury stock method.
Under generally accepted accounting principles, the grant or the
exercise of options to purchase shares of the Company's Common Stock with an
exercise price equal to the fair market value of the Company's Common Stock on
the grant date does not generally require a charge to the Company's earnings.
However, the Company is required to disclose in the notes to the Company's
financial statements the fair value of options granted under the Option Plan and
the pro forma impact on the Company's annual net income and earnings per share
as though the computed fair value of such options had been treated as
compensation expense.
Recommendation of the Board of Directors
The affirmative vote of a majority of the issued and outstanding shares
present or represented and entitled to vote at the 1999 Annual Meeting is sought
for approval of the amendments to the Option Plan. The Board of Directors
believes that option grants under the Option Plan play an important role in the
Company's efforts to attract, employ, and retain employees, directors, and
consultants of outstanding ability. Accordingly, the Board of Directors
recommends that the stockholders vote FOR this proposal. If the stockholders do
not approve the proposal, the re-elected non-employee Board members will not
receive an option to purchase 12,000 shares under the Automatic Grant Program as
of the Annual Meeting date, but will receive an option to purchase the
previously authorized 7,500 shares.
21
<PAGE>
ITEM NO. 5 --
RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the stockholders to ratify the selection of Ernst
& Young LLP as the Company's independent auditors for the fiscal year ending
January 2, 2000. The affirmative vote of the holders of a majority of the shares
represented and voting at the Annual Meeting will be required to ratify the
selection of Ernst & Young LLP.
In the event the stockholders fail to ratify the appointment, the Board
of Directors will reconsider its selection. Even if the selection is ratified,
the Board in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board feels that
such a change would be in the best interests of the Company and its
stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them FOR the ratification of the selection of Ernst & Young
LLP.
Ernst & Young LLP have audited the Company's financial statements
annually beginning in 1986. Representatives of the firm, who are expected to be
present at the Annual Meeting, will have the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate questions.
Recommendation of the Board of Directors
The affirmative vote of a majority of the issued and outstanding voting
shares is sought for the ratification of the selection of Ernst & Young LLP. The
Board of Directors recommends that the stockholders vote FOR this proposal.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
In compliance with the Securities and Exchange Commission's regulations
on disclosure of Executive Compensation, this section presents the Reports of
the Compensation Committee and of the Primary Stock Option Committee, a Stock
Performance Graph comparing Company stockholder return relative to a broad
market index and a peer group index, and Summary and Companion Compensation
Tables presenting a detailed representation of the Company's executive
compensation practices.
REPORT OF THE COMPENSATION AND PRIMARY STOCK OPTION COMMITTEES
ON EXECUTIVE COMPENSATION
The Compensation Committee's members, Craig R. Barrett, Irwin Federman,
Max Palevsky and Masayoshi Takebayashi, are independent directors who are not
employees of the Company and who further qualify as outside directors under
Section 162(m) of the Internal Revenue Code. The Compensation Committee is
accountable for the approval of cash compensation programs that fairly
compensate key executives and employees and that relate the pay levels of
officers to the performance of the Company. The Primary Stock Option Committee's
members, Craig R. Barrett, Irwin Federman and Max Palevsky qualify as
disinterested persons for purposes of Rule 16b-3 adopted under the 1934 Act. The
Primary Stock Option Committee is responsible for all stock option grants to
executive officers.
22
<PAGE>
Objectives of the Company's Executive Compensation Plan
The Company's executive compensation is based on the premise that the
executive officers are responsible for achievement of the Company's goals and
objectives and are rewarded when achievement of these goals results in
successful financial performance. The Committee intends to control fixed salary
costs, to provide a high degree of leverage in officers' pay based on the actual
performance of the Company, to allow flexibility to respond to specific
individual issues such as retention, and to balance cost to stockholders against
providing appropriate incentives for value creation. To structure the actual
annual compensation plans, the Compensation Committee relies on research
performed by an independent compensation consulting firm, and advice from the
Company's human resources department. For comparison purposes, the Company has
identified a group of high-performing companies ("peer companies") both within
and outside the Company's industry. The Company competes with the peer companies
for the hiring and retention of key executives and accordingly compares its
executive compensation practices to these companies. Each peer company shares at
least one attribute, such as high technology, location or size with the Company.
Such comparisons also include the relative financial performance of the Company
and the peer companies. Since executive search and retention is not necessarily
industry specific, no attempt is made to correlate the list of peer companies
with the companies in Nasdaq Computer Manufacturers Index, the Company's
Industry index in the "Stock Performance Graph."
The total compensation plan developed for each officer includes base
salary, incentive bonus and stock options in addition to participation in the
Company's Cash and Deferred Profit Sharing and Employee Stock Purchase plans
subject to the same eligibility criteria applicable to all employees. Executive
officers are also eligible to defer salary under the Company's 401(k) and
Non-qualified Deferred Compensation Plans. Average base salary is targeted at or
below the 50th percentile of base salaries for executives with similar positions
among the peer companies. The Compensation Committee considers this level of
base salary sufficient, in the context of the total compensation package, to
attract and retain executives of the caliber required to manage a company that
employs leading edge technology in a fiercely competitive, rapidly changing
industry, while controlling this fixed component of compensation in the event of
poor business conditions or company performance. On an individual basis, the
base salaries of the Company's executive officers range from the 30th percentile
to the 75th percentile. Variation from the targeted range is due to individual
qualifications, including performance, specific technical knowledge, experience
and/or total targeted cash compensation as judged by the Compensation Committee.
To complement base salary, the Compensation Committee administers the
Management Bonus Plan (the "Bonus Plan"). This Bonus Plan is designed to provide
substantial rewards for exceeding financial performance targets and little or no
payout when the Company performs poorly. Specifically, the Bonus Plan provides a
pool of funds available for bonus payments based on the Company's operating
income as compared to the Annual Operating Plan as approved by the Board of
Directors in the first quarter of each fiscal year. The maximum pool is equal to
7% of operating income when actual operating income is greater than or equal to
122% of the Annual Operating Plan. This percentage declines linearly to 2% of
operating income at a level of 66.67% of the Annual Operating Plan and to 0%
when there is no operating income or an operating loss. The Compensation
Committee allocates this pool to the executives, up to each executive's
pre-established maximum, and to other non-executive employees, based on its
judgment of each individual's contributions to the Company's financial and
operating performance. Since the Company sustained an operating loss in 1998, no
payments were accrued or paid under the Bonus Plan for the fiscal year.
The Compensation Committee also administers the Company's Discretionary
Bonus Plan (the "Discretionary Plan"). The Discretionary Plan is designed to
allow the Compensation Committee the flexibility to grant a bonus to an
executive if an executive has achieved a substantial objective during a time
when the Bonus Plan cannot provide a payout or if there is a specific retention
issue related to the executive's level of income. No payments were accrued or
made under this plan for the 1998 fiscal year.
23
<PAGE>
At the end of the second quarter of 1998, it became apparent that the
Company had excess capacity and more employees than could be supported by
expected sales. Accordingly, the Company restructured its operations, recorded
an impairment charge and reduced its workforce. In conjunction with these
restructuring activities and a similar action taken at the end of the third
quarter of 1997, the Company paid approximately $1.1 million to six former
officers, including $583,000 to two of the individuals in the following
compensation table, for severance and related compensation. Certain of these
former officers are contracted to perform consulting services during 1999.
In addition to cash compensation the Company's executive compensation
plan includes stock options that are designed to align the interests of the
executive officers with those of stockholders, providing each officer with a
significant incentive to manage the Company from the long-term perspective of an
owner with an equity stake in the business. The stock option plan encourages
long-term retention and provides rewards to executives and other eligible
employees commensurate with growth in stockholder value. The Primary Stock
Option Committee had the sole responsibility for making option grants to the
Company's executive officers during 1998. The Primary Stock Option Committee
also approved the guidelines for option grants made to other key employees
during that fiscal year. Based on a review of competitive data, the Primary
Stock Option Committee targeted total option grants for 1998 to fall within a
range of 2.5% - 4.0% of total shares outstanding. Actual option grants, net of
cancellations, for the fiscal year totaled 3.9% of the weighted average number
of shares issued and outstanding. All stock options were granted at market price
on the date of grant and have a maximum term of ten years.
The Primary Stock Option Committee has established guidelines for the
number of options to be granted to each level of executive officer,
non-executive management and key individual contributor based on analysis of
competitive data and internal estimates of the number of options necessary to
attract and retain these employees. These guidelines were used to determine the
range of options to be granted to each employee through the Company's annual
grant program. The Primary Stock Option Committee applied its judgment of
individual performance, with some consideration for the number of unvested
options held by an individual, when making specific grants to each executive
officer. These options will vest entirely in the fourth year after grant so that
generally the vesting will not overlap with previously granted options. In total
256,700 stock options were granted in January 1998 to 12 current executive
officers pursuant to the annual grant program.
The Primary Stock Option Committee deemed it in the best interest of
the Company to grant new options, as a retention tool, since it was clear that
there would be no cash bonuses paid during 1998. Accordingly, in January 1998,
the Primary Stock Option Committee granted 420,708 options to 12 current
executive officers. Each of these options becomes exercisable in a series of
installments with 50% vesting one year following grant date, and the remainder
vesting in successive 25% annual installments.
On June 12, 1998, the Board of Directors approved a plan to cancel and
regrant options for the company's employees and officers effective July 1, 1998.
The Board believes that the current price of the Common Stock is attributable in
large part to adverse industry conditions. In addition the Board believes that
the Company's future performance is dependent in large part on the skills,
capabilities and efforts of the Company's employees, especially the key
management and technical employees who hold the greatest number of options.
Given the disparity between the exercise prices of then outstanding options and
the trading prices during the first two fiscal quarters of 1998, the Board
believed the options held little value for retention and motivation of
employees. The Board remains confident it acted in the best interest of the
Company and its stockholders in authorizing the repricing. Employees were
permitted to voluntarily exchange options held for new options on a one-for-one
basis. The price of the regranted options was $5.3475 per share. Officers were
required to forfeit special options granted to them on October 6, 1997 as a
condition of accepting regranted options. Regranted options retained the same
number of shares, vested amount and vesting schedule as the original grants;
however, new options could not be exercised for a period of one year following
the July 1, 1998 effective date. All of the 13 current officers elected to
participate in the July Option Regrant Program.
24
<PAGE>
Compensation of the Chief Executive Officer and of the Chairman of the Board
Base salaries of Stephen C. Johnson and Tu Chen for 1998 were at
approximately the 30th percentile of salaries paid to executives in comparable
positions at the peer companies, in accordance with the Compensation Committee's
target. Neither Mr. Johnson nor Dr. Chen was granted merit increases for 1998.
As no cash bonuses were paid for 1998 under the Company's plans, Mr. Johnson and
Dr. Chen received no variable compensation during the year. Mr. Johnson and Dr.
Chen were each granted stock options for 113,500 shares during the year. In
addition, Mr. Johnson and Dr. Chen repriced 442,781 and 456,471 options,
respectively, pursuant to the July 1, 1998 Option Cancellation and Regrant
Program authorized by the Board of Directors on June 12, 1998.
Compliance with Internal Revenue Code Section 162(m)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a Federal income tax
deduction for compensation paid to certain officers, to the extent that
compensation exceeds one (1) million dollars per officer in any one year. This
limitation will be in effect for each fiscal year of the Company beginning after
December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based.
Compensation, which does qualify as performance-based compensation, will not
have to be taken into account for purposes of this limitation. At the 1994
Annual Meeting, the Company obtained stockholder approval for certain amendments
to the Company's Stock Option Plan which were designed to assure that any
compensation deemed paid in connection with the exercise of stock options
granted under that plan, with an exercise price equal to the market price of
Common Stock on the grant date, would qualify as performance-based compensation.
The Bonus Plan was restructured in 1996 and approved by stockholders so that the
payments made under that plan would also qualify as performance-based
compensation under Section 162(m) and the Company obtained a ruling from the
Internal Revenue Service that the payments under the Bonus Plan will qualify as
performance-based compensation. Stockholders subsequently approved an amendment
to the Bonus Plan in 1997, and future payments thereunder should continue to
qualify as performance-based compensation that would not be subject to the Code
Section 162(m) limitation on deductibility.
