-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDFYbjQ7niIGtO+mQMIlYZelzWMNVtLvR22bFHBgwiaE9Mg0g4YhY5doOB0NF6uS QW4MblM+yDf6WUrP9LEIvg== 0000950005-99-000335.txt : 19990405 0000950005-99-000335.hdr.sgml : 19990405 ACCESSION NUMBER: 0000950005-99-000335 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOMAG INC /DE/ CENTRAL INDEX KEY: 0000813347 STANDARD INDUSTRIAL CLASSIFICATION: MAGNETIC & OPTICAL RECORDING MEDIA [3695] IRS NUMBER: 942914864 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16852 FILM NUMBER: 99586644 BUSINESS ADDRESS: STREET 1: 1704 AUTOMATION PWY CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4089462300 MAIL ADDRESS: STREET 1: 1704 AUTOMATION PWY CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-16852 KOMAG, INCORPORATED (Exact name of registrant as specified in its charter) Delaware 94-2914864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1704 Automation Parkway, San Jose, California 95131 (Address of Principal Executive Offices, including Zip Code) Registrant's telephone number, including area code: (408) 576-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- -------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment of this Form 10-K. [X] [Cover page 1 of 2 pages] The aggregate market value of voting stock held by non-affiliates of the Registrant as of February 28, 1999 was approximately $313,892,180 based upon the closing sale price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On February 28, 1999, approximately 53,920,660 shares of the Registrant's Common Stock, $0.01 par value, were outstanding. Documents Incorporated by Reference Designated portions of the following document are incorporated by reference into this Report on Form 10-K where indicated: Komag, Incorporated Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 1999, Part III. 2 KOMAG, INCORPORATED TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10K
Page Item 1. Business ................................................................ 4-19 Item 2. Properties ................................................................ 20 Item 3. Legal Proceedings ........................................................ 20 Item 4. Submission of Matters to Vote of Security Holders ...................... 21 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 24 Item 6. Selected Consolidated Financial Data ................................... 25 Item 7. Management's Discussion and Analysis of Financial Condition Results of Operations .............................................. 26-34 Item 7A. Financial Market Risks .................................................. 35 Item 8. Consolidated Financial Statements .................................... 37-63 Item 9. Changes In and Disagreements with Accountants and Financial Disclosure ............................................................. 64 Item 10. Directors and Executive Officers ......................................... 64 Item 11. Executive Compensation ................................................... 64 Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 64 Item 13. Certain Relationships and Related Transactions ......................... 64 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................................................... 65-70
3 PART I ITEM 1. BUSINESS Komag, Incorporated ("Komag" or the "Company") designs, manufactures and markets thin-film media ("disks"), the primary storage medium for digital data used in computer hard disk drives. Komag believes it is the world's largest independent manufacturer of thin-film media and is well positioned as a broad-based strategic supplier of choice for the industry's leading disk drive manufacturers. The Company's business strategy relies on the combination of advanced technology and high-volume manufacturing. Komag's products are made for the high-end desktop and high-capacity/high-performance enterprise segments of the disk drive market and are used in products such as personal computers, disk arrays, network file servers and engineering workstations. The Company manufactures leading-edge disk products primarily for 3 1/2-inch form factor hard disk drives. The Company was organized in 1983 and is incorporated in the State of Delaware. The Company's business is subject to risks and uncertainties, a number of which are discussed under "Risk Factors." Increasing demand for digital storage and low-cost, high-performance hard disk drives has resulted in strong unit demand for these products. International Data Corporation ("IDC") forecasts that worldwide disk drive unit shipments in 1999 through 2002 will grow at a 15% compound annual growth rate. Greater processing power, more sophisticated operating systems and application software, high-resolution graphics, larger databases and the emergence of the Internet are among the developments that have required ever higher performance from disk drives. For example, the first 5 1/4-inch hard disk drive, introduced in 1980, offered a capacity of five megabytes (one million bytes is a megabyte or "MB") with an areal density of less than two megabits (one million bits is a megabit; eight bits is one byte) per square inch. Current-generation 3 1/2-inch drives typically have capacities of four to twenty gigabytes (one billion bytes is a gigabyte or "GB") with areal densities of approximately three to four gigabits (one billion bits is a gigabit) per square inch. Today's areal densities allow for approximately 4 GB of storage per 3 1/2-inch disk platter. By the end of 1999, the Company expects that increases in areal densities will allow for approximately 6 GB of storage per 3 1/2-inch disk. Advances in component technology have been critical to improving the performance and storage capacity of disk drives and lowering the cost per bit stored. The Company has capitalized on its technological strength in thin-film processes and its manufacturing capabilities to achieve and maintain its position as the leading independent supplier to the thin-film media market. The Company's technological strength stems from the depth of its understanding of materials science and the interplay between disks, heads and other drive components. Komag's manufacturing expertise in thin-film media is evidenced by its history of delivering reliable products in high volume. Current manufacturing operations are conducted by the Company in the U.S. and Malaysia as well as through Asahi Komag Co., Ltd. ("AKCL"), a joint venture with Asahi Glass Co., Ltd. ("Asahi Glass") and Vacuum Metallurgical Company, which manufactures thin-film media in Japan and Thailand. The Company manufactures disk substrates for internal use through its subsidiary, Komag Material Technology, Inc. ("KMT") located in Santa Rosa, California. A 20% minority interest in KMT is held by Kobe Steel USA Holdings Inc. ("Kobe USA"), together with Kobe Steel, Ltd. ("Kobe") and other affiliated companies. 4 Technology Komag manufactures and sells thin-film magnetic media on rigid disk platters for use in hard disk drives. These drives are used in computer systems to record, store and retrieve digital information. Inside a disk drive, the media or disk rotates at speeds of up to 10,000 rpm. The head scans across the disk as it spins, magnetically recording or reading information. The domains where each bit of magnetic code is stored are extremely small and precisely placed. The tolerances of the disks and recording heads are extremely demanding and the interaction between these components is one of the most critical design aspects in an advanced disk drive. The primary factors governing the density of storage achievable on a disk's surface are (1) the minimum distance at which read/write heads can reliably pass over the surface of the disk to detect a change in magnetic polarity when reading from the disk, defined as glide height (measured in microinches or millionths of an inch); (2) the strength of the magnetic field required to change the polarity of a bit of data on the magnetic layer of a disk when writing, defined as coercivity (measured in oersteds--"Oe"), and (3) the ability of the head to discriminate a signal from background media noise (signal-to-noise ratio). As glide height is reduced, smaller bits can be read. The higher the coercivity of the media, the smaller the width of the bit that can be stored. The signal-to-noise ratio is determined by the choice of magnetic materials and the method for depositing those materials on the disk's surface. The Company's plating, polishing and texturing processes produce a uniform disk surface with relatively few defects, which permits the read/write heads to fly over the disk surface at glide heights of 0.8 to 1.0 microinches. The magnetic alloys deposited on the surfaces of Komag's disks have high coercivity, low noise and other desirable magnetic characteristics. The combination of these factors results in more data stored in a given area on the disk surface. 1998 was a year of tremendous transition for the Company and the disk drive industry. Disk drive programs utilizing newer, more advanced, magnetoresistive ("MR") media and recording heads replaced older generation programs utilizing inductive media and heads. By the end of 1998 most disk drives were manufactured with MR components. An MR disk is optimized for use with MR heads that use separate read and write elements. The write element is made from conventional inductive materials, but the read element is made of a material whose electrical resistance changes when subjected to changes in a magnetic field. MR heads are more sensitive to magnetic fields enabling them to read more densely-packed, smaller-sized bits. The transition to MR disk drives has led to significant, unprecedented increases in areal density. The Company believes that the number of gigabits per square inch doubled in 1998. The Company began 1998 manufacturing both MR and inductive media. The Company had largely completed its transition to MR products by the fourth quarter of 1998 at which time MR media, including more advanced giant magnetoresistive ("GMR") disks, accounted for approximately 97% of the Company's unit sales. GMR disks accounted for 12% of unit sales in the fourth quarter of 1998. The Company believes that MR and GMR disks will continue to be the predominant media for disk drives in 1999. Products, Customers and Marketing Komag sells primarily MR media for 3 1/2-inch disk drives. The Company has also historically sold disks for 5 1/4-inch drives and other disk drive form factors. Komag's products offer a range of coercivities, glide height capabilities and other parameters to meet specific customer requirements. Unit sales of 3 1/2-inch disks capable of storing at least 3.2 GB per platter accounted for approximately 70% of the Company's unit sales in the fourth quarter of 1998. The Company anticipates that over 60% of its unit sales in the first quarter of 1999 will be 3 1/2-inch disks capable of storing at least 4.3 GB per platter and the Company is in the process of obtaining customer qualification of 3 1/2-inch products capable of storing up to 6.8 GB per platter. Prior to 1997, market demand for advanced thin-film media typically exceeded supply. In mid-1997, the rate of growth in demand for media slowed abruptly due in large measure to the rapid advancement 5 in increased storage capacity per disk achieved through the use of MR technology. As a result, drive designs incorporated fewer disks and recording heads to achieve the disk drive capacities demanded by the market. In addition, based upon historical supply shortages and forecasts for continued strong demand growth rates, the Company and its competitors (both independent and captive suppliers) began adding significant media manufacturing capacity in 1996 which for the most part became operational in 1997. The increased supply of media generated by the expanded physical capacity, coupled with the tremendous improvement in disk storage capacity, allowed the overall supply of thin-film media to catch up to, and then exceed, market demand. Captive media suppliers (owned by vertically integrated disk drive customers) utilized their capacity at the expense of independent suppliers, such as Komag, during this period. As a result, in 1997 and 1998, the market for disks produced by independent suppliers decreased sharply and pricing pressures intensified. In both 1997 and 1998, the Company idled certain equipment and facilities to more closely align its production capacity to demand for its products. These restructuring activities resulted in significant restructuring and impairment charges. The Company believes that there remains excess media capacity within the industry. Certain media manufacturers have idled capacity and restructured their operations. StorMedia, Inc., an independent media supplier, declared bankruptcy in late 1998. The Company believes that the longer-term success of the thin-film media industry is dependent upon high growth in demand for storage capacity and further consolidation within the media industry. Improvements in enabling technologies, such as increased bandwidth capability that will speed data transfers over the Internet and will promote use of other storage-intensive applications such as multimedia, are expected to drive the demand for storage capacity. Komag primarily sells its media products to independent OEM disk drive manufacturers for incorporation into hard disk drives that are marketed under the manufacturers' own labels. The Company also currently sells its disks to computer system manufacturers who make disk drives for their own use or for sale in the open market. The Company works closely with customers as they design new high-performance disk drives and generally customizes its products according to customer specifications. Three customers accounted for approximately 86% of the Company's net sales in 1998. Net sales to major customers were as follows: Western Digital Corporation ("Western Digital")--43%; Maxtor Corporation ("Maxtor")--25%; and International Business Machines ("IBM")--18%. Sales are generally concentrated in a small number of customers due to the high volume requirements of the dominant disk drive manufacturers and their tendency to rely on a few suppliers because of the close interrelationship between media and other disk drive components. Given the relatively small number of high-performance disk drive manufacturers, the Company expects that it will continue its dependence on a limited number of customers. Sales are made directly to disk drive manufacturers worldwide (except media sales into Japan) from the Company's U.S. and Malaysian operations. Sales of media for assembly into disk drives within Japan are made solely through AKCL. On a selective basis, the Company has used AKCL to distribute the Company's products to Japanese drive manufacturers for assembly outside of Japan. During 1998, the Company sold product to Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") in Japan and to MKE's Singapore manufacturing facility through AKCL. Media sales to the Far East from the Company's U.S. and Malaysian operations represented 83%, 96% and 88% of Komag's net sales in 1998, 1997 and 1996, respectively. The Company's customers assemble a substantial portion of their disk drives in the Far East and subsequently sell these products throughout the world. Therefore, the Company's high concentration of Far East sales does not accurately reflect the eventual point of consumption of the assembled disk drives. All foreign sales are subject to certain risks common to all export activities, such as government regulation and the risk of imposition of tariffs or other trade barriers. Foreign sales must also be licensed by the Office of Export Administration of the U.S. Department of Commerce. 6 The Company's sales are generally made pursuant to purchase orders rather than long-term contracts. At January 3, 1999, the Company's backlog of purchase orders scheduled for delivery within 90 days totaled approximately $69.6 million compared to $23.7 million at December 28, 1997. These purchase orders may be changed or canceled by customers on short notice without significant penalty. Accordingly, the backlog should not be relied upon as indicative of sales for any future period. Manufacturing Komag's manufacturing expertise in thin-film media is evidenced by its history of delivering reliable products in high volume. Through the utilization of proprietary processes and techniques, the Company has the capability to produce advanced disk products that generally exhibit uniform performance characteristics. Such uniform performance characteristics enhance the reliability of the drive products manufactured by the Company's customers. In addition, these characteristics raise production yields on the customers' manufacturing lines, which is an important cost consideration especially in high-performance disk drives with large component counts. Manufacturing costs are highly dependent upon the Company's ability to effectively utilize its installed physical capacity to produce large volumes of products at acceptable yields. To improve yields and capacity utilization, Komag has adopted formal continuous improvement programs at all of its worldwide operations. The process technologies employed by the Company require substantial capital investment. In addition, long lead times to install new increments of physical capacity complicate capacity planning. The manufacture of the Company's thin-film sputtered disks is a complex, multistep process that converts aluminum substrates into finished data storage media ready for use in a hard disk drive. The process requires the deposition of extremely thin, uniform layers of metallic film onto a disk substrate. To achieve this, the Company uses a vacuum deposition, or sputtering, method similar to that used to coat semiconductor wafers. The basic process consists of many interrelated steps that can be grouped into five major categories: 1. Sizing and Grinding of the Substrate: A raw aluminum blank substrate is sized by precisely cutting the inner and outer diameter of the blank. A mechanical grinding process is then utilized to provide a relatively flat surface on the substrate prior to nickel alloy plating. 2. Nickel Alloy Plating and Polishing of the Substrate: Through a series of chemical baths aluminum substrates are plated with a uniform nickel phosphorus layer in order to provide support for the magnetic layer. Next, this layer is polished to achieve the required flatness. 3. Fine Polishing, Texturing and Cleaning: During these process steps, disks are smoothed and cleaned to remove surface defects to allow the read/write heads of the disk drives to fly at low and constant levels over the disks. 4. Sputtering and Lube: By a technically demanding vacuum deposition process, magnetic layers are successively deposited on the disk and a hard protective overcoat is applied. After sputtering, a microscopic layer of lubrication is applied to the disk's surfaces to improve durability and reduce surface friction. 5. Glide Test and Certification: In robotically controlled test cells, disks are first tested for surface defects optically, then for a specified glide height and finally certified for magnetic properties. Based on these test results, disks are graded against customers' specific performance requirements. Most of the critical process steps are conducted in Class 100 or better environments. Throughout the process, disks are generally handled by custom-designed and, in many cases, Company-built automated equipment to reduce contamination and enhance process precision. Minute impurities in materials, particulate contamination or other production problems can reduce production yields and, in extreme cases, result in the prolonged suspension of production. Although no contamination problems have 7 required prolonged suspension of the Company's production to date, no assurance can be given that the Company will not experience manufacturing problems from contamination or other causes in the future. As areal density increases, recording heads are required to read and write smaller data bits packed more tightly together on the surface of the disk. To accomplish this, the read/write head must fly closer to the disks' surfaces in order to discriminate smaller, weaker magnetic signals. In 1998, the Company completed a number of changes in its manufacturing processes designed to improve disk characteristics. These new processes produce disk substrates that are smoother and flatter, with fewer, smaller defects. Additionally, disks produced with these modified processes facilitate increased density through more uniform crystal growth and improved magnetic orientation on the disk surface. The Company modified its sputtering process from the deposition of a magnetic layer over an amorphous underlayer to epitaxial deposition of the active magnetic layer upon a crystalline underlayer. Since epitaxial deposition requires higher temperatures and dryer process chambers than the former processes, several significant process changes were implemented in 1998. First, the processes related to producing substrates, prior to sputtering, were changed by adding new annealing steps to accommodate higher process temperatures. Next, to make substrates smoother and reduce defects a new polish step was added. Additionally, the Company upgraded a portion of its in-line sputtering lines to increase process temperatures and provide higher vacuum capability. Facilities and Production Capacity Based on analysis of the Company's production capacity and its expectations of media market demand, the Company implemented restructuring plans during the third quarter of 1997 and the second quarter of 1998. Under the 1997 restructuring plan, the Company consolidated its U.S. manufacturing operations onto its new campus in San Jose, California by closing two older factories in Milpitas, California. The first of the two Milpitas facilities was closed at the end of the third quarter of 1997 and the second facility was closed in January 1998. Under its 1998 restructuring plan, the Company ceased its back-end operations in its oldest San Jose, California facility in the fourth quarter of 1998. The Company, however, continues to use this facility for its front-end operations for both production and new process development. Additionally, the Company may periodically utilize back-end operations in this facility based on media demand. At January 3, 1999, the Company and its joint venture, AKCL, had facilities in the U.S., Malaysia, Japan and Thailand. The Company occupies three production factories in the U.S. comprising approximately 372,000 square feet of floorspace, an R&D facility of approximately 188,000 square feet and warehouse and administrative facilities with approximately 130,000 square feet. Two factories are located in San Jose, California. The third factory, the Company's majority-owned subsidiary (KMT), is located in Santa Rosa, California. The factories in San Jose primarily perform the process steps from plate through test, whereas the KMT facility manufactures aluminum substrates. The Company owns three production facilities in Malaysia, two in Penang totaling approximately 615,000 square feet and one in Sarawak of approximately 275,000 square feet. One of the Penang factories performs all of the Company's process steps except aluminum substrate preparation and the other is equipped to perform the fine polish through test steps. The Sarawak factory is primarily dedicated to substrate, plating and polishing operations. The Company has strategically located a large portion of its total worldwide front-end and back-end manufacturing capacity in Malaysia. These facilities are closer to the customers' disk drive assembly plants in Southeast Asia and enjoy certain cost and tax advantages. AKCL occupies approximately 495,000 square feet of building space. AKCL's Japanese facilities are primarily dedicated to fine polish through test and its Thailand facility is designed for plating and polishing. 