1998 MEMBERS OF THE COMPENSATION COMMITTEE
Craig R. Barrett Irwin Federman Max Palevsky Masayoshi Takebayashi
1998 MEMBERS OF THE PRIMARY STOCK OPTION COMMITTEE
Craig R. Barrett Irwin Federman Max Palevsky
The members of the Compensation Committee and the Primary Stock Option
Committee of the Company's Board of Directors are as named in the above report.
No member of either committee was at any time during the 1998 fiscal year, or at
any other time an officer or employee of the Company.
No executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more of its executive
officers serving as a member of the Company's Board of Directors, the
Compensation Committee, or the Primary Stock Option Committee. Mr. Takebayashi,
a member of the Company's Board of Directors, is an executive officer of Kobe
Precision, Inc. a wholly-owned subsidiary of Kobe Steel, Ltd. ("Kobe") and is a
member of the Board of Komag Materials Technology, a joint venture of the
Company and Kobe.
25
<PAGE>
<TABLE>
Stock Performance Graph
The following graph shows a five-year comparison of cumulative total
return on common stock for the Company, the Nasdaq Composite Index, and the
Nasdaq Computer Manufacturing Index from December 31, 1993 through December 31,
1998. The past performance of the Company's Common Stock is no indication of
future performance.
Comparison of Five Year Cumulative Total Return
of Komag, Incorporated. The Nasdaq Stock Market (US Companies)
Index, and the Nasdaq Computer Manufacturers Index
[PERFORMANCE GRAPH ARTWORK PLACED HERE]
The chart above assumes $100 invested on December 31, 1993, in Komag,
Incorporated Common Stock, Nasdaq Composite Index and Nasdaq Computer
Manufacturing Index, and the reinvestment of dividends (although dividends have
not been declared on the Company's Common Stock). Historical returns are not
necessarily indicative of future performance. The graph was plotted using the
following data:
<CAPTION>
---------------------------------------------------------------------------------------------------------
Prices indexed to an
initial investment of $100
12/31/93 12/30/94 12/29/95 12/27/96 12/26/97 12/31/98
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Komag, Incorporated $100.00 $147.18 $259.86 $302.82 $161.27 $116.90
---------------------------------------------------------------------------------------------------------
Nasdaq Composite $100.00 $97.75 $138.26 $170.22 $200.75 $293.21
---------------------------------------------------------------------------------------------------------
Nasdaq Computer Mfg $100.00 $109.85 $172.95 $238.98 $266.78 $610.15
---------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation earned by the Company's
Chief Executive Officer, each of the Company's four most highly compensated
executive officers whose base salary and bonus for the 1998 fiscal year was in
excess of $100,000, and two additional former executive officers of the Company
who earned in excess of $100,000, for services rendered in all capacities to the
Company and its subsidiaries for the 1998, 1997 and 1996 fiscal years (the
"Named Executive Officers").
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Compensation
------------------- ------------
Name and All Other
Principal Stock Options Compen-
Position Year Salary Bonus Granted sation
-------- ---- ------ - ----- -------- ------
($) (1) ($) (2) (# of shares) (3) ($) (4)
<S> <C> <C> <C> <C> <C>
Stephen C. Johnson................ 1998 $428,000 -- 113,500 $ 625
President, Chief Executive 1997 $428,000 $10,621 113,810 $ 9,067
Officer and Director 1996 $402,000 $66,949 43,500 $ 29,744
Tu Chen........................... 1998 $428,000 -- 113,500 $ 625
Chairman of the Board of 1997 $428,000 $10,621 113,810 $ 9,067
Directors 1996 $402,000 $66,949 43,500 $ 29,744
Christopher H. Bajorek............ 1998 $321,000 -- 86,640 $ 625
Senior Vice President -- 1997 $316,654 $ 7,966 160,825 $ 6,956
Chief Technical Officer 1996 $150,000 $30,000 110,000 --
Thian H. Tan...................... 1998 $257,216 -- 63,067 $ 625
Senior Vice President -- 1997 $230,000 $ 5,708 67,854 $ 5,161
Operations 1996 $203,000 $63,876 15,300 $ 15,882
Ray L. Martin..................... 1998 $252,847 -- 90,000 $ 625
Senior Vice President -- Customer 1997 $ 46,538 -- 60,000 --
Sales and Services 1996 -- -- -- --
Willard L. Kauffman............... 1998 $214,416 -- 46,067 $317,600
Former Chief Operations Officer 1997 $305,244 $ 7,643 27,285 $ 6,700
and Senior Vice President 1996 $289,000 $78,147 25,500 $ 21,559
Sonny S. J. Wey................... 1998 $151,135 -- 37,628 $371,839
Former Vice President Product 1997 $222,000 $ 5,509 16,215 $ 5,004
Development 1996 $209,000 $53,950 13,800 $ 15,764
- -------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes salary deferred under the Komag Savings and Deferred Profit
Sharing Plan and the Company's Non-Qualified Deferred Compensation Plan.
27
<PAGE>
(2) Includes amounts earned for the indicated year under the Company's Cash
Profit Sharing Plan, the Management Bonus Plan and the Discretionary Bonus
Plan. Amounts earned under the Cash Profit Sharing Plan are accrued during
a given year and are paid in July of that year and January or February of
the following year. Bonuses earned under the Management Bonus Plan are
accrued during a given year and paid in January or February of the
following year. Bonuses under the Discretionary Bonus Plan are awarded by
the Compensation Committee for a particular fiscal year solely on the basis
of such Committee's competitive compensation analysis for that year and are
paid in January or February of the following year. For the 1998 fiscal
year, no bonuses were paid.
(3) Fiscal 1998 Stock Option Grants do not include options granted in
connection with the July 1998 Stock Option Cancellation and Regrant
Program. See "Option Grants" table.
(4) Includes for the fiscal years indicated below: (i) the matching
contributions ($0.25 match per $1.00 individual contribution) made by the
Company on behalf of each Named Executive Officer to the Section 401(k)
Savings Program, up to a maximum match of $625 and (ii) the semi-annual
profit sharing contributions made by the Company on behalf of each Named
Executive Officer to the Savings and Deferred Profit-Sharing Plan and
Deferred Compensation Plan, and (iii) payments to former officers pursuant
to the terms of their separation of employment with the Company.
</FN>
</TABLE>
<TABLE>
<CAPTION>
All Other Compensation
----------------------------------------------------------------------------------------------------------
Matching Profit Sharing Separation
Contribution Contribution Payments
------------ ------------ --------
<S> <C> <C> <C> <C>
Stephen C. Johnson 1998 $625 -- --
1997 $625 $ 8,442 --
1996 $625 $29,119 --
Tu Chen 1998 $625 -- --
1997 $625 $ 8,442 --
1996 $625 $29,119 --
Christopher H. Bajorek 1998 $625 -- --
1997 $625 $ 6,331 --
1996 -- -- --
Thian H. Tan 1998 $625 -- --
1997 $625 $ 4,536 --
1996 $625 $15,257 --
Ray L. Martin 1998 $625 -- --
1997 -- -- --
1996 -- -- --
Willard L. Kauffman 1998 $625 -- $316,975
1997 $625 $ 6,075 --
1996 $625 $20,934 --
Sonny S. J. Wey 1998 $625 -- $371,214
1997 $625 $ 4,379 --
1996 $625 $15,139 --
----------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
Stock Options
The following table provides information with respect to the stock
option grants made for the 1998 fiscal year under the Company's Restated 1987
Stock Option Plan to the Named Executive Officers. Except for the limited stock
appreciation right described below, which formed part of the option grant made
to each of the Named Executive Officers, no stock appreciation rights were
granted to such individuals during the 1998 fiscal year. Potential Realizable
Values noted below reflect hypothetical appreciation based on the stock price at
grant date. Unless otherwise noted, grants dated July 1, 1998 represent options
cancelled and subsequently regranted under the July 1998 Stock Option
Cancellation and Regrant Program.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates
Stock Price Appreciation
Individual Grants for Option Term
----------------- ------------------------
Number of % of Total
Securities Options Exercise Valuation
Date Underlying Granted to or Base Price Expira- per SFAS
of Options Employees in ($/Share) tion 123 pro
Name Grant (1) Granted Fiscal Year (2) Date 5%($) (3) 10%($) (3) forma (4)
---- --------- ------- ----------- --- ---- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Johnson 01/30/98 113,500(6) 1.0008 $12.5625 01/30/08 $ 896,705(6) $ 2,272,428(6) $ 856,250(6)
07/01/98 113,500 1.0008 $ 5.3475 01/30/08 $ 361,817 $ 906,049 $ 139,658
07/01/98 78,444 .6917 $ 5.3475 01/23/02 $ 79,678 $ 169,703 $ 211,061
07/01/98 10,046 .0886 $ 5.3475 01/24/02 $ 10,213 $ 21,753 $ 27,064
07/01/98 46,000 .4056 $ 5.3475 01/18/04 $ 76,511 $ 171,525 $ 137,503
07/01/98 58,000 .5114 $ 5.3475 01/25/05 $ 117,201 $ 269,972 $ 87,609
07/01/98 43,500 .3836 $ 5.3475 01/02/06 $ 102,893 $ 243,123 $ 82,311
07/01/98 43,500 .3836 $ 5.3475 01/06/07 $ 119,857 $ 291,243 $ 86,391
07/01/98 49,791 .4391 $ 5.3475 01/20/07 $ 137,947 $ 335,559 $ 125,941
Tu Chen 01/30/98 113,500(6) 1.0008 $12.5625 01/30/08 $ 896,705(6) $ 2,272,428(6) $ 856,250(6)
07/01/98 113,500 1.0008 $ 5.3475 01/30/08 $ 361,817 $ 906,049 $ 139,658
07/01/98 16,400 .1446 $ 5.3475 01/24/01 $ 11,702 $ 24,310 $ 37,859
07/01/98 85,780 .7564 $ 5.3475 01/23/02 $ 87,129 $ 185,574 $ 230,800
07/01/98 46,000 .4056 $ 5.3475 01/18/04 $ 76,511 $ 171,525 $ 137,503
07/01/98 58,000 .5114 $ 5.3475 01/25/05 $ 117,201 $ 269,972 $ 87,609
07/01/98 43,500 .3836 $ 5.3475 01/02/06 $ 102,893 $ 243,123 $ 82,311
07/01/98 43,500 .3836 $ 5.3475 01/06/07 $ 119,857 $ 291,243 $ 86,391
07/01/98 49,791 .4391 $ 5.3475 01/20/07 $ 137,947 $ 335,559 $ 125,941
Christopher H. Bajorek 01/30/98 86,640(6) .7640 $12.5625 01/30/08 $ 684,498(6) $ 1,734,653(6) $ 645,181(6)
07/01/98 86,640 .7640 $ 5.3475 01/30/08 $ 276,193 $ 691,630 $ 106,968
07/01/98 110,000 .9700 $ 5.3475 06/24/06 $ 280,038 $ 670,385 $ 291,027
07/01/98 25,500 .2248 $ 5.3475 01/06/07 $ 70,261 $ 170,729 $ 50,643
07/01/98 100,000 .8818 $ 5.3475 01/20/07 $ 277,052 $ 673,936 $ 252,940
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates
Stock Price Appreciation
Individual Grants for Option Term
----------------- ------------------------
Number of % of Total
Securities Options Exercise Valuation
Date Underlying Granted to or Base Price Expira- per SFAS
of Options Employees in ($/Share) tion 123 pro
Name Grant (1) Granted Fiscal Year (2) Date 5%($) (3) 10%($) (3) forma (4)
---- --------- ------- ----------- --- ---- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ray L. Martin 01/30/98 29,167(6) .2572 $12.5625 01/30/08 $ 230,434(6) $ 583,964(6) $ 221,784(6)
07/01/98 29,167 .2572 $ 5.3475 01/30/08 $ 92,979 $ 323,835 $ 35,705
07/01/98 60,000 .5291 $ 5.3475 10/06/07 $ 183,390 $ 455,105 $ 116,160
07/01/98 60,833(5) .5364 $ 5.3475 07/01/08 $ 204,532 $ 518,452 $ 181,842
Thian H. Tan 01/30/98 63,607(6) .5561 $12.5625 01/30/08 $ 498,260(6) $ 1,262,689(6) $ 469,295(6)
07/01/98 63,067 .5561 $ 5.3475 01/30/08 $ 201,046 $ 503,452 $ 78,219
07/01/98 8,506 .0750 $ 5.3475 01/18/04 $ 14,148 $ 31,717 $ 25,426
07/01/98 18,400 .1623 $ 5.3475 01/25/05 $ 37,181 $ 85,646 $ 27,793
07/01/98 15,300 .1349 $ 5.3475 01/02/06 $ 36,190 $ 85,512 $ 28,951
07/01/98 15,300 .1349 $ 5.3475 01/06/07 $ 42,157 $ 102,437 $ 30,386
07/01/98 50,000 .4410 $ 5.3475 01/20/07 $ 138,526 $ 336,968 $ 126,470
Willard L. Kauffman 01/30/98 46,067 .4062 $12.5625 01/30/08 $ 363,952 $ 922,325 $ 351,808
Sonny S. J. Wey 01/30/98 37,628 .3318 $12.5625 01/30/08 $ 297,280 $ 753,365 $ 282,900
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each new option has a maximum term of 10 years, subject to earlier
termination upon the optionee's cessation of service. Repriced options retain
the remaining option term of the original grant at the time of repricing. Each
option will become immediately exercisable for all the option shares in the
event the Company is acquired by a merger or asset sale (unless the option is
assumed or replaced by the acquiring entity) or in the event the optionee's
employment terminates by reason of death or permanent disability. Each option
includes a limited stock appreciation right which would result in the
cancellation of that option upon a take-over of the Company effected through a
hostile tender offer for more than 50% of the Company's outstanding Common
Stock. In return, the optionee will be entitled to a cash distribution from
the Company per canceled option share equal to the highest reported price paid
per share of Common Stock in such tender offer less the option exercise price
per share.