8 Recent Development In February 1999, the Company and Western Digital announced the signing of a letter of intent under which the Company will acquire Western Digital's disk media business for approximately $80 million of the Company's Common Stock (based on the market value of the Company's Common Stock at the time the letter of intent was signed). In addition, the Company will assume certain liabilities, mainly lease obligations related to production equipment and facilities. Terms of the strategic relationship include a three-year volume purchase agreement under which Western Digital will buy a substantial portion of its media from the Company. The Company plans to combine Western Digital's media group with its manufacturing operations over the next 18 months. Such action will relocate a portion of Western Digital's production equipment to the Company's offshore locations, thus more fully utilizing the Company's lower-cost Malaysian operations. At the time of this filing the Company and Western Digital were continuing to negotiate terms of the acquisition. Research, Development and Engineering Since its founding, Komag has focused on the development of advanced thin-film disk designs as well as the process technologies necessary to produce these designs. The Company's spending and capital investment for R&D are aimed at the investigation, design, development and testing of new products and processes as well as the development of more efficient and cost effective processes that can be integrated into manufacturing in a commercially viable manner. Historically, the Company has utilized a full-scale in-line sputtering line for both development and pilot production. The Company's R&D facility is equipped with two in-line sputtering lines and two static sputtering systems. The Company believes this additional capacity will allow more rapid development of new products as well as expanded prototype and pilot production capability. The Company's expenditures (and percentage of sales) on research, development and engineering activities, were $61.6 million (18.7%) in fiscal 1998, $51.4 million (8.1%) in fiscal 1997 and $29.4 million (5.1%) in fiscal 1996. Strategic Alliances The Company has established joint ventures with Asahi Glass and Kobe. Komag believes these alliances have enhanced the Company's competitive position by providing research, development, engineering and manufacturing expertise that reduce costs and technical risks and shorten product development cycles. Asahi Komag Co., Ltd. ("AKCL") In 1987, the Company formed a partnership (Komag Technology Partners) with the U.S. subsidiaries of two Japanese companies, Asahi Glass and Vacuum Metallurgical Company. The partners simultaneously formed a wholly owned subsidiary, AKCL, to manufacture and distribute thin-film disks in Yonezawa, Japan. Under the joint venture agreement, the Company contributed technology developed prior to January 1987 and licensed technology developed after January 1987, to the extent such technology relates to sputtered thin-film hard disk media, for a 50% interest in the partnership. The Japanese partners contributed equity capital aggregating 1.5 billion yen (equivalent to approximately $11 million at that time). AKCL began commercial production in 1988. The terms of the joint venture agreement provide that AKCL may only sell disks for incorporation into disk drives that are assembled in Japan, with no limitation on the territory in which AKCL's customers can sell such assembled disk drive products. During the term of the joint venture agreement and for five years thereafter, the Japanese partners and their affiliates have agreed not to develop, manufacture or sell sputtered media anywhere in the world other than through the joint venture, and the Company and its affiliates have agreed not to develop, manufacture or sell such media in Japan except 9 through the joint venture. The Company has, however, periodically granted AKCL a limited right to sell its disks outside of Japan and has received royalties on such sales. Upon the occurrence of certain terminating events and the subsequent acquisition of AKCL by one or more of the joint venture partners, the restrictions related to activities of the acquiring joint venture partner(s) within Japan may lapse. Disk sales to AKCL represented 3% of the Company's net sales in 1998 compared to 14% in 1997 and less than 6% in 1996. The Company purchased 1% of AKCL's unit output during 1998 compared to approximately 11% and 3% in 1997 and 1996, respectively. The Company anticipates that distribution sales of AKCL-produced disks to U.S. customers in 1999 will remain a relatively small percentage of the Company's net sales. Substantially lower average selling prices, coupled with equipment writedowns and lower manufacturing yields, adversely affected AKCL's financial results for 1998. AKCL completed a transition to static sputter equipment in early 1998. As a result, AKCL idled its remaining in-line sputtering equipment and wrotedown the remaining book value of these permanently impaired assets during 1998. AKCL believes that the products produced by a static sputtering process are technically similar to those produced by other Japanese media suppliers, thus improving AKCL's ability to meet specific requirements of certain Japanese customers on a timely basis. AKCL incurred substantial losses in 1998. In the first half of 1998 AKCL incurred low yields and operated significantly under capacity. In the second half of 1998 unit volume and manufacturing yields increased but the overall average selling price for AKCL's products decreased sharply. AKCL's current financing arrangements may not be sufficient if losses continue at AKCL. There can be no assurance that additional financing will be available to AKCL. Failure to secure additional financing could have a material adverse affect on AKCL's business and financial results. The Company has no obligation to provide or guarantee financing to AKCL. Further writedowns of the Company's investment in AKCL are limited to the book value of the investment on the Company's consolidated balance sheet ($1.4 million at January 3, 1999). Komag Material Technology, Inc. ("KMT") In 1988, Komag formed a wholly owned subsidiary, KMT, to secure an additional stable supply of aluminum substrates of satisfactory quality for the Company's products. In 1989, Kobe, a leading worldwide supplier of blank aluminum substrates, purchased a 45% interest in KMT for $1.4 million. In December 1995, the Company reacquired 25% of the outstanding Common Stock of KMT by purchasing shares from Kobe for $6.75 million. The Company's purchase raised its total ownership percentage of KMT to 80%. Kobe retains one seat on KMT's Board of Directors. Under agreements between Kobe and the Company, Kobe will continue to supply substrate blanks to KMT while the Company will continue to purchase KMT's entire output of finished substrates. In combination, KMT, Kobe, and the Company's Sarawak facility supply substantially all of the Company's substrate requirements. Equity Positions Held by Asahi Glass and Kobe in Komag Asahi Glass and Kobe each purchased two million shares of newly issued Common Stock from the Company for $20 million in January 1989 and March 1990, respectively. In 1992, Asahi Glass transferred ownership of its shares to a U.S. subsidiary of Asahi Glass. Under their respective stock purchase agreements, Asahi Glass and Kobe each have the right to purchase additional shares of the Company's Common Stock on the open market to increase their respective equity interests in the Company to 20%, to maintain their percentage interest in the Company by purchasing their pro rata shares of any new equity issuance by the Company and to require the Company to register their shares for resale, either on a demand basis or concurrent with an offering by the Company. Each stock purchase agreement further provides that the Company shall use its best efforts to elect a representative of each 10 investor to the Company's Board of Directors and to include such representatives on the Nominating Committee of the Board. There were no purchases or sales of the Company's stock by Asahi Glass or Kobe in 1998 and according to the Company's stock records at February 28, 1999, Asahi America and Kobe held 2,000,000 and 2,000,002 shares of Common Stock, respectively. Sales of significant amounts of the security holdings of Asahi Glass and/or Kobe in the future could adversely affect the market price of the Company's Common Stock. Any sales by either party, however, would relieve the Company of its obligation to nominate that party's representative for election to the Board of Directors. Competition Current thin-film disk competitors fall into three groups: U.S. independent manufacturers, U.S. captive manufacturers, and Japanese/Asian manufacturers. Based upon research conducted by an independent market research firm, the Company believes it is the leading independent supplier of thin-film disks. U.S. independent thin-film disk competitors in 1998 included HMT Technology Corporation and StorMedia Inc. ("StorMedia"). StorMedia ceased operations and declared bankruptcy in the third quarter of 1998. Japan-based thin-film disk competitors include Fuji Electric Company, Ltd.; Mitsubishi Kasei Corp.; Showa Denko K.K.; and HOYA Corporation. The U.S. captive manufacturers include IBM and OEM disk drive manufacturers, such as Seagate Technology, Inc. ("Seagate") and Western Digital, which manufacture disks as a part of their vertical integration programs. In addition, Maxtor received a portion of its disks requirements from MaxMedia, a subsidiary of Hyundai Electronics America. Hyundai Electronics America is a major shareholder of Maxtor. To date, IBM and other OEM disk drive manufacturers have sold nominal quantities of disks in the open market. Prior to 1997, the U.S. independent manufacturers, U.S. captive manufacturers, and Japanese/Asian manufacturers each supplied approximately one-third of the worldwide thin-film disk unit output. The Company believes that the captive manufacturers increased their market share to approximately 40% and 50% in 1997 and 1998, respectively. The increased market share for the captive suppliers heightened price competition among the independent media suppliers for the remaining available market. This significant pricing pressure adversely affected the financial results of independent suppliers, including those of Komag. See "Risk Factors--Competition." Environmental Regulation The Company is subject to a variety of environmental and other regulations in connection with its operations and believes that it has obtained all necessary permits for its operations. The Company uses various industrial hazardous materials, including metal plating solutions, in its manufacturing processes. Wastes from the Company's manufacturing processes are either stored in areas with secondary containment before removal to a disposal site or processed on site and discharged to the industrial sewer system. The Company has made investments in upgrading its waste-water treatment facilities to improve the performance and consistency of its waste-water processing. Nonetheless, industrial waste-water discharges from the Company may, in the future, be subject to more stringent regulations. Failure to comply with present or future regulations could result in the suspension or cessation of part or all of the Company's operations. Such regulations could restrict the Company's ability to expand at its present locations or could require the Company to acquire costly equipment or incur other significant expenses. Patents and Proprietary Information Komag holds and has applied for U.S. and foreign patents and has entered into cross-licenses with certain of its customers. While possession of patents could present obstacles to the introduction of new products by competitors and possibly result in royalty-bearing licenses from third parties, the Company believes that its success does not depend on the ownership of intellectual property rights but rather on its 11 innovative skills, technical competence and marketing abilities. Accordingly, the patents held and applied for will not constitute any assurance of the Company's future success. The Company regards elements of its equipment designs and processes as proprietary and confidential and relies upon employee and vendor nondisclosure agreements and a system of internal safeguards for protection. Despite these steps for protecting proprietary and confidential information, there is a risk that competitors may obtain and use such information. Furthermore, the laws of certain foreign countries in which the Company does business may provide a lesser degree of protection to the Company's proprietary and confidential information than provided by the laws of the U.S. In addition, the Company from time to time receives proprietary and confidential information from vendors, customers and partners, the use and disclosure of which are governed by nondisclosure agreements. Through internal communication and the monitoring of use and disclosure of such information, the Company complies with its obligations regarding use and nondisclosure. However, despite these efforts, there is a risk that such information may be used or disclosed in violation of the Company's obligations of nondisclosure. The Company has occasionally received, and may receive in the future, communications from third parties asserting violation of intellectual rights alleged to cover certain of the Company's products or manufacturing processes or equipment. In such cases, the Company evaluates whether it would be necessary to defend against the claims or to seek licenses to the rights referred to in such communications. No assurance can be given that the Company will be able to negotiate necessary licenses on terms that would not have a material adverse effect on the Company or that any litigation resulting from such claims would not have a material adverse effect on the Company's business and financial results. Employees As of January 3, 1999, the Company and its consolidated subsidiaries had 4,086 employees (4,012 of which are regular employees and 74 of which were employed on a temporary basis), including 3,665 in manufacturing, 269 in research, development and engineering and 152 in sales, administrative and management positions. Of the total, 2,611 are employed at offshore facilities. The Company believes that its future success will depend in large part upon its ability to continue to attract, retain and motivate highly skilled and dedicated employees. None of the Company's employees is represented by a labor union and the Company has never experienced a work stoppage. Risk Factors The following discussion of risks and uncertainties facing Komag is presented in accordance with the SEC's Plain English requirements. Our business is subject to a number of risks and uncertainties. While this discussion represents our current judgment on the risks facing us and the future direction of our business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. The discussion contained in Item 1--"Business" and Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations" contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ are the following. We sell a single product into a market characterized by rapid technological change and sudden shifts in the balance between supply and demand. Further, we are dependent on a limited number of customers, some of whom also manufacture some or most of their own disks internally. Competition in the market, defined by both technology offerings and pricing, can be fierce, especially during times of excess available capacity. Such conditions were prevalent in 1998. We have a high fixed-cost structure that can cause operating results to vary dramatically with changes in product yields and utilization of our equipment and factories. In addition, our business requires 12 substantial investments for research and development activities and for physical assets such as equipment and facilities that are dependent on our access to financial resources. These and other risks are discussed more fully below. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Our Business Depends on the Success of the Hard Disk Drive Industry The demand for our high-performance thin-film disks depends on the demand for hard disk drives and our ability to provide high quality, technically superior products at competitive prices. The hard disk drive market is characterized by short product life cycles and rapid technological change. The market is also characterized by changes in the balance between supply and demand. During periods of excess supply, prices can drop rapidly, causing abrupt changes in our financial performance. Demand for disk drives grew rapidly for years, including a 22% increase in 1996 unit shipments over 1995, and industry forecasts were for continued strong growth. Komag and a majority of our competitors (both independent disk manufacturers and captive disk manufacturers owned by vertically integrated disk drive customers) committed to expansion programs in 1996 and substantially increased their media manufacturing capacity in 1997. In 1997 the rate of growth in demand for disk drives fell sharply to approximately 8%. Disk drive manufacturers abruptly reduced orders for media from independent suppliers and relied more heavily on internal capacity to supply a larger proportion of their media requirements. The media industry's capacity expansion, coupled with the decrease in the rate of demand growth, resulted in excess media production capacity in the last half of 1997 and continuing through 1998. This excess media production capacity caused sharp declines in average selling prices for disk products as independent suppliers struggled to utilize their capacity. Pricing pressure on component suppliers was further compounded by high consumer demand for sub-$1,000 personal computers. Recently, the disk drive industry has migrated from qualifying specific vendors to qualifying specific vendor plant sites for given product programs. This practice reduces the disk drive manufacturer's cost to qualify a given product and, in some cases, is a requirement imposed upon the disk drive manufacturer by computer systems manufacturers. Qualification by plant site limits our ability to more quickly balance production levels at our various plants and, in periods of excess capacity, may require us to staff and operate multiple plants inefficiently. Furthermore, our failure to qualify new products and/or successfully achieve volume production of such products could adversely affect our results of operations. In general, our customers have been moving towards fewer, larger-volume disk drive programs, characterized by shorter product life cycles. Additionally, media must be more customized to each disk drive program and supply chain management, including just-in-time delivery, is rapidly becoming a standard industry practice. Timely development of new products and technologies that assist customers in reducing their time-to-market performance and operational excellence that supports high-volume manufacturing ramps and tight inventory management throughout the supply chain will be keys to both the maintenance of constructive customer relationships and our profitability. We cannot assure you that we will be able to respond to this rapidly changing environment in a manner that will maximize utilization of our production facilities and minimize our inventory losses. We are in Default under Financial Covenants Contained in Our Bank Credit Facilities The size of our second quarter 1998 net loss resulted in a default under certain financial covenants contained in our bank credit facilities. We are not in payment default under these credit facilities as we have continued to pay all interest charges and fees associated with these facilities on their scheduled due dates. At the time of the covenant default we had $260 million of debt outstanding against a total borrowing capacity of $345 million under our various senior unsecured credit facilities. As a result of the covenant default, our lenders withdrew the $85 million in unused borrowing capacity. 