(1) Regranted options vest according to the vesting schedule of each original
option grant. All regranted options are subject to the one-year exercise
blackout period imposed under the terms of the July 1998 Stock Option
Cancellation and Regrant Program. Unless otherwise noted, items dated July
1, 1998 are regranted options.
(2) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date, or through a
cashless exercise procedure involving a same-day sale of the purchased
shares.
(3) There is no assurance provided to any executive officer, or any other
holder of the Company's securities, that the actual stock price
appreciation from the grant date and over the 10 year option term will be
at the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the option term, no value
will be realized from the option grants made to the executive officers.
(4) For purposes of such pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate
30
<PAGE>
of 5.5%; volatility factor of the expected market price of the Company's
Common Stock of 63.4%; and a weighted-average expected life of such options
of 4.8 years. There was no dividend yield included in the calculation since
the Company does not pay dividends. The weighted-average fair value of
options granted to all employees during 1998 was $4.3885. For officer
grants during 1998, the weighted-average fair value of the options was
$3.9945.
(5) Indicates a new stock option granted July 1, 1998.
(6) This option was granted on January 30, 1998 and was subsequently canceled
in connection with the July 1, 1998 Option Regrant. Accordingly, this
option is no longer outstanding and has no potential realizable value. See
"Report of the Compensation and Primary Stock Option Committees on
Executive Compensation".
<TABLE>
Option Exercises and Holdings
The table below sets forth information concerning the exercise of
options during the 1998 fiscal year and unexercised options held as of the end
of such year by the Named Executive Officers. No stock appreciation rights were
exercised during such fiscal year, and except for the limited stock appreciation
rights described immediately following the Option Grant Table above which form
part of each stock option grant, no stock appreciation rights were outstanding
at the end of such fiscal year.
<CAPTION>
OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value:
- -------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Securities Underlying In-The-Money
Shares Unexercised Options Options at Fiscal
Acquired Value At Fiscal Year-End (#) Year-End ($) (2)
on Exercise Realized (1) Exercisable (E)/ Exercisable (E)/
Name (#) (#) Unexercisable (U) Unexercisable (U)
---- --- --- ----------------- ----------------
<S> <C> <C> <C> <C>
Stephen C. Johnson -- -- 283,812 E $1,275,687 E
247,119 U (3) $1,242,391 U
Tu Chen -- -- 209,351 E $1,052,512 E
247,120 U (3) $1,242,396 U
Christopher H. Bajorek -- -- 78,751 E $ 395,921 E
243,389 U (3) $1,223,638 U
Ray L. Martin -- -- 15,000 E $ 75,412 E
135,000 U (3) $ 678,712 U
Thian H. Tan -- -- 30,373 E $ 152,700 E
140,200 U (3) $ 704,856 U
Willard L. Kauffman -- -- 117,771 E $ 135,200 E
58,881 U $ -- U
Sonny S. J. Wey -- -- 64,743 E $ 88,753 E
68,198 U $ -- U
- -------------------------------------------------------------------------------------------------------------------
31
<PAGE>
<FN>
(1) Value Realized equals the market price value of the shares at the time of
exercise less the exercise price thereof.
(2) Excess of the closing price per share of the Company's Common Stock at the
end of the fiscal year ($10.375) over the option exercise price. If the
closing price is less than the exercise price, then the value of
unexercised options equals zero.
(3) Numbers include options not exercisable due to the blackout period imposed
under the terms of the July 1998 Stock Option Cancellation and Regrant
Program.
</FN>
</TABLE>
<TABLE>
Option Regrant Program
The following table sets forth certain information with respect to the
Company's regrant of outstanding options with certain of its officers in July
1998 and March 1989. For further information with respect to such option
regrants, see "Report of the Compensation and Primary Stock Option Committees on
Executive Compensation".
<CAPTION>
TABLE OF TEN-YEAR OPTION REPRICINGS (1)
- -------------------------------- ----------- --------------- -------------- -------------- ----------- -------------------
Weighted Length
Number of Market Price Weighted of Original
Securities of Stock at Exercise Option Term
Underlying Time of Price at Remaining at
Options Repricing or Time of New Date of
Repriced or Amendment Repricing or Exercise Repricing or
Name & Principal Position Date Amended ($) Amendment Price ($) Amendment
- ------------------------- ---- -------- --- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen C. Johnson.....(2) 07/01/98 442,781 $5.3475 $ 15.7532 $5.3475 7 years 55 days
President, Chief Executive
Officer and Director
Tu Chen..................(2) 07/01/98 456,471 $5.3475 $ 15.4830 $5.3475 7 years 3 days
Chairman of the Board
of Directors
Christopher H. Bajorek.... 07/01/98 322,140 $5.3475 $ 23.0739 $5.3475 8 years 235 days
Senior Vice President --
Chief Technical Officer
Thian H. Tan................ 07/01/98 170,573 $5.3475 $ 19.3279 $5.3475 8 years 176 days
Senior Vice President --
Operations
Ray L. Martin................ 07/01/98 89,167 $5.3475 $ 17.1886 $5.3475 9 years 137 days
Senior Vice President --
Customer Sales and
Service
Sonny S. J. Wey..........(2) 03/16/89 51,176 $3.2500 $ 4.4253 $3.2500 4 years 244 days
Former Vice President --
Product Development
Ronald Allen................ 03/16/89 31,800 $3.2500 $ 4.4178 $3.2500 4 years 196 days
Vice President -- 07/01/98 78,273 $5.3475 $ 16.4688 $5.3475 8 years 227 days
Manufacturing
Technologies
- -------------------------------- ----------- --------------- -------------- -------------- ----------- -------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------- ----------- --------------- -------------- -------------- ----------- -------------------
Weighted Length
Number of Market Price Weighted of Original
Securities of Stock at Exercise Option Term
Underlying Time of Price at Remaining at
Options Repricing or Time of New Date of
Repriced or Amendment Repricing or Exercise Repricing or
Name & Principal Position Date Amended ($) Amendment Price ($) Amendment
- ------------------------- ---- -------- --- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Austin............ 07/01/98 138,090 $5.3475 $ 13.3976 $5.3475 6 years 351 days
Vice President -- Wordwide
Substrate Manufacturing
And Support Services
Timothy J. Gallagher......... 07/01/98 74,480 $5.3475 $ 16.6887 $5.3475 9 years 145 days
Vice President --
Product Development
Elizabeth A. Lamb............ 07/01/98 92,349 $5.3475 $ 20.0254 $5.3475 8 years 288 days
Vice President --
Human Resources
William L. Potts, Jr........... 03/16/89 20 400 $3.2500 $ 4.4252 $3.2500 4 years 241 days
Senior Vice President, 07/01/98 161,820 $5.3475 $ 15.1615 $5.3475 7 years 88 days
Chief Financial Officer
and Secretary
Tan Thiam Seng.............. 07/01/98 61,507 $5.3475 $ 14.4550 $5.3475 8 years 275 days
Vice President --
Penang Operations
Tsutomu T. Yamashita...... 03/16/89 14,000 $3.2500 $ 4.4196 $3.2500 4 years 313 days
Vice President -- Research 07/01/98 188,727 $5.3475 $ 17.9698 $5.3475 7 years 235 days
and Process Development
Sanford Fitch................. 03/16/89 49,082 $3.2500 $ 4.3866 $3.2500 4 years 12 days
Former Vice President
Chief Financial Officer
Philip Gahr, Sr................ 03/16/89 81,750 $3.2500 $ 4.4100 $3.2500 4 years 150 days
Former Vice President
Operations
Kathryn A. McGann......... 03/16/89 60,000 $3.2500 $ 5.0625 $3.2500 4 years 183 days
Former Vice President
Human Resources
T. Hunt Payne................ 03/16/89 27,000 $3.250 $ 4.4375 $3.250 4 years 313 days
Former Vice President
Marketing and Sales
- -------------------------------- ----------- --------------- -------------- -------------- ----------- -------------------
<FN>
(1) Table includes two regrant programs available to officers during the past
ten fiscal years. For the July 1998 Regrant Program, officers were required
to forfeit special options granted to them on October 6, 1997 as a
condition of accepting new options. In addition, a one-year exercise hold
was imposed on all July 1998 regranted options.
(2) Stephen C. Johnson and Tu Chen were not eligible to participate in the
March 1989 Stock Option Regrant Program. Willard L. Kauffman and Sonny S.
J. Wey, former executive officers named in Grant Table, did not participate
in the July 1998 Option Regrant Program.
</FN>
</TABLE>
33
<PAGE>
Officer Loans
The Company has advanced a total sum of $246,985 to Mr. Bajorek during
the 1997 and 1998 fiscal years to finance the cost of his legal fees in
connection with a lawsuit brought by his former employer. The advances bear
interest at the market rate required under the federal tax laws. The highest
amount outstanding under these advances during the 1998 fiscal year was
$267,187, and as of March 29, 1999, the amount outstanding was $270,469.
The Company has advanced a total sum of $233,684 to Mr. Thian H. Tan
during the 1998 fiscal year as a personal loan. The advances bear interest at
the market rate required under the federal tax laws. The highest amount
outstanding under these advances during the 1998 fiscal year was $236,689, and
as of March 29, 1999, the amount outstanding was $48,214.
Compliance with Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of common stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon written review of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 3, 1999, all Section
16(a) filing requirements applicable to the Company's officers, directors and
greater than ten percent stockholders were met in a timely manner.
OTHER BUSINESS
The Board of Directors knows of no other business that will be
presented for consideration at the Annual Meeting. If other matters are properly
brought before the Annual Meeting, however, it is the intention of the persons
named in the accompanying proxy to vote the shares represented thereby on such
matters in accordance with their best judgment.
34
<PAGE>
STOCKHOLDER PROPOSALS
Stockholders of the Company may submit proposals that they believe
should be voted upon at the Annual Meeting or nominate persons for election to
the Board of Directors. In accordance with the Company's Bylaws and applicable
rules under the Securities Exchange Act of 1934, as amended, any such proposal
or nomination must be submitted in writing to the Secretary of the Company no
later than December 31, 1999. As set forth in the Company's Bylaws, this
submission must include certain specified information concerning the proposal or
nominee, as the case may be. Proposals or nominations not meeting these
requirements will not be entertained at the Annual Meeting. The Secretary should
be contacted in writing at the address on the first page of this Proxy Statement
to make any submission or to obtain additional information as to the proper form
and content of submissions. Stockholders interested in submitting such a
proposal are advised to contact knowledgeable counsel with regards to the
detailed requirements of submitting such a proposal.
By Order of the Board of Directors
TU CHEN
Chairman of the Board
35
<PAGE>
APPENDIX A
KOMAG, INCORPORATED
1988 EMPLOYEE STOCK PURCHASE PLAN
(Restated June 29, 1992 and Amended January 27, 1994,
January 22, 1997, January 30, 1998 and February 4, 1999)
I. PURPOSE
The Komag, Incorporated 1988 Employee Stock Purchase Plan (the
"Plan") is intended to provide eligible employees of the Company and one or more
of its Corporate Affiliates with the opportunity to acquire a proprietary
interest in the Company through participation in a plan designed to qualify as
an employee stock purchase plan under Section 423 of the Internal Revenue Code
(the "Code").
II. DEFINITIONS
For purposes of administration of the Plan, the following
terms shall have the meanings indicated:
Base Compensation means (i) the regular base earnings paid to
a Participant by one or more Participating Companies, before deduction for any
contributions made on the Participant's behalf to any Code Section 401(k) Plan
maintained by the Company or any Corporate Affiliate. The calculation of Base
Compensation may also include, at the discretion of the Plan Administrator
exercisable prior to the start of any purchase period, bonuses, overtime pay,
shift differentials and other differentials. Base Compensation shall be
calculated on the basis of equivalent bi-weekly straight-time hours (up to a
maximum of 79.50 hours for three-day shift employees and 80.00 hours for all
other employees) multiplied by straight-time rate. In no event shall Base
Compensation include any profit-sharing or other non-salary deferral
contributions made on the Participant's behalf pursuant to any qualified
profit-sharing plan under Code Section 401(a).
Board means the Board of Directors of the Company.
Company means Komag, Incorporated, a Delaware corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Komag, Incorporated, which shall by appropriate action adopt the Plan.
Corporate Affiliate means any company which is either the
parent corporation or a subsidiary corporation of the Company (as determined in
accordance with Section 424 of the Code), including any parent or subsidiary
corporation which becomes such after the Effective Date.
Effective Date means, with respect to the 1992 plan
restatement, June 29, 1992. However, should any Corporate Affiliate become a
Participating Company in the Plan after such applicable date, then such
<PAGE>
entity shall designate a separate Effective Date with respect to its
employee-Participants.
Employee means any person who is regularly engaged, for a
period of more than 20 hours per week for more than 5 months per calendar year,
in the rendition of personal services to the Company or any other Participating
Company for earnings considered wages under Section 3121(a) of the Code.
Fiscal Quarter means a three-month period corresponding to a
fiscal quarter of the Company, based on the Company's 52-53 week fiscal year
ending on the Sunday closest to December 31st of each year.
Participant means any Employee of a Participating Company
actively participating in the Plan.
Participating Company means the Company and such Corporate
Affiliate or Affiliates as may be designated from time to time by the Board. The
Participating Companies in the Plan, as of the Effective Date, are listed in
attached Schedule A.
Stock means shares of the common stock of the Company.
III. ADMINISTRATION
(a) The Plan shall be administered by a committee (the
"Committee") comprised of at least two non-employee members of the Board
appointed from time to time by the Board. The Committee as Plan Administrator
shall have full authority to administer the Plan, including authority to
interpret and construe any provision of the Plan and to adopt such rules and
regulations for administering the Plan as it may deem necessary in order to
comply with the requirements of Code Section 423. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan.
(b) No member of the Committee while serving as such shall be
eligible to participate in the Plan.
IV. PURCHASE PERIODS
(a) Stock shall be offered for purchase under the Plan through
a series of successive purchase periods until such time as (i) the maximum
number of shares of Stock available for issuance under the Plan shall have been
purchased or (ii) the Plan shall have been sooner terminated in accordance with
Article X or Article XI.
(b) The Plan shall be implemented in a series of successive
purchase periods, each of such duration (not to exceed six months) as determined
by the Plan Administrator prior to the start date of the purchase period.
Purchase periods will start, at the Plan Administrator's discretion, either
2.
<PAGE>
on the first day or the first Monday of each successive Fiscal Quarter or each
alternate successive Fiscal Quarter. Accordingly, either four (4) or two (2)
separate purchase periods may commence per Fiscal Year.
(c) The Participant shall be granted a separate purchase right
for each purchase period in which he/she participates. The purchase right shall
be granted on the first day of the purchase period and shall be automatically
exercised in (i) successive quarterly installments on the last day of each
Fiscal Quarter such purchase right remains outstanding, in the case of a
purchase period in which purchases are effected quarterly, or (ii) successive
semi-annual installments on the last day of each alternate Fiscal Quarter such
purchase right remains outstanding, in the case of a purchase period in which
purchases are effected semi-annually.
(d) An Employee may participate in only one purchase period at
a time. Accordingly, an Employee who wishes to join a new purchase period must
withdraw from the current purchase period in which he/she is participating and
must also enroll in the new purchase period prior to the commencement date for
that period.
(e) The acquisition of Stock through participation in the Plan
for any purchase period shall neither limit nor require the acquisition of Stock
by the Participant in any subsequent purchase period. However, the acquisition
of Stock through participation in the Plan for any purchase period shall be
counted toward the limitations on the number of purchasable shares as provided
in Section VII(b) and the accrual limitations as provided in Section VIII.
(f) Under no circumstances shall any purchase rights granted
under the Plan be exercised, nor shall any shares of Stock be issued hereunder,
until such time as (i) the Plan shall have been approved by the Company's
shareholders and (ii) the Company shall have complied with all applicable
requirements of the Securities Act of 1933 (as amended), all applicable listing
requirements of any securities exchange on which the Stock is listed and all
other applicable requirements established by law or regulation.
V. ELIGIBILITY AND PARTICIPATION
(a) Every Employee of a Participating Company shall be
eligible to participate in the Plan on the first day of the first purchase
period following the Employee's commencement of service with the Company or any
Corporate Affiliate, but in no event shall participation commence prior to the
Effective Date.
(b) In order to participate in the Plan for a particular
purchase period, the Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) prior to the commencement date of the purchase period. Such
enrollment shall be effective for subsequent, but not overlapping, purchase
periods, unless the Employee notifies the Plan Administrator (or its designate)
to the contrary prior to the commencement date of any such subsequent purchase
period.
3.
<PAGE>
(c) The payroll deduction authorized by a Participant for
purposes of acquiring Stock under the Plan may be any multiple of 1% of the Base
Compensation paid to the Participant during the relevant purchase period, up to
a maximum of 10%. The deduction rate so authorized shall continue in effect for
the entire purchase period and for each subsequent purchase period, unless the
Participant shall, prior to the end of the purchase period for which the
purchase right is in effect, reduce the rate by filing the appropriate form with
the Plan Administrator (or its designate). The reduced rate shall become
effective as soon as practicable following the filing of such form. Each
Participant shall be permitted such a rate reduction only two (2) times in each
purchase period. The reduced rate shall continue in effect for the entire
purchase period and for each subsequent purchase period, unless the Participant
shall, prior to the commencement of any subsequent purchase period designate a
different rate (up to the 10% maximum) by filing the appropriate form with the
Plan Administrator (or its designate). The new rate shall become effective for
the first purchase period commencing after the filing of such form. Payroll
deductions, however, will automatically cease upon the termination of the
Participant's purchase right in accordance with Section VII(d) or (e) below.
VI. STOCK SUBJECT TO PLAN
(a) The Stock purchasable by Participants under the Plan
shall, solely in the Board's discretion, be made available from either
authorized but unissued Stock or from reacquired Stock, including shares of
Stock purchased on the open market. The total number of shares of Stock which
may be issued under the Plan shall not exceed 7,400,000 shares (subject to
adjustment under Section VI(b)). Such share reserve includes the 2,550,000-share
increase authorized by the Board on February 4, 1999, subject to stockholder
approval at the 1999 Annual Meeting.
(b) In the event any change is made to the Stock purchasable
under the Plan by reason of any recapitalization, stock dividend, stock split,
combination of shares or other change affecting the outstanding common stock of
the Company as a class without receipt of consideration, then appropriate
adjustments shall be made by the Plan Administrator to the class and maximum
number of shares purchasable under the Plan, the class and maximum number of
shares purchasable per Participant under any purchase right outstanding at the
time or purchasable per Participant over the term of the Plan, and the class and
number of shares and the price per share of the Stock subject to outstanding
purchase rights held by Participants under the Plan.
VII. PURCHASE RIGHTS
An Employee who participates in the Plan for a particular
purchase period shall have the right to purchase Stock on the purchase dates
designated by the Plan Administrator for such purchase period upon the terms and
conditions set forth below and shall execute a purchase agreement embodying such
terms and conditions and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.
(a) Purchase Price. The purchase price per share shall be the
lesser of (i) 85% of the fair market value of a share of Stock on the date on
which the purchase right is granted or (ii) 85%
4
<PAGE>
of the fair market value of a share of Stock on the date the purchase right is
exercised. For purposes of determining such fair market value (and for all other
valuation purposes under the Plan), the fair market value per share of Stock on
any date shall be determined in accordance with the following provisions:
(i) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded on the Nasdaq National
Market, the fair market value per share shall be the closing selling
price per share of Stock on the date in question, as such prices are
reported by the National Association of Securities Dealers on the
Nasdaq National Market. If there is no reported closing selling price
on the date in question, then the closing selling on the last
preceding date for which such quotation exists shall be determinative
of fair market value.
(ii) If the Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the
primary market for the Stock, as such price is officially quoted on
such exchange. If there is no reported sale of Stock on such exchange
on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for
which such quotation exists.
(b) Number of Purchasable Shares. The number of shares
purchasable by a Participant on any particular purchase date shall be the number
of whole shares obtained by dividing the amount collected from the Participant
through payroll deductions during the quarterly or semi-annual period beginning
with the start of the purchase period or the most recent purchase date in the
same purchase period (whichever is applicable), together with any amount carried
over from the preceding purchase date in the same purchase period pursuant to
the provisions of Section VII(f), by the purchase price in effect for such
purchase date. However, the maximum number of shares purchasable by the
Participant on any purchase date shall not exceed 3,000 shares, in the case of a
purchase period in which purchases are effected quarterly, or 6,000 shares, in
the case of a purchase period in which purchases are effected semi-annually
(subject in either instance to adjustment under Section VI(b)). In addition, the
maximum number of shares for which purchase rights may in the aggregate be
granted to any individual who is subject to the short-swing profit restrictions
of the Federal securities laws shall not exceed 50,000 shares (subject to
adjustment under Section VI(b)) over the term of the Plan. Accordingly, no such
officer or director shall be eligible to receive purchase rights for any
purchase period if the number of shares which would otherwise be purchasable by
such individual for that purchase period would result in the issuance to such
individual of shares of Stock in excess of the maximum number of shares
purchasable in the aggregate by such individual over the term of the Plan. Each
of the foregoing share-limitations has been adjusted to reflect the two-for-one
forward split of the Stock effected on December 21, 1995.
Under no circumstances shall purchase rights be granted under
the Plan to any
5.
<PAGE>
Employee if such Employee would, immediately after the grant, own (within the
meaning of Section 424(d) of the Code), or hold outstanding options or other
rights to purchase, stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or any of its Corporate
Affiliates.
(c) Payment. Payment for Stock purchased under the Plan shall
be effected by means of the Participant's authorized payroll deductions. Such
deductions shall begin on the first pay day coincident with or immediately
following the commencement date of the relevant purchase period and shall
terminate with the pay day ending with or immediately prior to the last day of
the purchase period. The amounts so collected shall be credited to the
Participant's individual account under the Plan, but no interest shall be paid
on the balance from time to time outstanding in the account. The amounts
collected from a Participant may be commingled with the general assets of the
Company and may be used for general corporate purposes.