13 To date, our lenders have not accelerated any principal payments under our credit facilities. As a result of the technical default and reclassification of our bank debt to current liabilities, our auditors have included a going concern paragraph in their audit opinion to highlight our need to amend or restructure our debt obligations. We are currently negotiating with our lenders for amendments to our existing credit facilities. If we successfully amend or restructure our credit facilities we will seek to have our auditors reissue their opinion without the going concern paragraph. We cannot assure you that we will be able to obtain such amendments to our credit facilities on commercially reasonable terms. If we do not successfully amend these credit facilities, we would remain in technical default of our bank loans and the lenders would retain their rights and remedies under the existing credit agreements. As long as the lenders choose not to accelerate any principal payments, we would continue to operate in default for the near term. However, we will likely need to raise additional funds to restructure our debt obligations and to operate our business for the long term. Over the next several years we will need financial resources for capital expenditures, working capital and research and development. During 1997 and 1998, we spent approximately $199 million and $89 million, respectively, on property, plant and equipment. In 1999, we plan to spend approximately $40 million on property, plant and equipment, primarily for projects designed to improve yield and productivity. We believe that in order to achieve our long-term growth objectives and maintain and enhance our competitive position, such additional financial resources will be required. We cannot assure you that we will be able to secure such financial resources on commercially reasonable terms. If we are unable to obtain adequate financing, we could be required to significantly reduce or possibly suspend our operations, and/or sell additional securities on terms that would be highly dilutive to our current stockholders. We are Dependent on a Small Number of Customers for Most of our Business Our sales are concentrated in a small number of customers. This concentration is due to the high-volume requirements of the dominant disk drive manufacturers and their tendency to rely on a few suppliers because of the close interrelationship between media performance and disk drive performance and the complexity of integrating components from a variety of suppliers. Our net sales to major customers in 1998 were as follows: o Western Digital Corporation ("Western Digital")--43%; o Maxtor Corporation, ("Maxtor")--25%; and o International Business Machines ("IBM")--18%. Given the relatively small number of disk drive manufacturers, we expect that we will continue to depend on a very limited number of customers. Our sales are generally made pursuant to purchase orders that are subject to cancellation, modification or rescheduling without significant penalties. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will recover to the levels of earlier periods or that we will be able to obtain orders from new customers. In addition, given our dependence on a few customers and a limited number of product programs for each customer, we must make significant inventory commitments to support our customers' programs. We have limited remedies in the event of program cancellations. If a customer cancels or materially reduces one or more product programs, or experiences financial difficulties, we may be required to take significant inventory charges, which, in turn, could materially and adversely affect our results of 14 operations. While we have taken certain charges including inventory write-downs to address known issues, we cannot assure you that we will not be required to take additional inventory writedowns due to our inability to obtain necessary product qualifications or due to further order cancellations by customers. The Hard Disk Drive Industry is Very Competitive Our thin-film disk products primarily serve the 3 1/2-inch hard disk drive market, where product performance, consistent quality and availability are of great competitive importance. To succeed in an industry characterized by rapid technological developments, we must continuously advance our thin-film technology at a pace consistent with or faster than our competitors. If we are unable to keep pace with rapid advances, we may lose market share and face increased price competition from other manufacturers. Such competition could materially adversely affect our results of operations. In response to higher historical and projected growth rates for the disk drive market, Komag and a majority of our competitors (both independent disk manufacturers and captive disk manufacturers owned by vertically integrated disk drive customers) substantially increased disk manufacturing capacity in 1997 to satisfy the anticipated demand for disk products. These significant investments in capable new disk production capacity, combined with the slowdown in demand, have resulted in excess disk media capacity in the merchant market as drive manufacturers sourced a higher portion of their disk requirements from their captive media operations. This excess supply over demand condition has increased competition for the remaining merchant market and has led to higher-than-historical price erosion and lower factory utilization among independent media suppliers. These market conditions adversely affected our results of operations beginning in the last half of 1997 and continued throughout 1998. Our operating results for the last half of 1998 improved relative to results for the first half of 1998 due to the lower cost structure associated with our restructuring activities, variable cost reductions, improved manufacturing yields, and higher factory utilization. We believe that our manufacturing operations in Penang and Sarawak, Malaysia can provide a competitive cost advantage relative to most other thin-film disk manufacturers that operate exclusively or primarily in the U.S. and Japan. We also compete against media operations owned directly by or affiliated with many of our customers for the supply of the thin-film disks. Of our customers, IBM, Seagate and Western Digital produce significant portions of their media demand through their directly-owned media operations. During 1998 IBM and Seagate produced more than 80% of their media demand internally, and Western Digital produced more than 60% of its media requirement internally. During 1998, MaxMedia supplied approximately 40% of Maxtor's requirement for media. Hyundai Electronics America owns MaxMedia and is also a major shareholder in Maxtor. To date, MaxMedia and the captive media operations of IBM, Seagate, and Western Digital have sold nominal quantities of disks in the merchant market. Our Operating results are Subject to Quarterly Fluctuations We believe that our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including: o the cyclical nature of the hard disk drive industry; o our ability to develop and implement new manufacturing process technologies; o increases in our production and engineering costs associated with initial design and production of new product programs; o the extensibility of our process equipment to meet more stringent future product requirements; 15 o our ability to introduce new products that achieve cost-effective, high-volume production in a timely manner; o changes in our product mix and average selling prices; o the availability and the extent of utilization of our production capacity; o changes in our manufacturing efficiencies, in particular product yields and input costs for direct materials, operating supplies and other running costs; o prolonged disruptions of operations at any of our facilities for any reason; o changes in the cost of or limitations on availability of labor; and o structural changes within the disk media industry, including combinations, failures, and joint venture arrangements. Because thin-film disk manufacturing requires a high level of fixed costs, our gross margins are also extremely sensitive to changes in volume. At constant average selling prices, reductions in our manufacturing efficiency cause declines in our gross margins. Additionally, decreasing market demand for our products generally results in reduced average selling prices and/or low capacity utilization that, in turn, adversely affect gross margins and operating results. We incurred substantial negative gross margins of 41.5% and 45.2% during the first and second quarters of 1998, respectively, as a result of the combination of the lower overall average selling price and higher unit production costs related to underutilized capacity. Our gross margin improved in the third and fourth quarters of 1998 to negative 3.4% and positive 7.9%, respectively, primarily due to: o increased unit volume; o higher manufacturing yields; o reduced material input costs; and o the lower fixed cost structure of our business resulting from our implementation of restructuring plans. Industry consolidation, including mergers, alliances or failures, within the hard disk drive industry can cause sudden market changes making capacity planning difficult and causing dramatic fluctuations in operating results. In 1998, disk drive makers JTS Corporation and Micropolis (USA) Inc. ceased operations. StorMedia Inc., one of our thin-film media competitors, also ceased operations in 1998. While we believe that further consolidation within hard disk drive manufacturers and media manufacturers will likely be beneficial to the industry for the long-term, we cannot assure you that such consolidation would not have an adverse affect on our results of operations. The Thin-film Disk Industry has been Characterized by Rapid Technology Developments, Increasingly Shorter Product Life Cycles and Price Erosion We believe that our future success depends, in large measure, on our ability to develop and implement new process technologies in a timely manner and to continually improve these technologies. New process technologies must support cost-effective, high-volume production of thin-film disks that meet the ever-advancing customer requirements for enhanced magnetic recording performance. 16 In this regard, in 1998, we modified our plating and polishing process for aluminum substrates and our sputtering process for applications of magnetic layers to the surface of a disk. Both changes required substantial process and equipment modifications. In the fourth quarter of 1998, more than three-quarters of our unit sales were manufactured using these new processes. Advances in hard disk drive technology demands continually lower glide heights and higher areal densities requiring substantial on-going process and technology development. Additionally, the development of alternatives to aluminum-based substrates, such as glass-based substrates, may require substantial investments in new process technologies and capital expenditures. We expect that manufacturers will migrate their programs to glass as the cost of glass-based media technologies decreases and/or demands for increasingly higher-density products require the technological advantages offered by glass. We have devoted a portion of our research and development efforts to glass-based technologies. However, we cannot assure you that we will be able to develop cost-efficient processes to compete in the glass-based thin-film media market. Although we have a significant, ongoing research and development effort to advance our process technologies and the resulting products, we cannot assure you that we will be able to develop and implement such technologies in a timely manner in order to compete effectively against competitors' products and/or entirely new data storage technologies. Our results of operations would be materially adversely affected if our efforts to advance our process technologies are not successful or if the technologies that we have chosen not to develop proved to be viable competitive alternatives. Our Foreign Operations and Joint Ventures Entail Risks to Our Business and Operations In 1998, our sales to customers in the Far East, including the foreign subsidiaries of domestic disk drive companies, accounted for approximately 83% of our net sales from our U.S. and Malaysian facilities. Our customers assemble a substantial portion of their disk drives in the Far East and subsequently sell these products throughout the world. Therefore, our high concentration of Far East sales does not accurately reflect the eventual point of consumption of the assembled disk drives. We anticipate that international sales will continue to represent the majority of our net sales. All of our sales are currently priced in U.S. dollars worldwide. Certain costs at our foreign manufacturing and marketing operations are incurred in the local currency. We also purchase certain operating supplies and production equipment from Japanese suppliers in yen-denominated transactions. Accordingly, our operating results are subject to the risks inherent with international operations, including, but not limited to: o compliance with or changes in the law and regulatory requirements of foreign jurisdictions; o fluctuations in exchange rates, tariffs or other barriers; o difficulties in staffing and managing foreign operations; o exposure to taxes in multiple jurisdictions; and o transportation delays and interruptions. Our Malaysian operations accounted for a significant portion of our 1998 consolidated net sales. Prolonged disruption of operations in Malaysia for any reason would cause delays in shipments of our products, thus materially adversely affecting our results of operations. Changes in relative currency values can be swift and unpredictable. In 1998, economic difficulties and political unrest throughout Southeast Asia created substantial currency devaluations in the region. In mid-1998, the Malaysian government devalued the Malaysian ringgit ("MR") to a fixed exchange rate of 3.8 MR to $1 U.S. While the effect of a devaluation in the MR reduces the U.S. dollar equivalent of MR-based operating 17 expenses, future fluctuations could also have the opposite effect. While the political and economic issues in Southeast Asia have not had a material adverse affect on our Malaysian operations, we cannot assure you that future events would not cause a disruption in our operations. Extended disruptions would have a material adverse affect on our results of operations. Fluctuations in the financial results of AKCL, our unconsolidated Japanese disk manufacturing joint venture, also impact our financial performance. Our equity in the net loss of AKCL increased our 1998 consolidated net loss by $27.0 million. Equipment writedowns for permanent impairment on AKCL's in-line sputtering equipment, coupled with low sales volumes in the first half of 1998 and substantially lower average selling prices and manufacturing yields, adversely affected AKCL's financial results for 1998. Further writedowns of our investment in AKCL are limited to the book value of the investment on our consolidated balance sheet ($1.4 million at January 3, 1999) assuming the Japanese yen to U.S. dollar exchange rate remains stable. Our investment in AKCL is adjusted for changes in the prevailing rate of exchange between the yen and dollar. A strengthening yen increases the dollar-based investment balance. AKCL is subject to many of the same risks that we face, including dependence on a limited customer base. Additionally, AKCL is subject to risks associated with fluctuations in the relative strength of the Japanese Yen to the U.S. dollar. AKCL, which bases the pricing for a large portion of its products in U.S. dollars, incurs most of its costs in Japanese Yen. The Market Price of Our Common Stock has been Volatile The market price of our common stock has been volatile in response to actual and anticipated quarterly variations in: o our operating results; o perceptions of the disk drive industry's relative strength or weakness; o developments in our relationships with our customers and/or suppliers; o announcements of alliances, mergers or other relationships by or between our competitors and/or customers; o announcements of technological innovations or new products by us or our competitors; o the success or failure of new product qualifications; o developments related to patents or other intellectual property rights; and o other events or factors. We expect this volatility to continue in the future. In addition, any shortfall or changes in our revenue, gross margins, earnings or other financial results from analysts' expectations could cause the price of our Common Stock to fluctuate significantly. In recent years, the stock market in general has experienced extreme price and volume fluctuations which have particularly affected the market price of many technology companies and which have often been unrelated to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of our Common Stock. Volatility in the price of stocks of companies in the hard disk drive industry has been particularly high, especially during 1997 and 1998. During this period the price of our stock fell to a low of $2 5/8 during the third quarter of 1998 from a high of $35 1/8 during the second quarter of 1997. See "Price Range of Common Stock." 18 Our Business Depends on Our Ability to Protect Our Patents and Proprietary Information Rights Protection of technology through patents and other forms of intellectual property rights in technically sophisticated fields is commonplace. In the disk drive industry, it is not uncommon for companies and individuals to initiate actions against others in the industry to enforce intellectual property rights. We cannot assure you that others have not or will not perfect intellectual property rights and either enforce those rights to prevent us from using certain technologies or demand royalty payments from us in return for using those technologies, either of which may have a material adverse affect on our results of operations. As a measure of protection, we have entered into cross-license agreements with certain customers. In addition, we review, on a routine basis, patent issuances in the U.S. and patent applications that are published in Japan. Through these reviews, we occasionally become aware of a patent, or an application that may mature into a patent, which could give rise to a claim of infringement. When such patents are identified, we investigate the validity and possibility of actual infringement. We are presently involved in such an investigation of several recently issued patents. However, we cannot assure you that we will anticipate claims that we infringe the technology of others or successfully defend ourselves against such claims. Similarly, we cannot assure you that we will discover significant infringements of our technology or successfully enforce our rights to our technology if we discover infringing uses. We Rely on a Limited Number of Suppliers for Materials and Equipment Used in Our Manufacturing Processes We rely on a limited number of suppliers, and in some cases a sole supplier, for some of the materials and equipment used in our manufacturing processes including aluminum substrates, nickel plating solutions, polishing and texturing supplies, and sputtering target materials. As a result, our production capacity would be limited if one or more of these materials were to become unavailable or available in reduced quantities. If such materials were unavailable for a significant period of time, our results of operations would be adversely affected. Earthquakes or Other Natural or Man-made Disasters Could Disrupt Our Operations Our California manufacturing facilities, our Japanese joint venture (AKCL), our Japanese supplier of aluminum blanks for substrate production, other Japanese suppliers of key manufacturing supplies and our Japanese supplier of sputtering machines are each located in areas with seismic activity. Our Malaysian operations have been subject to temporary production interruptions due to localized flooding, disruptions in the delivery of electrical power, and, on one occasion in 1997, by smoke generated by large, widespread fires in Indonesia. These events have in the past disrupted production and prevented a portion of our workforce from reaching the facility. We cannot assure you that natural or man-made disasters will not result in a prolonged disruption of production in the future. If any natural or man-made disasters do occur, they could have a material adverse effect on our results of operations. 19 ITEM 2. PROPERTIES Worldwide (excluding AKCL), the Company currently occupies facilities totaling approximately 1.6 million square feet. The Company owns three manufacturing facilities in Malaysia, two in Penang and one in Sarawak. The square footage of each of these facilities and acreage of the related land parcels are 340,000 square feet and 13 acres, 275,000 square feet and 18 acres, and 275,000 square feet and 89 acres. The Company leases four manufacturing facilities in San Jose and Santa Rosa, California. These facilities are leased for the following terms: Facility Size Current Lease (square feet) Term Expires Extension Options ------------- ------------- ----------------- 225,000 September 2006 20 years 188,000 January 2007 20 years 103,000 July 1999 10 years 97,000(1) February 2001 10 years 82,000 February 2007 20 years 48,000 December 1999 -- 44,000 April 1999 10 years In addition to the facilities listed above, the Company leases other smaller facilities in California and Singapore. The Company owned approximately 6 acres of undeveloped land adjacent to its Milpitas manufacturing complex which was sold in March 1998. (1) This facility was vacated in the third quarter of 1997 as part of the Company's restructuring plan and subleased in December 1997. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which either the Company or its subsidiaries is a party or to which any of its property is subject. 20 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to the stockholders of the Company during the Company's fourth quarter of 1998. Executive Officers of the Registrant As of February 23, 1999, the executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Tu Chen.............................63 Chairman of the Board of Directors Stephen C. Johnson..................56 President, Chief Executive Officer and Director Christopher H. Bajorek..............55 Senior Vice President--Chief Technical Officer Ray Martin..........................55 Senior Vice President--Customer Sales and Service William L. Potts, Jr................52 Senior Vice President, Chief Financial Officer and Secretary Thian Hoo Tan.......................50 Senior Vice President--Operations Ronald Allen........................50 Vice President--Manufacturing Technologies Richard Austin......................43 Vice President--Worldwide Substrate Manufacturing and Support Services Tim Gallagher.......................46 Vice President--Product Development Elizabeth A. Lamb...................47 Vice President--Human Resources Thiam Seng Tan......................42 Vice President--Penang Operations Eric Tu.............................45 Vice President--U.S. Media Operations Tsutomu T. Yamashita................44 Vice President--Research and Process Development
Dr. Chen is a founder of the Company and has served as Chairman of the Board from its inception in June 1983. From 1971 to June 1983, he was a Member, Research Staff, and Principal Scientist at Xerox Corporation's Palo Alto Research Center. From 1968 to 1971, Dr. Chen was employed as a research scientist for Northrop Corp. Dr. Chen received his Ph.D. and M.S. degrees in Metallurgical Engineering from the University of Minnesota and holds a B.S. degree in Metallurgical Engineering from Cheng Kung University in Taiwan. Dr. Chen is a director of Headway Technologies, Inc. Mr. Johnson has served as President and Chief Executive Officer of the Company since September 1983. From 1977 to 1983, Mr. Johnson was an officer of Boschert Incorporated, a manufacturer of switching power supplies, initially as Vice President, Marketing and subsequently as President and Chief Executive Officer. Mr. Johnson holds a B.S. degree in Engineering from Princeton University, a M.S. degree in Electrical Engineering from the University of New Mexico and an M.B.A. degree from the Harvard Graduate School of Business. Mr. Johnson is a director of Exabyte Corporation and Uniphase Corporation. Dr. Bajorek joined the Company and was elected to the newly created position of Senior Vice President-Chief Technical Officer in June 1996. Prior to joining Komag, Dr. Bajorek was Vice President, Technology Development and Manufacturing, for the Storage Systems Division of IBM in San Jose, California. During his 25-year career with IBM, Dr. Bajorek held various positions in research and management related to magnetic recording, magnetic bubble and optical storage applications. He holds a Ph.D. degree in Electrical Engineering and Business Economics from the California Institute of Technology. Dr. Bajorek is a director of the International Disk Drive Equipment and Materials Association (IDEMA), an industry trade association. 21 Mr. Martin joined the Company in October 1997 and served as Vice President--Product Assurance and Product Test until his promotion to Senior Vice President--Customer Sales and Service in June 1998. From 1990 to 1997, he headed product engineering and head/media development as Director of Process and Technology at Quantum Corporation. Prior to working at Quantum, Mr. Martin held a number of management and engineering positions at several leading disk drive manufacturers, including Western Digital, Seagate, and IBM. Mr. Martin holds a B.S. degree in Mechanical Engineering from Kansas State University. Mr. Potts joined the Company in 1987 and served as Vice President and Chief Financial Officer from January 1991 until his promotion to Senior Vice President and Chief Financial Officer in January 1996. In addition, Mr. Potts serves as Secretary. Prior to joining Komag, Mr. Potts held financial management positions at several high-technology manufacturing concerns. He has also served on the consulting staff of Arthur Andersen & Co. Mr. Potts holds a B.S. degree in Industrial Engineering from Lehigh University and an M.B.A. degree from the Stanford Graduate School of Business. Mr. Thian Hoo Tan was appointed Vice President of Manufacturing in September 1993 and was promoted to Senior Vice President--Operations in February 1998. He previously served as Vice President--Manufacturing--Asia Operations in charge of the Company's operations in Penang and Sarawak, Malaysia. Mr. Tan joined Komag in 1989 and was in charge of operations at the Company's first San Jose, California manufacturing facility. Before joining Komag in 1989, Mr. Tan was Vice President of Operations at HMT Technology. Mr. Tan holds a M.S. degree in Physics from the University of Malaya at Kuala Lumpur. Mr. Allen was promoted to Vice President--Manufacturing Technologies in January 1997. Mr. Allen joined the Company in October 1983 to establish the Company's automation manufacturing program that he has since directed. Prior to joining Komag, Mr. Allen was employed with Xerox's Palo Alto Research Center as a member of the research staff. Mr. Allen also worked at General Electric, in the Schenectady Research Center. Mr. Allen holds a B.S. degree in Physics and a minor in Chemistry from Dillard University. Mr. Austin joined the Company in October 1988 as Facilities and Equipment Maintenance Manager. Prior to his appointment as Vice President--Worldwide Substrate Manufacturing and Support Services in June 1998, Mr. Austin served Komag as Vice President--U.S. Manufacturing. Prior to joining Komag, Mr. Austin was an Equipment Maintenance and Facilities Manager at VLSI Technology Inc. Mr. Austin also worked at National Semiconductor and Rockwell International between 1975 and 1983. Dr. Gallagher joined the Company in May 1996 as Director of Advanced Product Integration and served in that capacity until his promotion to Vice President--Product Development in July 1998. Prior to joining Komag, Dr. Gallagher held positions as Director of New Products at Seagate and Senior Technical Staff Member at IBM, working primarily on advanced disk and recording head development. He holds a PhD degree in Applied Physics from the California Institute of Technology. Ms. Lamb joined the Company as Vice President--Human Resources in October 1996. From 1995 to 1996 she was Director of Worldwide Staffing and Employee Relations at Adaptec. Prior to that, Ms. Lamb was Director of Compensation, Benefits and Executive programs at Tandem. Ms. Lamb holds a B.A. degree in Communications from San Jose State University. Mr. Thiam Seng Tan joined the Company in December 1993 as Director of Quality Assurance. He was appointed Vice President--Penang Operations in October 1998. Prior to joining the Company, Mr. Tan held positions in manufacturing, engineering, customer service and materials management at Hewlett Packard Sdn. Bhd. from 1979 to 1993. Mr. Tan holds a B.Sc. degree in Mechanical Engineering from the University of London. 22 Mr. Tu rejoined the Company as Vice President--U.S. Media Operations in July 1998. He previously worked for Komag from 1988 to 1993. Prior to rejoining the Company, Mr. Tu held senior manufacturing positions with Kobe Precision, Inc., a manufacturer of aluminum substrates and Fuji Electric (Malaysia) Sdn. Bhd., a computer hard disk maker in Malaysia. Mr. Tu holds a MS degree in Mechanical Engineering from University of Missouri. Mr. Yamashita joined the Company in 1984 and was Senior Director of Research prior to his promotion to Vice President--Research and Development in January 1995. Mr. Yamashita currently serves as Vice President--Research and Process Development. Prior to joining the Company, Mr. Yamashita was a graduate research assistant in the Department of Material Science and Engineering at Stanford University. Mr. Yamashita holds a B.S. degree in Chemistry and an M.S. degree in Materials Science from Stanford University. 23 PART II ITEMS 5, 6, 7 and 8. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol KMAG. The following table sets forth the range of high and low closing sales prices, as reported on the Nasdaq National Market. At March 1, 1999 the Company had approximately 476 holders of record of its Common Stock and 53,923,044 shares outstanding. Price Range of Common Stock ------------ High Low ---- --- 1997 First Quarter 32 7/8 25 13/32 Second Quarter 35 1/8 16 7/16 Third Quarter 22 7/16 16 1/8 Fourth Quarter 21 3/8 14 1/2 1998 First Quarter 15 5/8 12 1/16 Second Quarter 15 1/2 5 5/8 Third Quarter 6 1/8 2 5/8 Fourth Quarter 11 2 1/8 1999 First Quarter (through March 30, 1999) 15 1/4 4 13/16 DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain all cash for use in the operation and expansion of the Company's business and does not anticipate paying any cash dividends in the near future. Komag's debt agreements prohibit the payment of dividends without the lenders' consent. 24 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data and other operating information of Komag, Incorporated. The financial data and operating information is derived from the consolidated financial statements of Komag, Incorporated and should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
Fiscal Year Ended ------------------------------------------------------------------------------- 1998 (1) 1997 (2) 1996 1995 1994 ---------------- ----------------- -------------- -------------- -------------- (in thousands, except per share amounts and number of employees) Consolidated Statements of Operations Data: Net Sales $ 328,883 $ 631,082 $577,791 $512,248 $392,391 Gross Profit (Loss) (62,752) 93,546 175,567 197,486 125,386 Restructuring Charge 187,768 52,157 - - - Income (Loss) Before Minority Interest and Equity in Joint Venture Income (Loss) (338,789) (16,838) 100,553 101,410 54,156 Minority Interest in Net Income of Consolidated Subsidiary 544 400 695 1,957 1,091 Equity in Net Income (Loss) of Unconsolidated Joint Venture (27,003) (4,865) 10,116 7,362 5,457 Net Income (Loss) $(366,336) $ (22,103) $109,974 $106,815 $ 58,522 Basic Net Income (Loss) Per Share $(6.89) $(0.42) $2.15 $2.24 $1.31 Diluted Net Income (Loss) Per Share $(6.89) $(0.42) $2.07 $2.14 $1.27 Consolidated Balance Sheet Data: Working Capital $ (92,844) $ 296,099 $142,142 $252,218 $118,230 Net Property, Plant & Equipment 470,017 678,596 643,706 329,174 228,883 Long-term Debt (less current portion) - 245,000 70,000 - 16,250 Stockholders' Equity 323,807 686,184 697,940 574,564 331,215 Total Assets $ 694,095 $1,084,664 $938,357 $686,315 $424,095 Number of Employees at Year-end 4,086 4,738 4,101 2,915 2,635 (1) Results of operations for 1998 included a $187.8 million restructuring charge that primarily related to an asset impairment charge of $175 million. The asset impairment charge effectively reduced asset valuations to reflect the economic effect of industry price erosion for disk media and projected underutilization of the Company's production equipment and facilities. Based on analysis of the Company's production capacity and its expectations of the media market over the remaining life of the Company's fixed assets, the Company concluded that it would not be able to recover the book value of those assets. (2) Results of operations for 1997 included a $52.2 million restructuring charge related to the consolidation of the Company's U.S. manufacturing operations. (3) The Company paid no cash dividends during the five-year period.
25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview The Company's business is both capital intensive and volume sensitive, making capacity planning and efficient capacity use imperative. Physical capacity, utilization of this physical capacity, yields and average unit sales price constitute the key determinants of the Company's profitability. Of these key determinants, price and utilization are the most sensitive to changes in product demand. If capacity and product price are fixed at a given level and demand is sufficient to support a higher level of output, then increased output attained through improved utilization rates and higher manufacturing yields will translate directly into increased sales and improved gross margins. Alternatively, if demand for the Company's products decreases, falling average selling prices and lower capacity utilization will adversely affect the results of the Company's operations. Risk Factors The following discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. While this discussion represents the Company's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. Factors that could cause actual results to differ include the following: availability of sufficient cash resources; changes in the industry supply-demand relationship and related pricing for enterprise and desktop disk products; timely and successful qualification of next-generation products; utilization of manufacturing facilities; changes in manufacturing efficiencies, in particular product yields and material input costs; extensibility of process equipment to meet more stringent future product requirements; structural changes within the disk media industry such as combinations, failures, and joint venture arrangements; vertical integration and consolidation within the Company's customer base; dependence of the Company's sales on a limited number of customers; increased competition; timely and successful deployment of new process technologies into manufacturing; and the availability of certain sole-sourced raw material supplies. See "Business--Risk Factors" for more detailed discussions of risks and uncertainties facing the Company. 1998 vs. 1997 Operating results for 1998 were significantly lower than 1997. Adverse market conditions, which began late in the second quarter of 1997, intensified during 1998. Late in the second quarter of 1997, demand for thin-film media products fell abruptly as an excess supply of enterprise-class disk drives caused drive manufacturers to reduce build plans for this class of drives. The decrease in demand for enterprise-class media, combined with a major expansion of media production capacity by both independent media suppliers and captive media operations of disk drive manufacturers, resulted in an excess supply of enterprise-class media. Orders for the Company's enterprise-class media products were reduced in the third quarter of 1997 as drive manufacturers reduced drive production and relied more heavily on their own captive media operations. Net sales decreased sharply to $129.7 million in the third quarter of 1997, down sequentially from $175.1 million in the second quarter of 1997. The Company's gross margin percentage fell to 0.2% in the third quarter of 1997, down from 20.4% in the second quarter of 1997. Net sales and the gross margin percentage improved to $159.0 million and 11.6%, respectively, for the fourth quarter of 1997. In December 1997, several disk drive manufacturers initiated cutbacks in their desktop product manufacturing plans for early 1998 in response to supply and demand imbalances within that industry 26 segment. Weakened demand for desktop media products, combined with the continuing slow recovery of the enterprise-class market segment, lowered overall media demand. The market share available to independent media suppliers shrank as captive media operations supplied a larger share of the industry's overall media requirements. The resulting excess supply of media in the merchant market heightened price competition among independent media suppliers, including the Company. The Company's net sales in the first quarter of 1998 dropped 52% sequentially to $76.1 million as a result of both a lower unit sales volume and a decrease of approximately 10% in the overall average selling price for the Company's products. Low utilization of the Company's factories during the first quarter of 1998 pushed unit production costs up substantially as fixed costs were spread over fewer production units. The combination of the lower overall average selling price and significantly higher average unit production cost resulted in a negative gross margin percentage of 41.5% for the first quarter of 1998. The second quarter of 1998 was negatively impacted by the continued weak merchant market demand for disk media. The Company's net sales in the second quarter of 1998 increased slightly on a sequential basis to $78.8 million, the net effect of an 9% increase in unit sales volume and a 5% decrease in the overall average selling price. The combination of the lower overall average selling price, increased inventory writedowns and continued low production volumes resulted in a negative gross margin percentage of 45.2% in the second quarter of 1998. Entering the second quarter of 1998, the Company had expected that net sales for the second quarter would increase sequentially to $100-$125 million. In the middle of the second quarter several customers reduced orders for the Company's products in response to downward adjustments in their disk drive production build schedules. In light of the order reductions and the Company's expectation that the media industry's supply/demand imbalance would extend into 1999, the Company adjusted its expectations for the utilization of its installed production capacity. Based on this analysis of the Company's production capacity and its expectations of the media market over the remaining life of the Company's fixed assets, the Company concluded that it would not be able to recover the book value of those assets. As a result, the Company implemented a restructuring plan in June 1998 and recorded a charge of $187.8 million. This charge included an asset impairment charge and provisions for facility closure expenses and severance-related costs. The asset impairment component of the charge was $175.0 million and effectively reduced asset valuations to reflect the economic effect of the industry price erosion for disk media and the projected underutilization of the Company's production equipment and facilities. Net sales for the third quarter of 1998 increased slightly on a sequential basis to $81.3 million as the net result of an 8% increase in unit sales and a 4% decrease in the overall average selling price. The gross margin percentage improved sequentially to a negative 3.4%. The asset impairment charge recorded in the second quarter of 1998 lowered depreciation and amortization charges beginning in June 1998. The impairment charge resulted in a reduction in depreciation and amortization of approximately $10.2 million in the third quarter of 1998 compared to the second quarter of 1998. Lower payroll costs, and improved unit demand, coupled with a favorable impact of certain non-recurring inventory adjustments, also contributed to the improved gross margin percentage in the third quarter of 1998. Net sales for the fourth quarter of 1998 increased to $92.7 million as the net result of an 18% increase in unit sales and a 4% decrease in the overall average selling price. The gross margin percentage improved sequentially to a positive 7.9%. The higher unit volume, higher manufacturing yields, and reduced material input costs generated the substantial sequential quarterly improvement. Net Sales Net sales for 1998 decreased to $328.9 million, down 47.9% from $631.1 million in 1997. The decrease was due to a combination of a 36% decrease in unit sales volume and a 19% decrease in the overall average selling price. Price reductions are common on individual product offerings in the thin-film media industry. The Company has traditionally prevented significant reductions in its overall 27 average selling price through transitions to higher-priced, more technologically advanced product offerings. The effect of price reductions in response to significant pricing pressures generated by the imbalance in supply and demand for thin-film media during 1998 more than offset the effect of transitions to more advanced product offerings. In addition to sales of internally produced disk products, the Company has historically resold products manufactured by its Japanese joint venture, Asahi Komag Co., Ltd. ("AKCL"). Distribution sales of thin-film media manufactured by AKCL were $2.5 million in 1998 compared to $10.5 million in 1997. The Company expects that distribution sales of AKCL product will remain a relatively small percentage of the Company's net sales. During 1998, three customers accounted for approximately 86% of consolidated net sales: Western Digital Corporation ("Western Digital")--43%, Maxtor Corporation, a subsidiary of Hyundai Electronics America, ("Maxtor")--25%, and International Business Machines ("IBM")--18%. The Company expects that it will continue to derive a substantial portion of its sales from relatively few customers. The distribution of sales among customers may vary from quarter to quarter based on the match of the Company's product capabilities with specific disk drive programs of the customers. Gross Margin The Company incurred a negative gross margin percentage of 19.1% in 1998 compared to a positive gross margin percentage of 14.8% in 1997. Unit production decreased 37% in 1998 relative to 1997. The Company operated well below capacity in 1998 in order to match unit production to the sharply lower demand for its products. The combination of the lower overall average selling price, higher unit production costs related to underutilized capacity, and lower manufacturing yields resulted in the negative gross margin percentage in 1998. Operating Expenses Research and development ("R&D") expenses increased 19.9% ($10.2 million) in 1998 relative to 1997. The additional R&D effort was directed toward the introduction of new product generations, process changes to manufacture such products, process improvements to increase yields and reduce material input costs of products in volume production, and increased development efforts to qualify new products with customers. In 1999, the Company plans to spend approximately $45-$50 million for R&D. Selling, general and administrative ("SG&A") expenses decreased $7.8 million in 1998 compared to 1997. Lower provisions for bonus and profit sharing programs (decrease of $3.8 million) and lower provisions for bad debt (decrease of $2.4 million) resulted in the majority of the overall decrease in SG&A between the years. Excluding provisions for bonus and profit sharing programs and provisions for bad debt in 1998, SG&A expenses decreased $1.6 million. The lower spending was primarily due to lower payroll and other employee-related costs as a direct result of restructuring activities completed in the fourth quarter of 1997 and second quarter of 1998. In the second quarter of 1998, the Company implemented a restructuring plan which included a reduction in the Company's U.S. and Malaysian workforce and the cessation of operations at its oldest San Jose, California plant. The Company recorded a restructuring charge of $187.8 million which included $4.1 million for severance costs (approximately 170 employees, primarily in the U.S.), $5.8 million related to equipment order cancellations and other equipment related costs, and $2.9 million for facility closure costs. The asset impairment component of the charge was $175.0 million. The cash component of the total charge was $12.8 million. Non-cash items in the restructuring/impairment charge totaled $175.0 million. During the third quarter of 1997, the Company implemented a restructuring plan involving the consolidation of its U.S. manufacturing operations. The Company recorded a $52.2 million restructuring charge which included $3.9 million for severance costs associated with approximately 330 terminated 28 employees, $33.0 million for the write-down of the net book value of excess equipment and disposed of leasehold improvements, $10.1 million related to equipment order cancellations and other equipment-related costs, and $5.2 million for facility closure costs. Non-cash items included in the restructuring charge totaled approximately $33.0 million. The Company incurred lower facility closure costs than anticipated in the restructuring charges. The oldest Milpitas plant was sublet sooner than anticipated and the Company reached a lease termination agreement with its landlord on the second Milpitas plant in the third quarter of 1998. The Company thereby avoided expected future rent payments and the cost of renovating the facility to its original lease condition. Additionally, the Company determined that it would not close its oldest San Jose, California facility at the expiration of its lease. As a result the Company will not incur costs to restore the facility to its original lease condition as contemplated in the restructuring charge. Higher than expected costs for equipment order cancellations offset the lower facility closure costs. A total of 515 employees were terminated in the restructuring activities. The following table summarizes these restructuring activities.