(d) Termination of Purchase Rights.
(i) A Participant may, prior to any purchase date,
terminate his/her outstanding purchase right under the Plan by filing the
prescribed notification form with the Plan Administrator (or its designate). The
Company will then refund all sums previously collected from the Participant and
not previously applied to the purchase of Stock during the purchase period, and
no further amounts will be collected from the Participant with respect to the
terminated purchase right.
(ii) The termination shall be irrevocable with respect
to the particular purchase period to which it pertains and shall also require
the Participant to re-enroll in the Plan (by making a timely filing of a new
purchase agreement and payroll deduction authorization) if the Participant
wishes to resume participation in a subsequent purchase period.
(e) Termination of Employment. If a Participant ceases
Employee status during any purchase period, then the Participant's outstanding
purchase right under the Plan shall immediately terminate and all sums
previously collected from the Participant and not previously applied to the
purchase of stock during such purchase period shall be promptly refunded.
However, should the Participant die or become permanently disabled while in
Employee status, then the Participant or the person or persons to whom the
rights of the deceased Participant under the Plan are transferred by will or by
the laws of descent and distribution (the "successor") will have the election,
exercisable at any time prior to the purchase date for the quarterly or
semi-annual period in which the Participant dies or becomes permanently
disabled, to (i) withdraw all the funds in the Participant's payroll account at
the time of his/her cessation of Employee status or (ii) have such funds applied
to the purchase of shares of Stock on the next purchase date. In no event,
however, shall any further payroll deductions be added to the Participant's
account following his/her cessation of Employee status.
For purposes of the Plan: (a) a Participant shall be
considered to be an Employee for so long as such Participant remains in the
employ of the Company or any other Participating Company under the Plan and (b)
a Participant shall be deemed to be permanently disabled if he/she is unable, by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of at least twelve (12) months,
to engage in any substantial gainful employment.
6.
<PAGE>
(f) Stock Purchase. Outstanding purchase rights shall be
automatically exercised in a series of successive installments as provided in
Section IV(c). The exercise shall be effected by applying the amount credited to
the Participant's account on the last date of the Fiscal Quarter, in the case of
a purchase period in which purchases are effected quarterly, or the last date of
the alternate Fiscal Quarter, in the case of a purchase period in which
purchases are effected semi-annually, to the purchase of whole shares of Stock
(subject to the limitations on the maximum number of purchasable shares set
forth in Section VII(b)) at the purchase price in effect for such purchase date.
Any amount remaining in the Participant's account after such purchase shall be
held for the purchase of Stock on the next quarterly or semi-annual purchase
date within the purchase period; provided, however, that any amount not applied
to the purchase of Stock at the end of a purchase period shall be refunded
promptly after the close of the purchase period, and any amount not applied to
the purchase of stock by reason of the Section VII(b) limitations on the maximum
number of purchasable shares shall be refunded promptly after the quarterly or
semi-annual purchase date.
(g) Proration of Purchase Rights. Should the total number of
shares of Stock which are to be purchased pursuant to outstanding purchase
rights on any particular date exceed the number of shares then available for
issuance under the Plan, the Plan Administrator shall make a pro-rata allocation
of the available shares on a uniform and nondiscriminatory basis, and any
amounts credited to the accounts of Participants shall, to the extent not
applied to the purchase of Stock, be refunded to the Participants.
(h) Rights as Shareholder. A Participant shall have no rights
as a shareholder with respect to shares covered by the purchase rights granted
to the Participant under the Plan until the shares are actually purchased on the
Participant's behalf in accordance with Section VII(f). No adjustments shall be
made for dividends, distributions or other rights for which the record date is
prior to the date of such purchase.
A Participant shall be entitled to receive, as soon as
practicable after the date of each purchase, stock certificates for the number
of shares purchased on the Participant's behalf. Such certificate may, upon the
Participant's request, be issued in the names of the Participant and his/her
spouse as community property or as joint tenants with right of survivorship.
In lieu of delivering a stock certificate to each Participant,
the Plan Administrator may, in its discretion, implement a designated broker
program and direct the Company to issue a single stock certificate to a broker
designated by the Plan Administrator. Such designated broker shall establish an
account for each Participant in the Plan and shall effect transfers and sales
from such account at the direction of the Participant. To facilitate the
designated broker program, the Plan Administrator may require, as a condition to
participation in the Plan, that a Participant agree to the issuance of his or
her stock certificates directly to the designated broker.
(i) Assignability. No purchase rights granted under the Plan
shall be assignable or transferable by a Participant except by will or by the
laws of descent and distribution, and the purchase rights shall, during the
lifetime of the Participant, be exercisable only by such Participant.
7.
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(j) Merger or Liquidation of Company. In the event the Company
or its shareholders enter into an agreement to dispose of all or substantially
all of the assets or outstanding capital stock of the Company by means of a
sale, merger or reorganization in which the Company will not be the surviving
corporation (other than a reorganization effected primarily to change the State
in which the Company is incorporated) or in the event the Company is liquidated,
then all outstanding purchase rights under the Plan shall automatically be
exercised immediately prior to such sale, merger, reorganization or liquidation
by applying all sums previously collected from Participants pursuant to their
payroll deductions in effect for such rights to the purchase of whole shares of
Common Stock, subject, however, to the applicable limitations of Section VII(b).
VIII. ACCRUAL LIMITATIONS
(a) No Participant shall be entitled to accrue rights to
acquire Stock pursuant to any purchase right under this Plan if and to the
extent such accrual, when aggregated with (I) Stock rights accrued under other
purchase rights outstanding under this Plan and (II) similar rights accrued
under other employee stock purchase plans (within the meaning of Section 423 of
the Code) of the Company or its Corporate Affiliates, would otherwise permit
such Participant to purchase more than $25,000 worth of stock of the Company or
any Corporate Affiliate (determined on the basis of the fair market value of
such stock on the date or dates such rights are granted to the Participant) for
each calendar year such rights are at any time outstanding.
(b) For purposes of applying the accrual limitations of
Section VIII(a), the right to acquire Stock under each purchase right
outstanding under the restated Plan shall accrue as follows:
- The right to acquire Stock under each such purchase
right shall accrue in a series of successive quarterly or semi-annual
installments as and when the purchase right first becomes exercisable
for each installment as provided in Section IV(c).
- No right to acquire Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Stock under that
purchase right or any other purchase rights held by the Participant at
the rate of $25,000 worth of Stock (based on the fair market value on
the date or dates of grant) for each calendar year (or portion thereof)
for which such purchase rights have been outstanding.
- If by reason of the Section VIII(a) limitations, the
Participant's outstanding purchase right does not accrue for a
particular purchase date of any purchase period, then the payroll
deductions which the Participant made during that quarterly or
semi-annual period with respect to such purchase right shall be
promptly refunded.
8.
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(c) In the event there is any conflict between the provisions
of this Article VIII and one or more provisions of the Plan or any instrument
issued thereunder, the provisions of this Article VIII shall be controlling.
IX. STATUS OF PLAN UNDER FEDERAL TAX LAWS
(a) The Plan is designed to qualify as an employee stock
purchase plan under Code Section 423. However, the Plan Administrator may, at
any time in its discretion, cease to administer the Plan as a qualified employee
stock purchase plan under Code Section 423. Accordingly, share purchases
effected under the Plan at any time after the Plan ceases to be administered as
a qualified employee stock purchase plan under Code Section 423 (whether
pursuant to purchase rights granted before or after the Plan ceases to be
qualified) shall result in taxable income to each Participant equal to the
excess of (i) the fair market value of the purchased shares on the purchase date
over (ii) the purchase price paid for such shares.
(b) To the extent required by law, the Company's obligation to
deliver shares to the Participant upon the exercise of any outstanding purchase
right shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding requirements.
X. AMENDMENT AND TERMINATION
(a) The Board may from time to time alter, amend, suspend or
discontinue the Plan; provided, however, that no such action shall become
effective prior to the exercise of outstanding purchase rights at the end of the
quarterly or semi-annual period in which such action is authorized; and
provided, further, that no such action of the Board may, without the approval of
the shareholders of the Company, increase the number of shares issuable under
the Plan or the maximum number of shares which any one Participant may purchase
during a single purchase period or over the term of the Plan (except for
adjustments permitted under Section VI(b)), alter the purchase price formula so
as to reduce the purchase price specified in the Plan, otherwise materially
increase the benefits accruing to Participants under the Plan or materially
modify the requirements for eligibility to participate in the Plan.
(b) The Company shall have the right, exercisable in the sole
discretion of the Plan Administrator, to terminate the Plan immediately
following the end of a quarterly or semi-annual purchase date. Should the
Company elect to exercise such right, then the Plan shall terminate in its
entirety, and no further purchase rights shall thereafter be granted, and no
further payroll deductions shall thereafter be collected, under the Plan.
XI. GENERAL PROVISIONS
(a) The Plan was initially adopted by the Board on January 21,
1988 and approved by the stockholders on June 7, 1988. In January 1991, the
Board approved a 250,000-share increase in the number of shares of Common Stock
issuable under the Plan, and the stockholders approved such
9.
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increase in May 1991. The 1992 restatement of the Plan and the 250,000-share
increase approved by the Board on January 23, 1992 became effective on the first
day of the first purchase period which began after the 1992 Annual Stockholders
Meeting. Additional amendments were made to the Plan on January 27, 1994,
January 22, 1997, and January 30, 1998 to increase the number of shares of Stock
reserved for issuance under the Plan, and the January 1997 amendment also
extended the term of the Plan to December 31, 2001. On February 4, 1999, the
Board authorized an amendment to the Plan to increase the number of shares of
Stock available for issuance hereunder by an additional 2,550,000 shares,
subject to stockholder approval at the 1999 Annual Meeting. If such stockholder
approval is not obtained, then no purchase rights will be granted under the
Purchase Plan on the basis of the 2,550,000-share increase.
(b) The provisions of this restated Plan shall apply only to
purchase rights exercised under the Plan from and after the Effective Date of
such restatement. All exercises effected under the Plan prior to such Effective
Date were governed by the terms and conditions of the Plan as in effect on each
such exercise date, and nothing in this restated Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of the shares of
Common Stock acquired thereunder.
(c) The Plan shall terminate upon the earlier of (i) December
31, 2001 or (ii) the date on which all shares available for issuance under the
Plan shall have been sold pursuant to purchase rights exercised under the Plan.
(d) All costs and expenses incurred in the administration of
the Plan shall be paid by the Company.
(e) Neither the action of the Company in establishing the
Plan, nor any action taken under the Plan by the Plan Administrator, nor any
provision of the Plan itself shall be construed so as to grant any person the
right to remain in the employ of the Company or any of its Corporate Affiliates
for any period of specific duration, and such person's employment may be
terminated at any time, with or without cause.
(f) The provisions of the Plan shall be governed by the laws
of the State of California.
10.
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Schedule A
Companies Participating in
1988 Employee Stock Purchase Plan
As of February 4, 1999
Komag, Incorporated
Komag Material Technology, Inc.
Komag U.S.A. (Malaysia) Sdn.
Komag Asia Pacific, Inc.
11.
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APPENDIX B
KOMAG, INCORPORATED
RESTATED 1987 STOCK OPTION PLAN
(Amended and Restated through April 16, 1999)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
This Restated 1987 Stock Option Plan (the "Plan") is intended
to promote the interests of Komag, Incorporated, a Delaware corporation (the
"Corporation"), by providing a method whereby eligible individuals may be
offered incentives and rewards which will encourage them to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation and continue to render services to the Corporation (or its parent or
subsidiary corporations).
II. STRUCTURE OF THE PLAN
A. Option Programs. The Plan shall be divided into two separate components: the
Discretionary Option Grant Program described in Article Two and the Automatic
Option Grant Program described in Article Three. Under the Discretionary Option
Grant Program, eligible individuals may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock in
accordance with the provisions of Article Two. Under the Automatic Option Grant
Program, each eligible member of the Corporation's Board of Directors (the
"Board") will automatically receive an option grant to purchase shares of Common
Stock in accordance with the provisions of Article Three.