Restructuring Incurred (in millions) Charges Through 1/3/99 ---------------- --------------- Asset impairment charge $175.0 $175.0 Writedown net book value of equipment and leasehold improvements 33.0 33.0 Equipment order cancellations and other equipment related costs 16.0 17.5 Facility closure costs 8.0 2.2 Severance costs 7.9 8.1
At January 3, 1999, $4.1 million related to the restructuring activities remained in current liabilities. The Company has made cash payments totaling approximately $27.8 million primarily for severance, equipment order cancellations and facility closure costs. The majority of the remaining liability, primarily for equipment order cancellations, is expected to be settled through the use of cash by the end of 1999. Interest Income/Expense and Other Income Interest income increased $4.1 million (85.2%) in 1998 relative to 1997 primarily due to a higher average investment balance in 1998. Interest expense increased $10.1 million (110.8%) in 1998 compared to 1997. The higher interest expense was due to a higher outstanding debt balance in 1998 compared to 1997. Income Taxes The Company's income tax provision of approximately $1.3 million for 1998 primarily represents foreign withholding taxes. The Company's wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"), received an extension of its initial five-year tax holiday for an additional five years commencing in July 1998. KMS has also been granted a ten-year tax holiday for its second and third plant sites in Malaysia. The commencement date for this new tax holiday has not been determined as of March 15, 1999. The tax provision benefit of 55% for 1997 primarily represents tax loss carrybacks associated with the Company's U.S. operations. As a result of profitable operations at 29 KMS in 1997, the tax holiday reduced the Company's 1997 consolidated net loss by approximately $16.6 million ($0.32 per share under both the basic and diluted methods). Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint Venture The minority interest in the net income of consolidated subsidiary during 1998 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") share of Komag Material Technology, Inc.'s ("KMT") net income. KMT recorded net income of $2.7 million and $2.0 million in 1998 and 1997, respectively. The Company owns a 50% interest in AKCL and records its share of AKCL's net income (loss) as equity in net income (loss) of unconsolidated joint venture. The Company recorded a loss of $27.0 million as its equity in AKCL's net loss for 1998 compared to a net loss of $4.9 million recorded for 1997. AKCL's results for 1997 included a $5.3 million (net of tax) gain on the sale of its investment in Headway Technologies, Inc. ("Headway"). The Company's equity in this gain was $2.6 million. Excluding the gain, the Company reported a loss of $7.5 million as its equity in AKCL's net loss for 1997. The combination of a significant decrease in the overall average selling price for AKCL's disk products, lower manufacturing yields, reduced equipment utilization, customer qualification issues and substantial equipment writedowns adversely affected AKCL's financial results for 1998. During 1998, AKCL wrote-off its remaining in-line sputtering equipment as it ramped products on its static sputtering equipment. AKCL believes that the products produced by a static sputtering process are technically similar to those produced by other Japanese media suppliers, thus improving AKCL's ability to meet specific requirements of certain Japanese customers on a timely basis. During 1997, AKCL operated substantially under capacity for the majority of the year due to product transition issues related to AKCL's customer qualification and its production of MR products. AKCL's current financing arrangements may not be sufficient in light of AKCL's expected continuing losses. There can be no assurance that additional financing will be available to AKCL. Failure to secure additional financing could have a material adverse affect on AKCL's business and financial results. Further writedowns of the Company's investment in AKCL are limited to the book value of the investment on the accompanying consolidated balance sheet ($1.4 million at January 3, 1999). Impact of Year 2000 Many computer systems were not designed to handle any dates beyond the year 1999. Such systems were designed using two digits rather than four to define the applicable year. Any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. Disruptions may also occur if key suppliers or customers experience disruptions in their ability to transact with the Company due to Year 2000 issues. The Company's global operations rely heavily on the infrastructures of the countries in which it conducts business. The Year 2000 readiness within infrastructure suppliers (utilities, government agencies such as customs, shipping organizations) will be critical to the Company's ability to avoid disruption of its operations. The Company is working with industry trade associations to evaluate the Year 2000 readiness of infrastructure suppliers. The Company is currently in the process of assessing its systems, equipment and processes to determine its Year 2000 readiness. The Company has committed personnel and resources to resolve potential Year 2000 issues and is working with key suppliers and customers to ensure their Year 2000 readiness. Additionally, the Company had its Year 2000 assessment plan reviewed by an outside consulting firm to evaluate the effectiveness. The Company will perform remediation procedures concurrent with its assessment planning. The Company plans to complete the assessment of its Year 2000 readiness by the end of the first quarter of 1999. The Company's Year 2000 efforts are focused on three primary areas of potential impact: internal information technology ("IT") systems, internal non-IT systems, and the readiness of third 30 parties with whom the Company has critical business relationships. The Company has completed its inventory of internal IT and non-IT systems. Testing and remediation of internal IT and non-IT systems is approximately 60% complete. The Company expects to complete the testing and remediation for these systems by July 31, 1999. The Company has developed a process for identifying and assessing Year 2000 readiness of its critical suppliers. This process generally involves the following steps: initial supplier survey, follow-up supplier review, and contingency planning. The Company is following up with critical suppliers that either did not respond initially or whose responses were unsatisfactory. To date, the Company has received responses from a majority of its critical suppliers, most of whom have responded that they expect to address all their significant Year 2000 issues on a timely basis. The Company currently believes that the remediation costs of the Year 2000 issue will not be material to the Company's results of operations or financial position. Cumulatively through February 28, 1999 the Company has incurred remediation costs of approximately $0.1 million. While the Company currently expects that the Year 2000 issue will not pose significant operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have material adverse consequences, including delays in the delivery or sale of products. Therefore, the Company is developing contingency plans for continuing operations in the event such problems arise. The Company intends to complete the contingency planning phase of its Year 2000 readiness by July 31, 1999. The Company is working to identify and analyze the most reasonably likely worst-case scenarios where it may be affected by Year 2000-related interruptions. These scenarios could include possible infrastructure collapse, the failure of power and water supplies, major transportation disruptions, unforeseen product shortages due to hoarding of materials and supplies and failures of communications and financial systems. Any one of these scenarios could have a major and material effect on the Company's ability to produce and deliver products to its customers. While the Company is developing contingency plans to address issues under its control, an infrastructure problem outside of its control or some combination of several of these problems could result in a delay in product shipments depending on the nature and severity of the problems. The Company would expect that most utilities and service providers would be able to restore service within days although more pervasive system problems involving multiple providers could last several weeks or longer depending on the complexity of the systems and the effectiveness of their contingency plans. The Company's products are not date-sensitive and the Company expects that it will have limited exposure to product liability litigation resulting from Year 2000-related failures. Disk drive manufacturers have generally stated that disk drives as a stand-alone product are not date-sensitive. However, disk drives using the Company's thin-film media products have been incorporated into computer systems which could experience Year 2000-related failures. The Company anticipates that litigation may be brought against suppliers of all component products of systems that are unable to properly handle Year 2000 issues. 1997 vs. 1996 Operating results for 1997 were dramatically lower than 1996. An imbalance between media supply and demand as well as product transitions were significant factors in 1997. In the last half of 1996, the Company began a rapid transition to MR and proximity-inductive thin-film media products. Quarterly sales in excess of $150 million and gross margins exceeding 40% during the first half of 1996 decreased to $131.5 million and 24%, respectively, in the third quarter of 1996 and $141.2 million and 11.7%, respectively, in the fourth quarter of 1996. During the first and second quarters of 1997, net sales increased sequentially to $167.2 million and $175.1 million, respectively, primarily due to manufacturing capacity additions. The gross margin percentages for the first and second quarters of 1997 were 23.5% and 20.4%, respectively. Demand for thin-film media products fell sharply at the end 31 of the second quarter of 1997 as an excess supply of enterprise-class disk drives caused drive manufacturers to reduce their build plans for this class of drives. The resulting imbalance between media supply and demand caused a loss of sales and prevented the Company from fully utilizing its expanded capacity during the last half of 1997. Net sales and the gross margin percentage fell sharply to $129.7 million and 0.2%, respectively, in the third quarter of 1997 and to $159.0 million and 11.6%, respectively, in the fourth quarter of 1997. Additionally, the Company recorded a restructuring charge to consolidate its U.S. manufacturing operations during the third quarter of 1997. Net Sales Net sales for 1997 increased to $631.1 million, up 9% from $577.8 million in 1996. The increase was primarily due to an increase in unit sales volume. The overall average selling price increased less than 1% in 1997 relative to 1996. The effect of the sales mix shift to higher-priced MR and proximity-inductive media more than offset the effect of price reductions on maturing inductive disk products and resulted in the flat overall average selling price. Distribution sales of product manufactured by AKCL increased to $10.5 million in 1997 from $5.7 million in 1996. Unit production increased 6% in 1997 relative to 1996. The Company increased capacity 25% in 1997 relative to 1996. Equipment utilization rates, therefore, decreased significantly as the Company operated below capacity in the last half of 1997 due to weak market demand for enterprise-class disk products. In addition, overall manufacturing yields declined as the Company experienced continuing yield losses on MR products. During the first half of 1996, the overall manufacturing yield was substantially higher prior to the transition to proximity-inductive and MR media. Gross Margin The gross margin percentage for 1997 decreased to 14.8% from 30.4% for 1996 primarily due to a combination of lower manufacturing yields, reduced equipment utilization rates and inherently higher material and processing costs for MR and advanced proximity disks. Additionally, the Company incurred inventory write-downs in 1997, which accounted for approximately one-fourth of the decrease in the gross margin percentage. Operating Expenses Research and development ("R&D") expenses increased 75% ($22.0 million) in 1997 relative to 1996. The increase was primarily due to higher facility costs associated with a newly constructed 188,000-square-foot R&D facility and increased R&D staffing. Selling, general and administrative ("SG&A") expenses decreased $6.1 million in 1997 compared to 1996. The decrease was mainly due to a decrease of $10.2 million in provisions for bonus and profit sharing programs offset by increased provisions for bad debt of $2.4 million. Excluding provisions for bonus/profit sharing programs and provisions for bad debt, SG&A expenses increased $1.7 million due primarily to higher payroll and facility-related costs connected with the Company's newly constructed administration facility in 1997. In 1997, the Company implemented a restructuring plan involving the consolidation of its U.S. manufacturing operations. The restructuring charge primarily related to disposing of assets, equipment order cancellations, provisions for facility closure expenses and severance-related costs. The Company recorded a $52.2 million restructuring charge which included $3.9 million for severance costs associated with approximately 330 terminated employees, $33.0 million for the write-down of the net book value of excess equipment and disposed of leasehold improvements, $10.1 million related to equipment order cancellations and other equipment-related costs, and $5.2 million for facility closure costs. Non-cash items included in the restructuring charge totaled approximately $33.0 million. 32 Interest Income/Expense and Other Income Interest income decreased $1.7 million (26%) in 1997 relative to 1996 primarily due to a lower average investment balance in 1997. Interest expense increased $8.5 million in 1997 compared to 1996. The Company was debt free from late 1995 until November 1996. Between November 1996 and the end of 1997, the Company borrowed $245 million under its credit facilities. Other income increased $1.3 million in 1997 relative to 1996 mainly due to foreign currency gains generated by the weakening of the Malaysian ringgit. Income Taxes The tax provision benefit of 55% for 1997 represents tax loss carrybacks associated with the Company's U.S. operations. The effective income tax rate for 1996 of 17% was lower than the 1996 combined federal and state statutory rate of 41% primarily as a result of an initial five-year tax holiday granted to the Company's wholly owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"), which commenced in July 1993. The impact of this tax holiday was to reduce the Company's 1997 net loss by approximately $16.6 million ($0.32 per share under both the basic and diluted methods) and increase 1996 net income by approximately $21.8 million ($0.43 basic income per share and $0.41 diluted income per share). Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint Venture The minority interest in the net income of consolidated subsidiary during 1997 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") share of Komag Material Technology, Inc.'s ("KMT") net income. KMT recorded net income of $2.0 million and $3.5 million in 1997 and 1996, respectively. The Company owns a 50% interest in AKCL and records its share of AKCL's net income (loss) as equity in net income (loss) of unconsolidated joint venture. As its share of AKCL's net income (loss), the Company recorded a loss of $4.9 million in 1997 compared to income of $10.1 million in 1996. Product transition issues related to AKCL's qualification and production of new MR products resulted in AKCL's underutilization of its capacity and adversely affected 1997 results. Liquidity and Capital Resources Cash and short-term investments of $127.8 million at the end of 1998 decreased from $166.2 million at the end of 1997. Consolidated operating activities generated $23.6 million in cash during 1998. The $366.3 million loss for 1998, net of non-cash depreciation charges of $116.7 million, the non-cash asset impairment charge of $175.0 million and the non-cash equity loss from AKCL of $27.0 million, consumed $47.6 million. Changes in operating assets and liabilities provided $71.0 million. The Company borrowed $15.0 million under its credit facilities and spent $89.0 million on capital requirements during 1998. Proceeds from sales of property, plant and equipment (primarily the sale of vacant land in Milpitas, California) generated $5.5 million. Sales of Common Stock under the Company's stock option programs generated $5.7 million. Working capital decreased by $388.9 million in 1998 primarily due to the reclassification of $260.0 million of the Company's long-term debt to current liabilities as a result of a technical default under the Company's credit facilities (see further discussion in the following paragraph). Additionally, capital expenditures of $89.0 million further reduced working capital in 1998. Accounts receivable and inventory decreased $39.6 million and $33.1 million, respectively, in line with reductions in sales. Current noncancellable capital commitments total approximately $17 million. Total capital expenditures for 1999 are currently planned at approximately $40 million. The 1999 capital spending 33 plan primarily includes costs for projects designed to improve yield and productivity. The size of the Company's second quarter 1998 net loss resulted in a default under certain financial covenants contained in the Company's bank credit facilities. The Company is not in payment default under these credit facilities as all interest charges and fees associated with these facilities have been paid on their scheduled due dates. At the time of the covenant default the Company had $260 million of debt outstanding against a total borrowing capacity of $345.0 million under the various senior unsecured credit facilities. As a result of the covenant default, the Company's lenders withdrew the $85 million in unused borrowing capacity. To date, the lenders have not accelerated any principal payments under the credit facilities. As a result of the technical default and reclassification of the bank debt to current liabilities, the Company's auditors have included a going concern paragraph in their audit opinion to highlight the Company's need to amend or restructure its debt obligations. The Company is currently negotiating with its lenders for amendments to the existing credit facilities. If we successfully amend or restructure our credit facilities we will seek to have our auditors reissue their opinion without the going concern paragraph. There can be no assurance that the Company will be able to obtain such amendments to its credit facilities on commercially reasonable terms. If the Company does not successfully amend these credit facilities, it would remain in technical default of its bank loans and the lenders would retain their rights and remedies under the existing credit agreements. As long as the lenders choose not to accelerate any principal payments, the Company would continue to operate in default for the near term. However, the Company will likely need to raise additional funds to restructure its debt obligations and to operate its business for the long term. Over the next several years the Company will need financial resources for capital expenditures, working capital and research and development. During 1997 and 1998, the Company spent approximately $199 million and $89 million, respectively, on property, plant and equipment. In 1999, the Company plans to spend approximately $40 million on property, plant and equipment, primarily for projects designed to improve yield and productivity. The Company believes that in order to achieve its long-term growth objectives and maintain and enhance its competitive position, such additional financial resources will be required. There can be no assurance that the Company will be able to secure such financial resources on commercially reasonable terms. If the Company is unable to obtain adequate financing, it could be required to significantly reduce or possibly suspend its operations, and/or to sell additional securities on terms that would be highly dilutive to current stockholders. In July 1998, at a Special Meeting of Stockholders, the Company received authorization to sell and issue up to $350,000,000 of Common Stock in equity or equity-linked private transactions from time to time through July 22, 1999 at a price below book value but at or above the then current market value of the Company's Common Stock. Additionally, the Company's stockholders approved a proposal to increase the amount of Common Stock the Company is authorized to issue from 85,000,000 to 150,000,000 shares. Other In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and will be adopted by the Company for its fiscal year 2000. The Company is currently assessing the impact of adoption of this pronouncement on its financial statements. 34 ITEM 7A. FINANCIAL MARKET RISKS The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, the Company utilizes derivative financial instruments. The Company does not use derivative financial instruments for speculative or trading purposes. The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. The Company invests primarily in high-quality, short-term debt instruments. A hypothetical 60 basis point increase in interest rates would result in an approximate $2.2 million decrease (approximately 0.3%) in the fair value of the Company's available-for-sale securities. The Company has long-term debt with a notional value of $260 million which includes both term debt and lines of credit. Term debt totaling $75 million bears interest at a fixed rate of 7.4% per annum. The lines of credit totaling $185 million bear interest at the lenders' base rate (currently 7.75%). The Company has not hedged its exposure to fluctuations in the base interest rate. A hypothetical 60 basis point increase in interest rates would result in approximately $1.1 million of additional interest expense per year. The Company enters into foreign currency forward exchange contracts to reduce the impact of currency fluctuations on firm purchase order commitments for equipment and construction-in-process. Gains and losses on these foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company. A substantial majority of the Company's revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, the Company does enter into these transactions in other currencies, primarily, the Malaysian ringgit. The Company cannot eliminate the impact of foreign currency exchange rate movements on the expenses it incurs in ringgits. An adverse change in exchange rates (defined as 20% in the Malaysian ringgit to U.S. dollar rate) would result in a decline in income before taxes of approximately $17 million. 35 [This Page Intentionally Left Blank] 36 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS KOMAG, INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Auditors 37 Consolidated Statements of Operations, 1998, 1997 and 1996 38 Consolidated Balance Sheets, 1998 and 1997 39-40 Consolidated Statements of Cash Flows, 1998, 1997 and 1996 41-42 Consolidated Statements of Stockholders' Equity, 1998, 1997 and 1996 43 Notes to Consolidated Financial Statements 44-64 37 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Komag, Incorporated We have audited the accompanying consolidated balance sheets of Komag, Incorporated as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 3, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Asahi Komag Co., Ltd. (a corporation in which the Company has a 50% interest) as of January 3, 1999 and December 28, 1997, and for each of the three years in the period ended January 3, 1999. Those financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Asahi Komag Co., Ltd. as of January 3, 1999 and December 28, 1997, and for each of the three years in the period ended January 3, 1999, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Komag, Incorporated at January 3, 1999 and December 28, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Komag, Incorporated will continue as a going concern. As more fully described in Note 1, the Company has incurred recent operating losses and is out of compliance with certain covenants of loan agreements with its lenders. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP San Jose, California January 22, 1999 38 KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Fiscal Year Ended ----------------------------------------------------- 1998 1997 1996 ---------------- ---------------- --------------- Net sales (see Note 13) $ 328,883 $631,082 $577,791 Cost of sales (see Notes 12 and 13) 391,635 537,536 402,224 ---------------- ---------------- --------------- Gross profit (loss) (62,752) 93,546 175,567 Operating expenses: Research, development and engineering 61,637 51,427 29,409 Selling, general and administrative 19,762 27,523 33,665 Restructuring charge 187,768 52,157 - ---------------- ---------------- --------------- 269,167 131,107 63,074 ---------------- ---------------- --------------- Operating income (loss) (331,919) (37,561) 112,493 Other income (expense): Interest income 8,804 4,753 6,437 Interest expense (19,212) (9,116) (625) Other, net 4,853 4,104 2,843 ---------------- ---------------- --------------- (5,555) (259) 8,655 ---------------- ---------------- --------------- Income (loss) before income taxes, minority interest and equity in joint venture income (loss) (337,474) (37,820) 121,148 Provision (benefit) for income taxes 1,315 (20,982) 20,595 ---------------- ---------------- --------------- Income (loss) before minority interest and equity in joint venture income (loss) (338,789) (16,838) 100,553 Minority interest in net income of consolidated subsidiary 544 400 695 Equity in net income (loss) of unconsolidated joint venture (27,003) (4,865) 10,116 ---------------- ---------------- --------------- Net income (loss) $(366,336) $(22,103) $109,974 ================ ================ =============== Basic income (loss) per share $ (6.89) $ (0.42) $ 2.15 ================ ================ =============== Diluted income (loss) per share $ (6.89) $ (0.42) $ 2.07 ================ ================ =============== Number of shares used in basic computation 53,169 52,217 51,179 ================ ================ =============== Number of shares used in diluted computation 53,169 52,217 53,132 ================ ================ =============== See notes to consolidated financial statements.
39 KOMAG, INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
Fiscal Year End ------------------------------------- 1998 1997 ----------------- --------------- Assets Current Assets Cash and cash equivalents $64,467 $ 133,897 Short-term investments 63,350 32,300 Accounts receivable, less allowances of $2,847 in 1998 and $4,424 in 1997 42,922 77,792 Accounts receivable from related parties 512 4,106 Inventories: Raw materials 8,434 33,730 Work-in-process 10,672 17,490 Finished goods 14,534 15,558 ----------------- --------------- Total inventories 33,640 66,778 Prepaid expenses and deposits 4,348 3,697 Refundable income taxes 2,216 24,524 Deferred income taxes 7,883 28,595 ----------------- --------------- Total current assets 219,338 371,689 Investment in Unconsolidated Joint Venture 1,399 30,126 Property, Plant and Equipment Land 7,785 9,526 Building 128,359 126,405 Leasehold improvements 86,565 141,111 Furniture 10,911 11,791 Equipment 686,169 793,561 ----------------- --------------- 919,789 1,082,394 Less allowances for depreciation and amortization (449,772) (403,798) ----------------- --------------- Net property, plant and equipment 470,017 678,596 Deposits and Other Assets 3,341 4,253 ----------------- --------------- $694,095 $1,084,664 ================= ===============
40
Fiscal Year End --------------------------------------- 1998 1997 ------------------ ---------------- Liabilities and Stockholders' Equity Current Liabilities Current portion of long-term debt $260,000 $ - Trade accounts payable 27,274 40,043 Accounts payable to related parties 1,848 7,093 Accrued compensation and benefits 15,544 13,596 Other liabilities 3,254 3,596 Income taxes payable 134 9 Restructuring liability 4,128 11,253 ------------------ ---------------- Total current liabilities 312,182 75,590 Long-term Debt, Less Current Portion - 245,000 Deferred Income Taxes 52,564 73,335 Other Long-term Liabilities 1,403 960 Minority Interest in Consolidated Subsidiary 4,139 3,595 Commitments Stockholders' Equity Preferred Stock, $0.01 par value per share: Authorized-1,000 shares No shares issued and outstanding - - Common Stock, $0.01 par value per share: Authorized-150,000 shares in 1998 and 85,000 shares in 1997 Issued and outstanding 53,887 shares in 1998 and 52,794 shares in 1997 539 528 Additional paid-in capital 407,549 401,869 Retained earnings/(accumulated deficit) (84,860) 281,476 Accumulated other comprehensive income 579 2,311 ------------------ ---------------- Total stockholders' equity 323,807 686,184 ------------------ ---------------- $694,095 $1,084,664 ================== ================ See notes to consolidated financial statements.
41 KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended -------------------------------------------------- 1998 1997 1996 --------------- -------------- --------------- Operating Activities Net cash provided by operating activities- see detail on following page $23,601 $ 84,396 $200,892 Investing Activities Acquisition of property, plant and equipment (89,033) (199,112) (403,062) Purchases of short-term investments (31,050) (37,585) (163) Proceeds from short-term investments at maturity - 7,785 196,462 Proceeds from disposal of property, plant and equipment 5,449 550 1,883 Deposits and other assets 912 (1,190) (649) Dividend distribution from unconsolidated joint venture - 1,535 - --------------- -------------- --------------- Net cash used in investing activities (113,722) (228,017) (205,529) Financing Activities Proceeds from long-term obligations 15,000 175,000 70,000 Sale of Common Stock, net of issuance costs 5,691 11,777 10,778 Distribution to minority interest holder - - (279) --------------- -------------- --------------- Net cash provided by financing activities 20,691 186,777 80,499 --------------- -------------- --------------- Increase (decrease) in cash and cash equivalents (69,430) 43,156 75,862 Cash and cash equivalents at beginning of year 133,897 90,741 14,879 --------------- -------------- --------------- Cash and cash equivalents at end of year $64,467 $133,897 $ 90,741 =============== ============== ===============
42
Fiscal Year Ended --------------------------------------------------- 1998 1997 1996 ----------------- -------------- -------------- Net income (loss) $(366,336) $(22,103) $109,974 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 116,682 128,542 86,928 Provision for losses on accounts receivable (1,125) 1,315 (1,011) Equity in net (income) loss of unconsolidated joint venture 27,003 4,865 (10,117) Loss on disposal of equipment 481 2,854 445 Impairment charge related to property, plant and equipment 175,000 - - Non-cash portion of restructuring charge related to write-off of property, plant and equipment - 33,013 - Deferred income taxes (59) 2,513 13,153 Deferred rent 443 463 23 Minority interest in net income of consolidated subsidiary 544 400 695 Changes in operating assets and liabilities: Accounts receivable 35,995 (23,431) 6,995 Accounts receivable from related parties 3,594 4,343 (3,415) Inventories 33,138 (4,818) (32,939) Prepaid expenses and deposits (659) (831) 974 Trade accounts payable (12,769) (40,046) 51,372 Accounts payable to related parties (5,245) 3,799 (4,467) Accrued compensation and benefits 1,948 (8,239) (10,131) Other liabilities (342) 1,683 (183) Income taxes (payable) refundable 22,433 (11,179) (7,404) Restructuring liability (7,125) 11,253 - ----------------- -------------- -------------- Net cash provided by operating activities $ 23,601 $ 84,396 $200,892 ================= ============== ============== Supplemental disclosure of cash flow information Cash paid for interest $ 19,683 $ 8,148 $ 340 Cash paid (refunded) for income taxes (21,017) (12,305) 15,280 Income tax benefit from stock options exercised - 1,834 3,138 See notes to consolidated financial statements.
43 KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Accumulated Common Stock Additional Earnings/ Other ----------------------- Paid-in (Accumulated Comprehensive Shares Amount Capital Deficit) Income Total ----------- ---------- ------------- --------------- ----------------- ------------- Balance at December 31, 1995 50,714 $507 $374,399 $193,605 $6,053 $574,564 Net Income 109,974 109,974 (514) (514) Accumulated translation adjustment ------------- Total Comprehensive Income 109,460 ------------- Common Stock issued under stock option and purchase plans, including related tax benefits 982 10 13,906 13,916 ----------- ---------- ------------- --------------- ----------------- ------------- Balance at December 29, 1996 51,696 517 388,305 303,579 5,539 697,940 Net Loss (22,103) (22,103) (3,228) (3,228) Accumulated translation adjustment ------------- Total Comprehensive Income (25,331) ------------- Common Stock issued under stock option and purchase plans, including related tax benefits 1,098 11 13,564 13,575 ----------- ---------- ------------- --------------- ----------------- ------------- Balance at December 28, 1997 52,794 528 401,869 281,476 2,311 686,184 Net Loss (366,336) (366,336) Accumulated translation adjustment (1,732) (1,732) ------------- Total Comprehensive Loss (368,068) Common Stock issued under stock ------------- option and purchase plans 1,093 11 5,680 5,691 ----------- ---------- ------------- --------------- ----------------- ------------- Balance at January 3, 1999 53,887 $539 $407,549 ($84,860) $ 579 $323,807 =========== ========== ============= =============== ================= =============
44 KOMAG, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation: The consolidated financial statements include the accounts of the Company, its wholly owned and majority-owned subsidiaries (see Note 12) and equity in its unconsolidated joint venture (see Note 13). All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements have been prepared on a going concern basis. The Company has incurred recent operating losses and is not in compliance with certain financial covenants of its various bank agreements. Such non-compliance constitutes an event of default under the agreements. The Company has not been in payment default under these credit facilities and has continued to pay all interest charges and other fees associated with these facilities on their scheduled due dates. Amounts outstanding under these unsecured credit agreements at January 3, 1999 amounted to $260,000,000. To date, the Company's lenders have not accelerated any principal payments under these facilities. The Company is currently negotiating with its lenders for amendments to its existing credit facilities. There can be no assurance that the Company will be able to obtain such amendments to its credit facilities on commercially reasonable terms. In the event that the Company does not successfully amend its credit facilities or restructure its debt obligations, the Company could be required to significantly reduce or possibly suspend its operations, and/or sell additional securities on terms that would be highly dilutive to current stockholders of the Company. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of assets and liabilities that may result from the outcome of this uncertainty. Foreign Currency Translation: The functional currency of the Company's unconsolidated joint venture is the Japanese yen. Translation adjustments relating to the translation of these statements are included as a separate component of stockholders' equity and not included in net income. The functional currency for the Company's Malaysian operation is the U.S. dollar. Remeasurement gains and losses, resulting from the process of remeasuring these foreign currency financial statements into U.S. dollars, are included in operations. Foreign Exchange Gains and Losses: The Company enters into foreign currency forward exchange contracts to reduce the impact of currency fluctuations on firm purchase order commitments for equipment and construction-in-process. Gains and losses related to these contracts are included in the cost of the assets acquired. The Company had approximately $767,000 of Japanese yen and $129,000 of Singapore dollar based firm purchase commitments at January 3, 1999. There were no foreign exchange contracts outstanding at January 3, 1999. The Company had approximately $14,095,000 in foreign exchange forward purchase contracts outstanding at December 28, 1997. These forward exchange contracts were comprised of Japanese yen and Malaysian ringgit foreign currencies and approximated fair market value at December 28, 1997. Cash Equivalents: The Company considers as a cash equivalent any highly liquid investment that matures within three months of its purchase date. Short-Term Investments: The Company invests its excess cash in high-quality, short-term debt instruments. None of the Company's debt security investments have maturities greater than one year. At January 3, 1999, all short-term investments are designated as available for sale. Interest and dividends on the investments are included in interest income. 45 The following is a summary of the Company's investments by major security type at amortized cost, which approximates fair value: Fiscal Year Ended ------------------------------- 1998 1997 --------------- --------------- (in thousands) Municipal auction rate preferred stock $63,350 $32,300 Corporate debt securities 33,765 56,837 Mortgage-backed securities 34,060 79,419 --------------- --------------- $131,175 $168,556 =============== =============== Amounts included in cash and cash equivalents $67,825 $136,256 Amounts included in short-term investments 63,350 32,300 --------------- --------------- $131,175 $168,556 =============== =============== There were no realized gains or losses on the Company's investments during 1998 as all investments were held to maturity during the year. The Company utilizes zero-balance accounts and other cash management tools to invest all available funds, including bank balances in excess of book balances. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. The estimated useful life of the Company's buildings is 30 years. Furniture and equipment are generally depreciated over 3 to 5 years and leasehold improvements are amortized over the shorter of the lease term or the useful life. Revenue Recognition: The Company records sales upon shipment and provides an allowance for estimated returns of defective products. Research and Development: Research and development costs are expensed as incurred. Stock Compensation: The Company has adopted Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). In accordance with the provisions of FAS 123, the Company applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. Note 5 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income (loss) and basic and diluted income (loss) per share for 1998, 1997 and 1996 as if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 123. Income Taxes: The provision (benefit) for income taxes is based on pretax financial accounting income (loss). Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax and book basis of assets and liabilities. 46 Income (Loss) Per Share: The Company determines earnings per share in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("FAS 128").