B. General Provisions. Unless the context clearly indicates
otherwise, the provisions of Articles One and Four of the Plan shall apply to
the Discretionary Option Grant Program and the Automatic Option Grant Program
and shall accordingly govern the interests of all individuals under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Discretionary Option Grant Program shall be administered by one
or more committees comprised of Board members. The primary committee (the
"Primary Committee") shall be comprised of two or more non-employee Board
members and shall have sole and exclusive authority to grant stock options and
stock appreciation rights under the Discretionary Option Grant Program to
officers and employee-directors of the Corporation subject to the short-swing
profit restrictions of the Federal securities laws. Stock options may be granted
under the Discretionary Option Grant Program to all other eligible employees and
consultants by either the Primary Committee or a second committee comprised of
two or more employee-Board members (the "Secondary Committee"). The members of
the Primary Committee and the Secondary Committee shall each serve for such
period of time as the Board may determine and shall be subject to removal by the
Board at any time.
B. Subject to the limited authority provided the Secondary Committee
to effect option grants in accordance with the provisions of paragraph III.A of
this Article One, the Primary Committee shall serve as the Plan Administrator
and shall have full power and authority (subject to the express provisions of
the Discretionary Option Grant Program) to establish such rules and regulations
as it may deem appropriate for the proper administration of such program and to
make such determinations under the program and any outstanding option as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties with an interest in the Plan or any outstanding
option under this Discretionary Option Grant Program.
C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three.
IV. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to receive options pursuant to the
Discretionary Option Grant Program under Article Two of the Plan shall be
- those key employees (including officers and directors) of the
Corporation (or its parent or subsidiary corporations) who render
services which tend to contribute materially to the success of the
Corporation (or its parent or subsidiary corporations) or which may
reasonably be anticipated to contribute materially to the future
success of the Corporation (or its parent or subsidiary corporations),
2.
<PAGE>
- non-employee Board members who render valuable services to the
Corporation (or its parent or subsidiary corporations), and
- those independent contractors and consultants who provide
valuable services to the Corporation (or its parent or subsidiary
corporations).
B. Non-employee Board members shall also be eligible to receive automatic
option grants under the provisions of Article Three.
C. The Plan Administrator shall have full authority to select the eligible
individuals who are to receive option grants under the Plan, the number of
shares to be covered by each granted option, whether such option is to be an
incentive stock option ("Incentive Option") which satisfies the requirements of
Section 422 of the Internal Revenue Code or a non-statutory option
("Non-Statutory Option") not intended to meet such requirements, the time or
times at which such option is to become exercisable and the maximum term for
which the option is to be outstanding.
D. For purposes of the Plan, the following provisions shall be applicable
in determining the parent and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation shall be considered to be a parent
corporation of the Corporation, provided each such corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
Each corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation shall be considered to be a
subsidiary of the Corporation, provided each such corporation (other than
the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
3.
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the
Corporation's authorized but unissued or reacquired Common Stock. The aggregate
number of shares which may be issued over the term of the Plan shall not exceed
18,140,000 shares (subject to adjustment from time to time in accordance with
paragraph V.D of this Article One).
B. In no event any one individual participating in the Plan be granted
stock options and separately exercisable stock appreciation rights for more than
3,000,000 shares of Common Stock (as adjusted for the December 1995 split) in
the aggregate over the remaining term of the Plan, subject to adjustment from
time to time in accordance with paragraph V.D of this Article One. For purposes
of such limitation, no stock options or stock appreciation rights granted prior
to January 1, 1994 shall be taken into account.
C. Should an option be terminated for any reason prior to exercise in
whole or in part, the shares subject to the portion of the option not so
exercised shall be available for subsequent option grants under this Plan. In
addition, unvested shares issued under the Plan and subsequently repurchased by
the Corporation at the original exercise price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, shares subject to any option or portion thereof
cancelled in accordance with paragraph IV of Article Two or paragraph III of
Article Three and shares repurchased by the Corporation pursuant to its
repurchase rights under the Plan shall not be available for subsequent option
grants under the Plan.
4.
<PAGE>
D. In the event any change is made to the Common Stock issuable under
the Plan (whether by reason of (i) merger, consolidation or reorganization or
(ii) recapitalization, stock dividend, stock split, combination of shares,
exchange of shares or other similar change affecting the outstanding Common
Stock as a class without receipt of consideration), then unless such change
results in the termination of all outstanding options pursuant to the provisions
of paragraph III of Articles Two and Three of the Plan, appropriate adjustments
shall be made to (i) the aggregate number and/or class of shares issuable under
the Plan, (ii) the maximum number and/or class of shares for which stock options
and separately exercisable stock appreciation rights may be granted to any one
participant in the aggregate after December 31, 1993, (iii) the number and/or
class of shares and price per share in effect under each outstanding option
under the Discretionary Option Grant Program, (iv) the number and/or class of
shares per non-employee Board member for which automatic option grants are
subsequently to be made under the Automatic Option Grant Program, and (v) the
number and/or class of shares and price per share of the Common Stock in effect
under each automatic grant outstanding under the Automatic Option Grant Program.
The purpose of such adjustments to the outstanding options shall be to preclude
the enlargement or dilution of rights and benefits under such options.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
VI. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to this Article Two shall be authorized by
action of the Plan Administrator and may, at the Plan Administrator's
discretion, be either Incentive Options or Non-Statutory Options. Individuals
who are not Employees may only be granted Non-Statutory options. The granted
options shall be evidenced by instruments in such form as the Plan Administrator
shall from time to time approve; provided, however, that each such instrument
shall comply with and incorporate the terms and conditions specified below. Each
instrument evidencing an Incentive Option shall, in addition, be subject to the
applicable provisions of paragraph II of this Article Two.
A. Option Price.
1. The option price per share shall be fixed by the Plan
Administrator. In no event, however, shall the option price per share be less
than one hundred percent (100%) of the fair market value per share of Common
Stock on the date of the option grant.
2. The option price shall become immediately due upon exercise of
the option and shall, subject to the provisions of paragraph VI of this Article
Two and the instrument evidencing the grant, be payable as follows:
(i) full payment in cash or check drawn to the Corporation's
order;
(ii) full payment in shares of Common Stock held by the
optionee for the requisite period necessary to avoid a charge to
the Corporation's earnings for financial reporting purposes and
valued at fair market value on the Exercise Date (as such term is
defined below) equal to the option price; or
(iii) full payment through a combination of shares of Common
Stock held by the optionee for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at fair market value on the
Exercise Date and cash or check, equal in the aggregate to the
option price.
6.
<PAGE>
(iv) to the extent the option is exercised for vested
shares, the option price may also be paid through a broker-dealer
sale and remittance procedure pursuant to which the optionee
shall provide irrevocable instructions to (I) a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, an amount
equal to the aggregate option price payable for the purchased
shares plus all applicable Federal and State income and
employment taxes required to be withheld by the Corporation by
reason of such purchase and (II) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm.
For purposes of this subparagraph 2, the Exercise
Date shall be the date on which notice of the exercise of
the option is delivered to the Corporation. Except to the extent the sale and
remittance procedure is utilized in connection with the exercise of the option,
payment of the option price for the purchased shares must accompany such notice.
3. The fair market value of a share of Common Stock on any
relevant date under subparagraph 1 or 2 above (and for all other valuation
purposes under the Plan) shall be determined in accordance with the following
provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the fair market value shall be the closing
sales price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If
there is no closing sales price for the Common Stock on the date
in question, then the fair market value shall be the closing
sales price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on either the
New York Stock Exchange or the American Stock Exchange, then the
fair market value shall be the closing sales price per share of
Common Stock on the date in question on such exchange, as such
price is officially quoted in the composite tape of transactions
on that exchange. If there is no closing sales price for the
Common Stock on the date in question, then the fair market value
shall be the closing sales price on the last preceding date for
which such quotation exists.
7.
<PAGE>
B. Term and Exercise of Options.
Each option granted under this Article Two shall be exercisable at
such time or times, during such period, and for such number of shares as shall
be determined by the Plan Administrator and set forth in the instrument
evidencing such option; provided, however, that no option granted under this
Article Two shall have a maximum term in excess of ten (10) years from the grant
date.
C. Limited Transferability of Options.
During the lifetime of the optionee, the option shall be exercisable
only by the optionee and shall not be assignable or transferable by the optionee
otherwise than by will or by the laws of descent and distribution following the
optionee's death. However, the Plan Administrator may grant one or more
Non-Statutory Options under this Article Two which may, in connection with the
optionee's estate plan, be assigned in whole or in part during the optionee's
lifetime to one or more members of the optionee's immediate family or to a trust
established exclusively for one or more such family members. The assigned
portion may only be exercised by the person or persons who acquire a proprietary
interest in the option pursuant to the assignment. The terms applicable to the
assigned portion shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
D. Termination of Service.
1. Should an optionee cease to remain in Service for any reason
(including death, permanent disability or retirement at or after age 65) while
the holder of one or more outstanding options granted to such optionee under the
Plan, then such option or options shall not (except to the extent otherwise
provided pursuant to paragraph VII below) remain exercisable for more than a
twelve (12)-month period (or such shorter period as is determined by the Plan
Administrator and set forth in the option agreement) following the date of
cessation of Service; provided, however, that under no circumstances shall any
such option be exercisable after the specified expiration date of the option
term. Except to the extent otherwise provided pursuant to subparagraph I.D.4
below, each such option shall, during such twelve (12)-month or shorter period,
be exercisable for any or all vested shares for which that option is exercisable
on the date of such cessation of Service. Upon the expiration of such twelve
(12)-month or shorter period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be exercisable for any such vested
shares for which the option has not been exercised. However, the option shall,
immediately upon the optionee's cessation of Service, terminate and cease to be
outstanding with respect to any option shares in which the optionee is not
otherwise at that time vested or for which the option is not otherwise at that
time exercisable.
8.
<PAGE>
2. Should the optionee die while in Service, or cease to remain
in Service and thereafter die while the holder of one or more outstanding
options under the Plan, each such option may be exercised by the personal
representative of the optionee's estate or by the person or persons to whom the
option is transferred pursuant to the optionee's will or in accordance with the
laws of descent and distribution but, except to the extent otherwise provided
pursuant to subparagraph I.D.4 below, only to the extent of the number of vested
shares (if any) for which the option is exercisable on the date of the
optionee's death. Such exercise must be effected prior to the earlier of (i) the
first anniversary of the date of the optionee's death or (ii) the specified
expiration date of the option term. Upon the occurrence of the earlier event,
the option shall terminate and cease to be exercisable.
3. If (i) the optionee's Service is terminated for cause
(including, but not limited to, any act of dishonesty, willful misconduct, fraud
or embezzlement or any unauthorized disclosure or use of confidential
information or trade secrets) or (ii) the optionee makes or attempts to make any
unauthorized use or disclosure of confidential information or trade secrets of
the Corporation or its parent or subsidiary corporations, then in any such event
all outstanding options granted the optionee under the Plan shall terminate and
cease to be exercisable immediately upon such cessation of Service or (if
earlier) upon such unauthorized use or disclosure of confidential or secret
information or attempt thereat.
4. The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at the time the optionee
dies, retires at or after age 65, or ceases to remain in Service, to establish
as a provision applicable to the exercise of one or more options granted under
the Plan that during the limited period of exercisability following death,
retirement at or after age 65, or cessation of Employee status as provided in
subparagraph I.D.1 or I.D.2 above, the option may be exercised not only with
respect to the number of vested shares for which it is exercisable at the time
of the optionee's cessation of Service, but also with respect to one or more
subsequent installments in which the optionee would have otherwise vested had
such cessation of Service not occurred.
9.
<PAGE>
5. For purposes of the foregoing provisions of this paragraph I.D
(and all other provisions of the Plan),
- The optionee shall be deemed to remain in the Service of
the Corporation for so long as such individual renders services on a
periodic basis to the Corporation (or any parent or subsidiary
corporation) in the capacity of an Employee, a non-employee member of
the Board or an independent consultant or advisor.
- The optionee shall be considered to be an Employee for so
long as such individual remains in the employ of the Corporation or
one or more of its parent or subsidiary corporations, subject to the
control and direction of the employer not only as to the work to be
performed but also as to the manner and method of performance.
D. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with
respect to any shares covered by the option until such individual shall have
exercised the option, paid the option price and been issued a stock certificate
for the purchased shares. No adjustment shall be made for dividends or
distributions (whether paid in cash, securities or other property) for which the
record date is prior to the date the stock certificate is issued.
E. Repurchase Rights.
The shares of Common Stock acquired upon the exercise of options
granted under this Article Two may be subject to repurchase by the Corporation
in accordance with the following provisions:
The Plan Administrator shall have the discretion to authorize the
issuance of unvested shares of Common Stock under this Article Two. Should the
Optionee cease Service while holding such unvested shares, the Corporation shall
have the right to repurchase any or all of those unvested shares at the option
price paid per share. The terms and conditions upon which such repurchase right
shall be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the instrument evidencing such
repurchase right.
10.
<PAGE>
All of the Corporation's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights shall
immediately vest in full, upon the occurrence of any Corporate Transaction under
paragraph III of this Article Two, except to the extent: (i) any such repurchase
right is to be assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination is precluded
by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
The Plan Administrator shall have the discretionary authority,
exercisable either before or after the optionee's cessation of Service, to
cancel the Corporation's outstanding repurchase rights with respect to one or
more shares purchased or purchasable by the optionee under this Article Two and
thereby accelerate the vesting of such shares in connection with the optionee's
cessation of Service.
VII. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as "non-qualified" or "non-statutory" options when issued under the
Plan shall not be subject to such terms and conditions:
A. Option Price. The option price per share of the Common Stock
subject to an Incentive Option shall in no event be less than one hundred
percent (100%) of the fair market value of a share of Common Stock on the date
of grant.
B. Dollar Limitation. The aggregate fair market value (determined as
of the respective date or dates of grant) of the shares of Common Stock for
which one or more options granted to any employee under the Plan (or any other
option plan of the Corporation or any parent or subsidiary corporation) may for
the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
11.
<PAGE>
C. 10% Stockholder. If any individual to whom an Incentive Option is
granted is the owner of stock (as determined under Section 424(d) of the
Internal Revenue Code) possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation or any one of its parent or
subsidiary corporations, then the option price per share shall not be less than
one hundred and ten percent (110%) of the fair market value per share of Common
Stock on the grant date, and the option term shall not exceed five (5) years,
measured from the grant date.
Except as modified by the preceding provisions of this
paragraph II, the provisions of Articles One, Two and Four of the Plan shall
apply to all Incentive Options granted hereunder.
VIII. CORPORATE TRANSACTIONS
A. In the event of any of the following stockholder-approved
transactions (a "Corporate Transaction"):
(i) a merger or acquisition in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation's incorporation,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation, or
(iii) any reverse merger in which the Corporation is the
surviving entity,
then each option outstanding under this Article Two shall
automatically become exercisable, during the five (5) business day period
immediately prior to the specified effective date for the Corporate
Transaction, with respect to the full number of shares of Common Stock
purchasable under such option and may be exercised for all or any portion
of such shares as fully vested shares of Common Stock. An outstanding
option under the Plan shall not be so accelerated, however, if and to the
extent (i) such option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation or parent thereof or be
replaced with a comparable option to purchase shares of the capital stock
of the successor corporation or parent thereof or (ii) the acceleration of
such option is subject to other limitations imposed by the Plan
Administrator at the time of grant.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Plan shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be exercisable.
12.
<PAGE>
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issuable, in consummation of such Corporate Transaction, to an actual holder of
the same number of shares of Common Stock as are subject to such option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the option price payable per share, provided the aggregate
option price payable for such securities shall remain the same. In addition, the
class and number of securities available for issuance under the Plan following
the consummation of the Corporate Transaction shall be appropriately adjusted.
D. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction shall remain subject to the applicable limitations of
paragraph II.B.
E. Option grants under this Article Two shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IX. STOCK APPRECIATION RIGHTS
A. Officers and non-employee Board members of the Corporation subject
to the short-swing profit restrictions of the Federal securities laws may, in
the Plan Administrator's sole discretion, be granted limited stock appreciation
rights in tandem with their outstanding options under this Article Two. Upon the
occurrence of a Hostile Take-Over effected at any time after the Corporation's
outstanding Common Stock is registered under Section 12(g) of the Exchange Act,
each outstanding option with such a limited stock appreciation right shall
automatically be cancelled and the optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the shares of Common Stock at the time subject to the
cancelled option (whether or not the option is otherwise at the time exercisable
for such shares) over (ii) the aggregate exercise price payable for such shares.
The cash distribution payable upon such cancellation shall be made within five
(5) days following the consummation of the Hostile Take-Over. The Plan
Administrator shall pre-approve, at the time the limited right is granted, the
subsequent exercise of that right in accordance with the terms of the grant and
the provisions of this Section IV. No additional approval of the Plan
Administrator or the Board shall be required at the time of the actual option
cancellation and cash distribution.
13.
<PAGE>
B. For purposes of paragraph IV.A, the following definitions shall be
in effect:
A Hostile Take-Over shall be deemed to occur in the event
any person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer which the Board does
not recommend the Corporation's stockholders to accept.
The Take-Over Price per share shall be deemed to be equal to
the greater of (a) the fair market value per share on the date of
cancellation, as determined pursuant to the valuation provisions of
subparagraph I.A.3, or (b) the highest reported price per share paid
in effecting such Hostile Take-Over. However, if the cancelled option
is an Incentive Option, the Take-Over Price shall not exceed the
clause (a) price per share.
C. The shares of Common Stock subject to any option cancelled for an
appreciation distribution pursuant to this paragraph V shall not be available
for subsequent option grant under the Plan.
X. EXTENSION OF EXERCISE PERIOD
The Plan Administrator shall have full power and authority,
exercisable from time to time in its sole discretion, to extend, either at the
time the option is granted or at any time while such option remains outstanding,
the period of time for which the option is to remain exercisable following the
optionee's cessation of Service or death from the twelve (12)-month or shorter
period set forth in the option agreement to such greater period of time as the
Plan Administrator shall deem appropriate; provided, however, that in no event
shall such option be exercisable after the specified expiration date of the
option term.
14.
<PAGE>
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
XI. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant
to the provisions of this Article Three shall be limited to the following:
(i) each individual serving as a non-employee member of the Board
on January 24, 1995, the effective date of this Automatic Option Grant
Program (the "Effective Date"); and
(ii) each individual who is first appointed or elected as a
non-employee Board member at any time after the Effective Date.
XII. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants will be made under this Article Three on
the dates specified below:
(i) Each individual who first becomes a non-employee Board member
at any time after the Effective Date, whether through election at an
Annual Stockholders Meeting or through appointment by the Board, shall
automatically be granted, at the time of such initial election or
appointment, a Non-Statutory Option to purchase 30,000 shares of
Common Stock upon the terms and conditions of this Article Three. The
size of such grant has been adjusted to reflect the two-for-one split
of the Common Stock which occurred in December 1995, but then reduced
by twenty-five percent (25%) to effect a net adjustment on a
1.5-for-one basis.
(ii) On the date of each Annual Stockholders Meeting, beginning
with the 1999 Annual Stockholders Meeting, each individual who is at
the time elected or reelected as a non-employee member of the Board
shall receive an additional grant of a Non-Statutory Option under the
Plan to purchase 12,000 shares of the Common Stock, provided such
individual has been a member of the Board for at least six (6) months.
15.
<PAGE>
The applicable 30,000-share and 12,000-share limitations on
the automatic option grants to be made to non-employee Board members under this
Article Three shall be subject to periodic adjustment pursuant to the applicable
provisions of paragraph V.C of Article One.
B. Exercise Price. The exercise price per share shall be equal to one
hundred percent (100%) of the fair market value per share of Common Stock on the
automatic grant date.
C. Payment.
The exercise price shall be payable in one of the alternative
forms specified below:
(i) full payment in cash or check made payable to the
Corporation's order;
(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
reported earnings and valued at fair market value on the Exercise Date
(as such term is defined below); or
(iii) full payment in a combination of shares of Common
Stock held for the requisite period necessary to avoid a charge to the
Corporation's reported earnings and valued at fair market value on the
Exercise Date and cash or check payable to the Corporation's order.
(iv) the option price may also be paid through a
broker-dealer sale and remittance procedure pursuant to which the
optionee shall provide irrevocable instructions to (I) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, an amount equal to the
aggregate option price payable for the purchased shares plus all
applicable Federal and State income and employment taxes required to
be withheld by the Corporation by reason of such purchase and (II) the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm.
16.
<PAGE>
For purposes of this subparagraph, the Exercise Date shall be
the date on which notice of the option exercise is delivered to the Corporation,
and the fair market value per share of Common Stock on any relevant date shall
be determined in accordance with the provisions of paragraph I.A.3 of Article
Two. Except to the extent the sale and remittance procedure specified above is
utilized for the exercise of the option, payment of the exercise price for the
purchased shares must accompany such notice.
D. Option Term. Each automatic grant under this Article Three shall
have a maximum term of ten (10) years measured from the automatic grant date.
E. Exercisability. The initial 30,000-share automatic grant made to
each newly-elected or newly-appointed non-employee Board member shall become
exercisable for the option shares in four (4) installments as follows:
(i) The option shall become exercisable for twenty-five
percent (25%) of the option shares upon the completion of twelve (12)
months of Board service measured from the automatic grant date.
(ii) The option shall become exercisable for an additional
twenty-five percent (25%) of the option shares upon the completion of
twenty-four (24) months of Board service measured from the automatic
grant date.
(iii) The option shall become exercisable for an additional
twenty-five percent (25%) of the option shares upon the completion of
thirty-six (36) months of Board service measured from the automatic
grant date.
(iv) The option shall become exercisable for the final
twenty-five percent (25%) of the option shares upon the completion of
forty-eight (48) months of Board service measured from the automatic
grant date.
The annual 12,000-share option grant made to each
re-elected non-employee Board member shall become exercisable for all the option
shares upon the optionee's completion of twelve (12) months of Board service
measured from the automatic grant date.
17.
<PAGE>
As the option becomes exercisable for one or more installments of
the option shares, those installments shall accumulate, and the option shall
remain exercisable for the accumulated installments until the expiration or
sooner termination of the option term. The option, however, shall not become
exercisable for any additional option shares following the optionee's cessation
of Board service, except to the extent the option is otherwise to become
exercisable in accordance with the provisions of paragraph III of this Article
Three.
F. Limited Transferability of Options. During the lifetime of the
optionee, the option shall only be exercisable by the optionee and shall not be
assignable or transferable by the optionee otherwise than by will or the by the
laws of descent and distribution following the optionee's death. However, each
option granted under this Automatic Option Grant Program on or after the date of
the 1999 Annual Stockholders Meeting shall be assignable in whole or in part by
the optionee during his or her lifetime, but only to the extent such assignment
is made in connection with the optionee's estate plan to one or more members of
the optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
G. Effect of Termination of Board Membership.
1. Should the optionee cease to be a Board member for any reason
(other than death) while holding an automatic option grant under this
Article Three, then such optionee shall have a six (6)-month period
following the date of such cessation of Board membership in which to
exercise such option for any or all of the shares of Common Stock for which
the option is exercisable at the time the optionee ceases service as a
Board member.
2. Should the optionee die while serving as a Board member or
during the six (6)-month period following his or her cessation of Board
service, then the option may subsequently be exercised, for any or all of
the shares of Common Stock for which the option is exercisable at the time
of the optionee's cessation of Board membership, by the personal
representative of the optionee's estate or by the person or persons to whom
the option is transferred pursuant to the optionee's will or in accordance
with the laws of descent and distribution. Any such exercise must, however,
occur within twelve (12) months after the date of the optionee's death.
18.
<PAGE>
3. In no event shall any automatic grant under this Article Three
remain exercisable after the specified expiration date of the ten (10)-year
option term. Upon the expiration of the applicable exercise period in
accordance with subparagraphs 1 and 2 above or (if earlier) upon the
expiration of the ten (10)-year option term, the automatic grant shall
terminate and cease to be exercisable.
H. Stockholder Rights. The holder of an automatic option grant under
this Article Three shall have no stockholder rights with respect to any shares
covered by such option until such individual shall have exercised the option,
paid the exercise price for the purchased shares and been issued a stock
certificate for such shares.
I. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the prototype Non-statutory
Stock Option Agreement attached as Exhibit A to the Plan.
XIII. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In connection with any Corporate Transaction (as such term is
defined in paragraph III of Article Two, above), the exercisability of each
automatic option grant outstanding under this Article Three shall automatically
accelerate so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares. Upon the
consummation of the Corporate Transaction, all automatic option grants under
this Article Three shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof).
19.
<PAGE>
B. In connection with any Change in Control of the Corporation, the
exercisability of each automatic option grant at the time outstanding under this
Article Three shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for all or any
portion of such shares. For purposes of this Article Three, a Change in Control
shall be deemed to occur in the event:
(i) any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer; or
(ii) there is a change in the composition of the Board over
a period of twenty-four (24) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more proxy
contests for the election of Board members, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least two-thirds of
the Board members described in clause (A) who were still in office at
the time such election or nomination was approved by the Board.
C. Upon the occurrence of a Hostile Take-Over, each automatic option
grant which has been outstanding under this Article Three shall automatically be
cancelled in return for a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to the cancelled option (whether or not the option is otherwise
at the time exercisable for such shares) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Take-Over. Stockholder approval of this 1999 restatement of the Plan shall
constitute pre-approval of each option subsequently granted with such an
automatic cancellation provision and the subsequent cancellation of that option
in accordance with the terms and provisions of this paragraph III.C. No
additional approval of the Plan Administrator or the Board shall be required at
the time of the actual option cancellation and cash distribution.
D. For purposes of this Article Three, Hostile Take-Over shall have
the meaning assigned to such term in paragraph V.B of Article Two. The Take-Over
Price per share shall be deemed to be equal to the greater of (a) the fair
market value per share on the date of cancellation, as determined pursuant to
the valuation provisions of paragraph I.A.3 of Article Two, or (b) the highest
reported price per share paid in effecting such Hostile Take-Over.
E. The shares of Common Stock subject to each option cancelled in
connection with the Hostile Take-Over shall not be available for subsequent
issuance under this Plan.
F. The automatic option grants outstanding under this Article Three
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
20.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
XIV. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects whatsoever. However, no such
amendment or modification shall, without the consent of the holders, adversely
affect rights and obligations with respect to options at the time outstanding
under the Plan. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
XV. EFFECTIVE DATE AND TERM OF PLAN
A. The Corporation's 1983 Stock Option Plan was initially adopted by
the Board of Directors in October 1983 and approved by the Corporation's
stockholders in November 1983. In January 1987, the Plan was renamed the Komag,
Incorporated 1987 Stock Option Plan. The Board then amended the Plan in May 1987
and such amendment was approved by the stockholders at the Annual Meeting held
in May 1987. The Plan was subsequently amended and restated by the Board in
December 1987 and January 1988, respectively, and such restatement and
amendments were approved by the stockholders at the Annual Meeting held in June
of 1988. The Plan was further amended by the Board in January 1991 and the
amendment was approved by the stockholders in May 1991. The January 23, 1992
restatement of the Plan, together with the 1,000,000 share increase, was
approved by the Board on January 23, 1992 and became effective on such date. The
stockholders approved the January 23, 1992 restatement on May 21, 1992. On
January 27, 1994, the Board adopted an amendment which increased the number of
shares of Common Stock issuable under the Plan by an additional 1,000,000
shares. The increase was approved by the stockholders at the 1994 Annual
Meeting.
B. On January 24, 1995, the Board approved an amendment to the Plan to
effect the following changes to the Automatic Option Grant Program: (i) increase
the number of shares subject to the initial automatic option grant made to
newly-elected or newly-appointed non-employee Board members from 3,500 shares to
20,000 shares per individual; (ii) increase the number of shares subject to the
annual automatic option grant made to each re-elected non-employee Board member
from 3,500 shares to 5,000 shares; and (iii) adjust the vesting schedule in
effect for each such annual 5,000-share grant to provide for full vesting upon
completion of one (1) year of Board service rather than annual vesting over a
four (4)-year period. The amendments to the Automatic Option Grant Program were
approved by the stockholders at the 1995 Annual Meeting.
C. In January 1996 the Board approved an amendment to the Plan to (i)
eliminate the discretion of the Plan Administrator to grant options under the
Discretionary Option Grant Program with an exercise price per share less than
100% of the fair market value per share of Common Stock on the grant date, (ii)
eliminate the loan provisions of the Plan pursuant to which one or more holders
of options under the Discretionary Option Grant Program would have otherwise had
the opportunity to finance the exercise of those options through the delivery of
full-recourse promissory notes, (iii) increase the number of shares of Common
Stock reserved for issuance over the term of the Plan by an additional 3,000,000
shares and (iv) adjust the number of shares granted to non-employee Board
members. The clause (iii) and (iv) amendments were approved by the stockholders
at the 1996 Annual Meeting.
21.
<PAGE>
D. In March 1997 the Board amended and restated the Plan to effect the
following revisions: (i) increase the number of shares of Common Stock reserved
for issuance over the term of the Plan by an additional 2,500,000 shares, (ii)
render the non-employee Board members eligible to receive option grants under
the Discretionary Option Grant Program, (iii) allow unvested shares issued under
the Plan and subsequently repurchased by the Corporation at the option exercise
price or issue price paid per share to be reissued under the Plan, (iv) remove
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator and (v) effect a series of additional changes to the
provisions of the Plan (including the stockholder approval requirements) in
order to take advantage of the recent amendments to Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, which exempts certain officer and director
transactions under the Plan from the short-swing liability provisions of the
federal securities laws. The 1997 restatement of the Plan was approved by
stockholders at the 1997 Annual Meeting.
E. On April 16, 1999, the Board amended and restated the Plan to
effect an increase in the number of stock options granted to re-elected
non-employee Board members under the Automatic Grant Program from 7,500 to
12,000 shares annually. The 1999 restatement of the Plan is subject to approval
by stockholders at the 1999 Annual Meeting.
F. The special sale and remittance procedure for the exercise of
outstanding options under the Plan, which was approved by the Board in January
1991, shall be in effect for all options outstanding as of January 24, 1991
which already include such procedure as a method of exercise and for all options
granted after January 24, 1991. In addition, such procedure shall be available
for all non-qualified options currently held by officers and directors which do
not otherwise include such procedure and for any disqualifying dispositions of
Incentive Option shares effected after January 24, 1991.
G. The provisions of each restatement and amendment of the Plan apply
only to stock options and stock appreciation rights granted under the Plan from
and after the effective date of such restatement or amendment. All stock options
and stock appreciation rights issued and outstanding under the Plan immediately
prior to such effective date shall continue to be governed by the terms and
conditions of the Plan (and the respective instruments evidencing each such
option or stock appreciation right) as in effect on the date each such option or
stock appreciation right was previously granted, and nothing in any such
restatement or amendment shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such options or stock appreciation
rights with respect to their acquisition of shares of Common Stock under such
options or their exercise of such stock appreciation rights.
H. Unless sooner terminated in accordance with paragraph III of
Articles Two and Three, the Plan shall terminate upon the earlier of (i) January
22, 2002 or (ii) the date on which all shares available for issuance under the
Plan shall have been issued or cancelled pursuant to the exercise or surrender
of options granted hereunder. If the date of termination is determined under
clause (i) above, then options outstanding on such date shall not be affected by
the termination of the Plan and shall continue to have force and effect in
accordance with the provisions of the instruments evidencing such options.
I. Options may be granted under this Plan to purchase shares of Common
Stock in excess of the number of shares then available for issuance under the
Plan, provided (i) an amendment to increase the maximum number of shares
issuable under the Plan is adopted by the Board prior to the initial grant of
any such option and is thereafter submitted to the Corporation's stockholders
for approval and (ii) each option so granted is not to become exercisable, in
whole or in part, at any time prior to the obtaining of such stockholder
approval.
22.
<PAGE>
XVI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to options granted under the Plan shall be used for general corporate
purposes.
XVII. TAX WITHHOLDING
The Corporation's obligation to deliver shares or cash upon the
exercise or surrender of any option granted under the Discretionary Option Grant
Program shall be subject to the satisfaction of all applicable federal, state
and local income and employment tax withholding requirements.
XVIII. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing or restating the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the restated Plan shall be construed so as to grant any individual
the right to remain in the employ or service of the Corporation (or any parent
or subsidiary corporation) for any period of specific duration, and the
Corporation (or any parent or subsidiary corporation retaining the services of
such individual) may terminate such individual's employment or service at any
time and for any reason, with or without cause.
XIX. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option hereunder,
and the issuance of stock upon the exercise or surrender of any such option
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it and the stock issued pursuant to it.
23.
<PAGE>
APPENDIX C
KOMAG, INCORPORATED
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF KOMAG INCORPORATED FOR THE ANNUAL MEETING, MAY 25, 1999
The undersigned hereby appoints STEPHEN C. JOHNSON and TU CHEN, or either of
them, as lawful agents and proxies, with full power of substitution in each, to
represent the undersigned at the Annual Meeting of Stockholders of Komag,
Incorporated (the Company) to be held on May 25, 1999, and at any adjournments
or postponements thereof, on all matters properly coming before said Annual
Meeting, including but not limited to the matters set forth on the reverse side.
You are encouraged to specify your choices by marking the appropriate boxes on
the reverse side, but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations. Your proxy cannot be
voted unless you sign, date and return this card or follow the instructions for
telephone or Internet voting, if provided.
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted FOR proposals 1 - 5, and will
be voted in the discretion of the proxies upon such other matters as may
properly come before the Annual Meeting.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
The Board of Directors recommends a vote FOR each of Proposals 1 - 5.
VOTE ON DIRECTORS:
1) Proposal to elect nine directors to a one-year term. Nominees:
01) Tu Chen [_] FOR [_] WITHHELD
02) Stephen C. Johnson ALL FROM ALL
03) Chris A. Eyre NOMINEES NOMINEES
04) Irwin Federman
05) George A. Neil
06) Max Palevsky
07) Michael R. Splinter [_] _______________________________
08) Anthony Sun FOR ALL NOMINEES EXCEPT AS
09) Masayoshi Takebayashi NOTED ABOVE
VOTE ON PROPOSALS:
2) Proposal to amend the Company's 1988 Employee Stock Purchase Plan FOR AGAINST ABSTAIN
to increase the number of shares of Common Stock available for [_] [_] [_]
issuance by 2,550,000 shares.
3) Proposal to renew the approval of the sale and issuance by the FOR AGAINST ABSTAIN
Company of up to $250 million of Common Stock or securities [_] [_] [_]
convertible into Common Stock in private transactions from time to
time until October 1, 2000 at a price below book value but at or
above the then current market price of the Common Stock.
4) Proposal to amend the Company's Restated 1987 Stock Option Plan FOR AGAINST ABSTAIN
to increase the number of stock options to be granted to [_] [_] [_]
re-elected non-employee directors under the Automatic Option Grant
Program from 7,500 to 12,000 shares annually.
5) Proposal to ratify the appointment of Ernst & Young LLP as FOR AGAINST ABSTAIN
independent auditors of the Company for the fiscal year ending [_] [_] [_]
January 2, 2000.
Please mark, sign, date and return this proxy card promptly, using the enclosed envelope.
The signer hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and accompanying Proxy
Statement dated April 16, 1999.
The signer hereby revokes all proxies heretofore given by the signer to vote at said Annual Meeting and any
adjournments or postponements thereof.
____________________________ _______ ______________________________ ____
Signature Date Signature (Joint Owner) Date
NOTE: Please sign exactly as name appears herein. When signing as attorney, executor, administrator, trustee
or guardian, or in any other representative capacity, please give full title as such, and sign your own name as
well. Joint owners should each sign.
</TABLE>