Fiscal Year Ended ------------------------------------------------------------ 1998 1997 1996 ------------------- ------------------- ------------------- (in thousands, except per share amounts) Numerator: Net income (loss) ($366,336) ($22,103) $109,974 ------------------- ------------------- ------------------- Denominator for basic income (loss) per share - weighted-average shares 53,169 52,217 51,179 ------------------- ------------------- ------------------- Effect of dilutive securities: Employee stock options - - 1,953 Denominator for diluted ------------------- ------------------- ------------------- income (loss) per share 53,169 52,217 53,132 ------------------- ------------------- ------------------- Basic income (loss) per share ($6.89) ($0.42) $2.15 =================== =================== =================== Diluted income (loss) per share ($6.89) ($0.42) $2.07 =================== =================== ===================
No stock options were included in the computation of diluted loss per share for 1998 and 1997 as their effect would have been antidilutive. Comprehensive Income (Loss): In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for the Company's 1998 fiscal year. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Adoption of this pronouncement did not have a material impact on the Company's financial statements. Accumulated other comprehensive income is primarily comprised of accumulated translation adjustments. Segment Information: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting Standards No. 14 and changes the way public companies report segment information. This statement is effective for the Company's 1998 fiscal year. Adoption of this pronouncement did not have a material impact on the Company's financial statements Fiscal Year: The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The year ended January 3, 1999 was comprised of 53 weeks. The years ended December 28, 1997 and December 29, 1996 were each comprised of 52 weeks. Derivative Instruments and Hedging Activities: In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" 47 ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and will be adopted by the Company for its fiscal year 2000. The Company is currently assessing the impact of adoption of this pronouncement on its financial statements. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one business segment, which is the development, production and marketing of high-performance thin-film media for use in hard disk drives. The Company sells to original equipment manufacturers in the rigid disk drive market and computer system manufacturers that produce their own disk drives. The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131") at January 3, 1999. SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Under SFAS 131, the Company's operations are treated as one operating segment as it only reports profit and loss information on an aggregate basis to chief operating decision makers of the Company. 48 Summary information for the Company's operations by geographic location is as follows:
1998 1997 1996 ----------------- ------------------ --------------- (in thousands) Net sales To customers from U.S. operations $ 157,408 $ 290,986 $ 316,658 To customers from Far East operations 171,475 340,096 261,133 Intercompany from Far East operations 88,890 121,945 75,608 Intercompany from U.S. operations 33,360 38,310 22,232 ----------------- ------------------ --------------- 451,133 791,337 675,631 Eliminations (122,250) (160,255) (97,840) ----------------- ------------------ --------------- Total net sales $ 328,883 $ 631,082 $ 577,791 ================= ================== =============== Operating income (loss) U.S. operations $(205,852) $ (112,022) $9,108 Far East operations (127,837) 70,821 107,774 ----------------- ------------------ --------------- (333,689) (41,201) 116,882 Eliminations 1,770 3,640 (4,389) ----------------- ------------------ --------------- Total operating income (loss) $(331,919) $ (37,561) $ 112,493 ================= ================== =============== Identifiable assets U.S. operations $ 538,989 $ 768,395 $ 708,436 Far East operations 263,153 467,990 381,015 ----------------- ------------------ --------------- 802,142 1,236,385 1,089,451 Eliminations (108,047) (151,721) (151,094) ----------------- ------------------ --------------- Total identifiable assets $ 694,095 $1,084,664 $ 938,357 ================= ================== =============== Export sales by domestic operations included the following: Fiscal Year Ended ---------------------------------------------------- 1998 1997 1996 ----------------- ------------------ --------------- (in thousands) Far East (see Note 13) $109,842 $268,117 $249,130 Europe 23,973 11,896 -
49 NOTE 3. CONCENTRATION OF CUSTOMER AND SUPPLIER RISK The Company performs ongoing credit evaluations of its customers' financial conditions and generally requires no collateral. Significant customers accounted for the following percentages of net sales in 1998, 1997 and 1996: Fiscal Year Ended ------------------------------------------ 1998 1997 1996 ------------- -------------- ------------- Western Digital Corporation 43% 38% 22% Maxtor Corporation 25% 19% Less than 10% International Business Machines 18% 10% Less than 10% Quantum Corporation/MKE Less than 10% 15% 18% Seagate Technology, Inc. Less than 10% 14% 52% In early 1996, Seagate merged with Conner Peripherals, Inc. In addition, Quantum ceased disk drive production in Milpitas, California and Penang, Malaysia and contracted with its Japanese manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"), to manufacture all of its disk drives. Percentages for 1998, 1997 and 1996 represent the combined sales to Seagate/Conner and Quantum/MKE. Kobe Steel, Ltd. ("Kobe") supplies aluminum substrate blanks to Komag Material Technology, Inc. ("KMT"), and the Company in turn purchases KMT's entire output of finished substrates. The Company also relies on a limited number of other suppliers, in some cases a sole supplier, for certain other materials used in its manufacturing processes. These materials include nickel plating solutions, certain polishing and texturing supplies and sputtering target materials. These suppliers work closely with the Company to optimize the Company's production processes. Although this reliance on a limited number of suppliers, or a sole supplier, entails some risk that the Company's production capacity would be limited if one or more of such materials were to become unavailable or available in reduced quantities, the Company believes that the advantages of working closely with these suppliers outweigh such risks. If such materials should be unavailable for a significant period of time, the Company's results of operations could be adversely affected. NOTE 4. STOCKHOLDER'S EQUITY In July 1998, the Company's stockholders approved at a Special Meeting of Stockholders a proposal to increase the amount of Common Stock the Company is authorized to issue from 85,000,000 to 150,000,000 shares. In July 1998, at a Special Meeting of Stockholders, the Company received authorization to sell and issue up to $350,000,000 of Common Stock in equity or equity-linked private transactions from time to time through July 22, 1999 at a price below book value but at or above the then current market value of the Company's Common Stock. 50 NOTE 5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN At January 3, 1999, the Company has stock-based compensation plans, which are described below. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recorded in the financial statements for its stock option and stock purchase plans. Had compensation cost for the stock-based compensation plans been determined consistent with Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Fiscal Year Ended ----------------------------------------------------- 1998 1997 1996 ----------------- ---------------- -------------- (in thousands, except per share amounts) Net income (loss): As reported ($366,336) ($22,103) $109,974 Pro forma (396,390) (36,833) 102,355 Basic EPS: As reported ($6.89) ($0.42) $2.15 Pro forma (7.46) (0.71) 2.00 Diluted EPS: As reported ($6.89) ($0.42) $2.07 Pro forma (7.46) (0.71) 1.93
Since FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. In September 1997, the Company's Board of Directors approved the 1997 Supplemental Stock Option Plan ("Supplemental Plan"). Under the Supplemental Plan, the Company may grant nonqualified stock options to purchase up to 3,600,000 shares of Common Stock. In January 1998 and in June 1998, the Company's Board of Directors approved increases of 1,000,000 and 1,500,000 shares, respectively, in the total number of shares that may be issued under the Supplemental Plan. Under the Company's stock option plans ("Plans"), including the Supplemental Plan, the Company may grant options to purchase up to 24,360,000 shares of Common Stock. Options may be granted to employees, directors, independent contractors and consultants. Options under the Supplemental Plan may not, however, be granted to the Company's executive officers or nonemployee members of the Company's Board of Directors. The Plans provide for issuing both incentive stock options and nonqualified stock options, both of which must be granted at fair market value at the date of grant. Outstanding options generally vest over four years and expire no later than ten years from the date of grant. Options may be exercised in exchange for cash or outstanding shares of the Company's Common Stock. Approximately 16,000 and 5,000 shares of the Company's Common Stock were received in exchange for option exercises in 1997 and 1996, respectively. No options were exercised in exchange for outstanding shares of the Company's Common Stock in 1998. In October 1997, the Company's Board of Directors approved an option exchange program, subject to election by the option holders, whereby options to purchase 1,806,000 shares of the Company's Common Stock at prices ranging from $19.75 to $36.00 per share were canceled and reissued at $19.44 per share, which was the fair market value of the Company's Common Stock at that time. The average exercise price of the canceled options was approximately $26.62 per share. The new options generally vest over two to four years. The option exchange program was not available to the Company's executive officers or nonemployee members of the Company's Board of Directors. 51 In June 1998, the Company's Board of Directors approved an option exchange program, subject to election by the option holders, whereby options to purchase 7,551,000 shares of the Company's Common Stock at prices ranging from $6.19 to $31.06 per share were canceled and reissued at $5.35 per share, which was the fair market value of the Company's Common Stock at that time. The average exercise price of the canceled options was approximately $15.65 per share. Vesting under the new options remained unchanged, however, the options were subject to a one year prohibition on exercisability. The option exchange program was available to executive officers but was not available to the Company's nonemployee members of the Company's Board of Directors. At January 3, 1999, approximately 6,882,000 shares of Common Stock were reserved for future option grants and 8,816,000 shares of Common Stock were reserved for the exercise of outstanding options. Approximately 950,000, 2,297,000 and 1,917,000 of the outstanding options were exercisable at January 3, 1999, December 28, 1997 and December 29, 1996, respectively. For purposes of the pro forma disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free interest rates of 5.5%, 6.3% and 6.1%; volatility factors of the expected market price of the Company's Common Stock of 63.4%, 61.9% and 60.0%; and a weighted-average expected life of the options of 4.7, 6.5 and 5.9 years. There was no dividend yield included in the calculation as the Company does not pay dividends. The weighted-average fair value of options granted during 1998, 1997 and 1996 was $4.29, $11.06 and $12.88, respectively. 52 A summary of stock option transactions is as follows: Weighted- average Shares Exercise Price Total ------------- ----------------- ------------- (in thousands, except per share amounts) Outstanding at December 31, 1995 5,028 $11.13 $55,954 Granted 1,651 25.65 42,351 Exercised (635) 9.00 (5,714) Cancelled (299) 16.43 (4,913) ------------- ----------------- ------------- Outstanding at December 29, 1996 5,745 15.26 87,678 Granted 4,141 22.38 92,685 Exercised (678) 9.66 (6,549) Cancelled (2,314) 25.42 (58,817) ------------- ----------------- ------------- Outstanding at December 28, 1997 6,894 16.68 114,997 Granted 11,290 7.43 83,842 Exercised (168) 8.55 (1,432) Cancelled (9,200) 15.23 (140,122) ------------- ----------------- ------------- Outstanding at January 3, 1999 8,816 $ 6.50 $57,285 ============= ================= ============= 53 The following table summarizes information concerning currently outstanding and exercisable options (option shares in thousands):
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------- Remaining Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (yrs)* Price* Exercisable Price* - ----------------------- ---------------- ---------------- ---------------- ---------------- ---------------- $2.19 - $5.25 145 9.6 $ 3.00 - $ - 5.26 - 5.35 7,398 7.9 5.35 - - 5.36 - 12.56 893 5.4 9.04 665 8.52 12.57 - 20.75 154 6.5 16.28 132 16.07 20.76 - 34.13 226 7.6 29.56 153 31.62 ---------------- ---------------- 8,816 950 ================ ================ *Weighted-average
Under the terms of the Employee Stock Purchase Plan ("ESPP Plan"), employees may elect to contribute up to 10% of their compensation toward the purchase of shares of the Company's Common Stock. The purchase price per share will be the lesser of 85% of the fair market value of the stock on the first day or the last day of each semi-annual offering period. In May 1998, the Company's shareholders approved a 1,300,000-share increase in the total number of shares that may be issued under the ESPP Plan. The total number of shares of stock that may be issued under the Plan cannot exceed 4,850,000 shares. Shares issued under the ESPP Plan approximated 925,000, 436,000 and 352,000 in 1998, 1997 and 1996, respectively. At January 3, 1999, approximately 735,000 shares of Common Stock were reserved for future issuance under the ESPP Plan. For purposes of the pro forma disclosure, the fair value of the employees' purchase rights has been estimated using the Black-Scholes model assuming risk-free interest rates of 5.5%, 6.5% and 5.6% in 1998, 1997 and 1996, respectively. Volatility factors of the expected market price were 63.5%, 60% and 60% for 1998, 1997 and 1996, respectively. The weighted-average expected life of the purchase rights was six months for 1998, 1997 and 1996. The weighted-average fair value of those purchase rights granted in 1998, 1997 and 1996 was $3.09, $6.37 and $5.09, respectively. NOTE 6. BONUS AND PROFIT SHARING PLANS Under the terms of the Company's cash profit sharing plan, a percentage of consolidated semi-annual operating profit, as defined in the plan, is allocated among all employees who meet certain criteria. Under the terms of the Company's bonus plans, a percentage of consolidated annual operating profit, as defined in the respective bonus plans, is paid to eligible employees. No bonus and cash profit sharing provision was recorded during 1998. The Company expensed $1,966,000 and $9,078,000 under these bonus and cash profit sharing plans in 1997 and 1996, respectively. The Company and its subsidiaries maintain savings and deferred profit sharing plans. Employees who meet certain criteria are eligible to participate. In addition to voluntary employee contributions to these plans, the Company contributes four percent of semi-annual consolidated operating profit, as defined in the plans. These contributions are allocated to all eligible employees. Furthermore, the Company matches a portion of each employee's contributions to the plans up to a maximum amount. The 54 Company contributed $695,000, $2,534,000 and $5,573,000 to the plans in 1998, 1997 and 1996, respectively. Expenses for the Company's bonus and profit sharing plans are included in selling, general and administrative expenses. NOTE 7. INCOME TAXES The provision (benefit) for income taxes consists of the following: Fiscal Year Ended ----------------------------------------------- 1998 1997 1996 ----------------- -------------- -------------- (in thousands) Federal: Current $ 59 $(24,036) $ 3,988 Deferred (59) 2,192 10,265 ----------------- -------------- -------------- - (21,844) 14,253 State: Current 2 (490) 496 Deferred - 321 2,888 ----------------- -------------- -------------- 2 (169) 3,384 Foreign: Current 1,313 1,031 2,958 ----------------- -------------- -------------- $1,315 $(20,982) $20,595 ================= ============== ============== The foreign provision above consists of withholding taxes on royalty and interest payments and foreign taxes of subsidiaries. 55 Deferred tax assets (liabilities) are comprised of the following: Fiscal Year End -------------------------------- 1998 1997 ----------------- -------------- (in thousands) Depreciation $ - $(22,118) State income taxes (10,649) (10,299) Deferred income (34,023) (34,023) Other (7,892) (6,895) ----------------- -------------- Gross deferred tax liabilities (52,564) (73,335) ----------------- -------------- Depreciation 319 - Inventory valuation adjustments 2,283 8,971 Accrued compensation and benefits 2,442 3,175 State income taxes 2,484 2,484 Other 355 13,965 Tax benefit of net operating losses 97,846 43,046 Tax benefit of credit carryforwards 33,085 24,000 ----------------- -------------- Gross deferred tax assets 138,814 95,641 ----------------- -------------- Deferred tax asset valuation allowance (130,931) (67,046) ----------------- -------------- $(44,681) $(44,740) ================= ============== As of January 3, 1999, the Company has federal and state tax net operating loss carryforwards of approximately $165,100,000 and $90,200,000, respectively. The Company also has federal and state tax credit carryforwards of approximately $15,500,000 and $17,500,000, respectively. The Company's federal net operating losses expire beginning in 2013 through 2019 and the state net operating losses expire beginning in 2003 through 2004. The Company's federal tax credit carryovers expire beginning in 2000 through 2019 and the state tax credit carryforwards expire beginning in 2003 through 2006. Due to the uncertainty of the timing and amount of future income, the Company has fully reserved for the potential future tax benefit of all net operating loss and credit carryforwards in the deferred tax asset valuation allowance. Dastek Holding Company, a 60%-owned subsidiary of the Company, has a federal tax net operating loss carryforward of approximately $100,000,000. The Company has fully reserved for the potential future federal tax benefit of this net operating loss in the deferred tax asset valuation allowance due to the fact that its utilization is limited to the subsidiary's separately computed future taxable income and that the subsidiary has no history of operating profits. The net operating losses expire beginning in 2009 through 2011. The deferred tax asset valuation allowance increased $63,885,000 in 1998 and $32,000,000 in 1997. 56 A reconciliation of the income tax provision at the 35% federal statutory rate to the income tax provision at the effective tax rate is as follows:
Fiscal Year Ended ----------------------------------------------- 1998 1997 1996 ----------------- -------------- -------------- (in thousands) Income taxes computed at federal statutory rate $(118,116) $(13,237) $42,402 State and foreign income taxes, net of federal benefit 1,315 907 5,021 Permanently reinvested foreign (earnings) losses 46,446 (25,597) (26,050) Losses for which no current year benefit available 70,995 16,561 - Other 675 384 (778) ----------------- -------------- -------------- $ 1,315 $(20,982) $20,595 ================= ============== ==============
Foreign pretax income (loss) was ($131,400,000), $74,400,000 and $104,300,000 in 1998, 1997 and 1996, respectively. Komag USA (Malaysia) Sdn. ("KMS"), the Company's wholly owned thin-film media operation in Malaysia, was granted an extension of its initial five-year tax holiday by the Malaysian government for an additional five years commencing in July 1998. The tax holiday had no impact on the Company's 1998 net loss, but in 1997 the tax holiday reduced the Company's net loss by approximately $16,596,000 ($0.32 per share under both the basic and diluted methods). Losses incurred prior to the commencement of the initial tax holiday, approximately $6,237,000, are available for carryforward to years following the expiration of the tax holiday. KMS has also been granted an additional ten-year tax holiday for its second and third plant sites in Malaysia. This new tax holiday had not yet commenced at January 3, 1999. The Company has generated $59,059,000 of cumulative earnings for which no U.S. tax has been provided as of January 3, 1999. These earnings are considered to be permanently invested outside the United States. NOTE 8. TERM DEBT AND LINES OF CREDIT The Company has borrowed $260,000,000 and $245,000,000 under its term debt and line of credit facilities at January 3, 1999 and December 28, 1997, respectively. At January 3, 1999, these borrowings incurred interest at 7.4% to 7.75%, with interest-only payments due quarterly. The size of the Company's second quarter 1998 net loss resulted in a default under certain financial covenants contained in the Company's bank credit facilities. The Company is not in payment default under these credit facilities as all interest charges and fees associated with these facilities have been paid on their scheduled due dates. At the time of the covenant default the Company had $260,000,000 of debt outstanding against a total borrowing capacity of $345,000,000 under the various senior unsecured credit facilities. As a result of the covenant default, the Company's lenders withdrew the $85,000,000 in unused borrowing capacity. To date, the lenders have not accelerated any principal payments under the credit facilities. The Company is currently negotiating with its lenders for amendments to the existing credit facilities. 57 NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and short-term investments, accounts receivable and certain other liabilities on the Consolidated Balance Sheets approximate fair value at January 3, 1999 and December 28, 1997 due to the relatively short period to maturity of the instruments. The carrying value of the Company's debt borrowings on the Consolidated Balance Sheets approximated fair value as of December 28, 1997. As of January 3, 1999, the Company was in default of its debt covenants and the fair value of the Company's debt borrowings was approximately $251,000,000. The fair value of the bank borrowings was based on quoted market prices or pricing models using current market rates. See Note 1 for fair value of foreign currency hedge contracts. NOTE 10. LEASES AND COMMITMENTS The Company leases certain production, research and administrative facilities under operating leases that expire at various dates between 1999 and 2007. Certain of these leases include renewal options varying from ten to twenty years. At January 3, 1999, the future minimum commitments for all noncancellable operating leases are as follows (in thousands): 1999 $5,769 2000 4,778 2001 4,820 2002 4,815 2003 4,815 Thereafter 14,313 ------------- Total minimum lease payments $39,310 ============= Rental expense for all operating leases amounted to $6,573,000, $8,047,000 and $4,838,000 in 1998, 1997 and 1996, respectively. The Company has current noncancellable capital commitments of approximately $17,000,000. NOTE 11. RESTRUCTURING CHARGES During the third quarter of 1997, the Company implemented a restructuring plan based on an evaluation of the size and location of its existing production capacity relative to the short-term market demand outlook. Under the 1997 restructuring plan, the Company consolidated its U.S. manufacturing operations onto its new campus in San Jose, California and closed two older factories in Milpitas, California. The first of the two Milpitas factories was closed at the end of the third quarter of 1997 and the second factory was closed in January 1998. The 1997 restructuring actions resulted in a charge of $52.2 million and included reducing headcount, vacating leased facilities, consolidating operations and disposing of assets. The restructuring charge included $3.9 million for severance costs associated with approximately 330 terminated employees, $33.0 million for the write-down of the net book value of equipment and leasehold improvements, $10.1 million related to equipment order cancellations and other equipment-related costs, and $5.2 million for facility closure costs. Non-cash items included in the restructuring charge totaled approximately $33.0 million. 58 In the second quarter of 1998 several customers reduced orders for the Company's products in response to downward adjustments in their disk drive production build schedules. In light of the order reductions and the Company's expectation that the media industry's supply/demand imbalance would extend into 1999, the Company adjusted its expectations for the utilization of its installed production capacity. Based on this analysis of the Company's production capacity and its expectations of the media market over the remaining life of the Company's fixed assets, the Company concluded that it would not be able to recover the book value of those assets. As a result, the Company implemented a restructuring plan in June 1998 and recorded a charge of $187.8 million. This charge included an asset impairment charge and provisions for facility closure expenses and severance-related costs. The asset impairment component of the charge was $175.0 million and effectively reduced asset valuations to reflect the economic effect of recent industry price erosion for disk media and the projected underutilization of the Company's production equipment and facilities. Non-cash items in the restructuring/impairment charge totaled $175.0 million. The cash component of the total charge was $12.8 million. The restructuring plan included reducing the Company's U.S. and Malaysian workforce and ceasing operations at its oldest San Jose, California plant. The restructuring charge included $4.1 million for severance costs (approximately 170 employees, primarily in the U.S.), $5.8 million related to equipment order cancellations and other equipment related costs, and $2.9 million for facility closure costs. Production equipment and leasehold improvements at the Company's U.S. and Malaysian facilities with a net book value of $562.8 million were written down to their fair value as a result of the impairment. The fair value of these assets was determined based upon the estimated future cash flows to be generated by the assets, discounted at a market rate of interest (15.8%). The Company incurred lower facility closure costs than anticipated in its 1997 and 1998 restructuring charges. The oldest Milpitas plant was sublet sooner than anticipated and the Company reached a lease termination agreement with its landlord on the second Milpitas plant in the third quarter of 1998. The Company thereby avoided expected future rent payments and the cost of renovating the facility to its original lease condition. Additionally, the Company determined that it would not close its oldest San Jose, California facility at the expiration of its lease. The Company plans to devote the front-end operations in this facility for glass media development. Back-end operations in this facility ceased in the fourth quarter of 1998. As a result the Company will not incur costs to restore the facility to its original lease condition as contemplated in the restructuring charge. Higher costs for equipment order cancellations offset the lower facility closure costs. A total of 515 employees were in the restructuring activities. The following table summarizes these restructuring activities. Restructuring Incurred (in millions) Charges Through 1/3/99 ---------------- ---------------- Asset impairment charge $175.0 $175.0 Writedown net book value of equipment and leasehold improvements 33.0 33.0 Equipment order cancellations and other equipment related costs 16.0 17.5 Facility closure costs 8.0 2.2 Severance costs 7.9 8.1 At January 3, 1999, $4,128,000 related to the restructuring activities remained in current liabilities. The Company has made cash payments totaling approximately $27,784,000 primarily for severance, equipment order cancellations and facility closure costs. The majority of the remaining liability, 59 primarily for equipment order cancellations is expected to be settled through the use of cash by the end of 1999. NOTE 12. KOMAG MATERIAL TECHNOLOGY, INC. The Company's financial statements include the consolidation of the financial results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells aluminum disk substrate products for high-performance magnetic storage media. KMT is owned 80% by the Company and 20% by Kobe Steel USA Holdings Inc. ("Kobe USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe"). Other transactions between Kobe or its distributors and the Company were as follows:
Fiscal Year Ended ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (in thousands) Accounts payable to Kobe or its distributors: Beginning of year $4,830 $2,430 $3,302 Purchases 23,758 52,308 53,554 Payments (26,789) (49,908) (54,426) ------------- ------------- ------------- End of year $1,799 $4,830 $2,430 ============= ============= =============
NOTE 13. UNCONSOLIDATED JOINT VENTURE In 1987, the Company formed a partnership, Komag Technology Partners ("Partnership"), with the U.S. subsidiaries of two Japanese companies and simultaneously formed a subsidiary, Asahi Komag Co., Ltd. ("AKCL"). The Company contributed technology in exchange for a 50% interest in the Partnership. The Partnership and its subsidiary (joint venture) established a facility in Japan to manufacture and sell the Company's thin-film media products in Japan. AKCL also sells its products to the Company for resale outside of Japan. In 1996, the Company granted AKCL various licenses to sell its products to specified customers outside of Japan in exchange for a 5% royalty on these sales. The Company recorded approximately $1,989,000 and $1,388,000 of royalty in other income in 1998 and 1997, respectively. The Company's share of the joint venture's net income (loss) was ($27,003,000), ($4,865,000) and $10,116,000 in 1998, 1997 and 1996, respectively. 60 Other transactions between the joint venture and the Company were as follows:
Fiscal Year Ended ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (in thousands) Accounts receivable from joint venture: Beginning of year $4,053 $8,316 $4,906 Sales 15,799 95,302 69,311 Cash receipts (19,393) (99,565) (65,901) ------------- ------------- ------------- End of year $ 459 $4,053 $8,316 ============= ============= ============= Accounts payable to joint venture: Beginning of year $2,256 $ 549 $ 355 Purchases 4,153 14,686 12,145 Payments (6,390) (12,979) (11,951) ------------- ------------- ------------- End of year $ 19 $2,256 $ 549 ============= ============= =============
Equipment purchases by the Company from its joint venture partners were $14,458,000, $17,836,000 and $20,655,000 in 1998, 1997 and 1996, respectively. Summary combined financial information for the Partnership and AKCL for the years ended December 31, 1998, 1997 and 1996, and as of December 31, 1998 and 1997 is as follows. The subsidiary's total assets, liabilities, revenues, costs and expenses approximate 100% of the combined totals.
Fiscal Year Ended ------------------------------------------------- 1998 1997 1996 -------------- ---------------- --------------- (in thousands) Summarized Statements of Operations: Net sales $138,330 $186,474 $230,904 Costs and expenses 192,311 200,305 188,707 Income tax provision (benefit) 25 (4,101) 21,965 -------------- ---------------- --------------- Net Income (loss) $(54,006) $ (9,730) $ 20,232 ============== ================ ===============
61
Fiscal Year End --------------------------------- 1998 1997 ---------------- --------------- (in thousands) Summarized Balance Sheets: Current assets $ 69,773 $ 63,512 Noncurrent assets 163,035 151,540 ---------------- --------------- Total Assets $232,808 $215,052 ================ =============== Current liabilities $139,043 $115,106 Long-term obligations 88,892 41,975 Partners' capital 4,873 57,971 ---------------- --------------- Total Liabilities and Partners' Capital $232,808 $215,052 ================ ===============
NOTE 14. PARTICIPATION IN HEADWAY TECHNOLOGIES, INC. Headway Technologies, Inc. ("Headway") was formed in 1994 to research, develop and manufacture advanced magnetoresistive ("MR") heads for the data storage industry. Hewlett-Packard Company ("HP") and AKCL (see Note 13) provided the initial cash funding to Headway in exchange for equity interests. The Company and Asahi America licensed to Headway MR technology developed through a prior joint venture and contributed certain research and production equipment in exchange for equity. As a result of these transactions, the Company held a direct voting interest in Headway of less than 20% and had no cost basis in its investment in Headway. In 1997, the Company sold its interest in Headway. AKCL invested in Headway in 1994 and recorded partial write-downs of its investment through 1995 based upon net losses incurred at Headway. During the third quarter of 1996, Headway's major customer, HP, announced the closure of its disk drive manufacturing operations. Based upon anticipated future operating losses at Headway arising from the loss of HP's business, AKCL wrote off its remaining Headway investment at the end of the third quarter of 1996. In 1997, AKCL sold its entire interest in Headway for $10,800,000 to a group of new investors as part of a recapitalization and AKCL recorded the proceeds from this sale as a gain ($5,300,000, net of tax). 62 NOTE 15. QUARTERLY SUMMARIES (in thousands, except per share amounts, unaudited)
1998 -------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter(1) 3rd Quarter 4th Quarter --------------------- -------------------- --------------------- --------------------- Net sales $ 76,057 $ 78,808 $ 81,314 $ 92,704 Gross profit (loss) (31,595) (35,637) (2,803) 7,283 Net loss (58,158) (261,884) (27,449) (18,845) Basic loss per share ($1.10) ($4.95) ($0.51) ($0.35) Diluted loss per share ($1.10) ($4.95) ($0.51) ($0.35) 1997 -------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter(2) 4th Quarter --------------------- -------------------- --------------------- --------------------- Net sales $167,242 $175,121 $129,694 $159,025 Gross profit 39,315 35,661 202 18,368 Net income (loss) 17,799 11,677 (52,748) 1,169 Basic income (loss) per share $ 0.34 $ 0.22 ($1.01) $ 0.02 Diluted income (loss) per share $ 0.33 $ 0.22 ($1.01) $ 0.02 (1) Results for the second quarter of 1998 included a $187,768,000 restructuring charge which primarily related to an asset impairment charge of $175,000,000. The asset impairment charge effectively reduced asset valuations to reflect the economic effect of industry price erosion for disk media and projected underutilization of the Company's production equipment and facilities. Based on analysis of the Company's production capacity and its expectations of the media market over the remaining life of the Company's fixed assets, the Company concluded that it would not be able to recover the book value of those assets. (2) Results for the third quarter of 1997 included a $52,157,000 restructuring charge to consolidate the Company's U.S. manufacturing operations.
NOTE 16. SUBSEQUENT EVENT (UNAUDITED) In February 1999, the Company and Western Digital announced the signing of a letter of intent under which the Company will acquire Western Digital's disk media business for approximately $80 million of the Company's Common Stock (based on the market value of the Company's Common Stock at the time the letter of intent was signed). In addition, the Company will assume certain liabilities, mainly lease obligations related to production equipment and facilities. Terms of the strategic relationship include a three-year volume purchase agreement under which Western Digital will buy a substantial portion of its media from the Company. The Company plans to combine Western Digital's media group with its manufacturing operations over the next 18 months. Such action will relocate a portion of Western Digital's production equipment to the Company's offshore locations, thus more fully utilizing the Company's lower-cost Malaysian operations. At the time of this filing the Company and Western Digital were continuing to negotiate terms of the acquisition. 63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEMS 10, 11, 12 and 13. Items 10 through 13 of Part III will be contained in the Komag, Incorporated Proxy Statement for the Annual Meeting of Stockholders to be held May 25, 1999 (the "1999 Proxy Statement"), which will be filed with the Securities and Exchange Commission no later than May 5, 1999. The cross- reference table below sets forth the captions under which the responses to these items are found:
10-K Item Description Caption in 1999 Proxy Statement - --------- ----------- ------------------------------- 10 Directors and Executive Officers "Item No. 1--Election of Directors: Nominees; Business Experience of Directors and Nominees" and "Additional Information: Certain Relationships and Related Transactions; Other Matters" 11 Executive Compensation "Additional Information: Executive Compensation and Related Information" 12 Security Ownership of Certain Beneficial "Additional Information: Principal Owners and Management Stockholders" 13 Certain Relationships and Related "Additional Information: Certain Transactions Relationships and Related Transactions"
The information set forth under the captions listed above, contained in the 1999 Proxy Statement, are hereby incorporated herein by reference in response to Items 10 through 13 of this Report on Form 10-K. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) List of Documents filed as part of this Report. 1. Financial Statements. The following consolidated financial statements of Komag, Incorporated are filed in Part II, Item 8 of this Report on Form 10-K: Consolidated Statements of Operations--Fiscal Years 1998, 1997 and 1996 Consolidated Balance Sheets--January 3, 1999 and December 28, 1997 Consolidated Statements of Cash Flows--Fiscal Years 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity--Fiscal Years 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following financial statement schedule of Komag, Incorporated is filed in Part IV, Item 14(d) of this report on Form 10-K: Schedule II--Valuation and Qualifying Accounts Report of Other Auditor --Report of Chuo Audit Corporation on Asahi Komag Co., Ltd. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 65 3. Exhibits. 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-Q for the quarter ended September 27, 1998). 3.2 Bylaws (incorporated by reference from Exhibit 3.3 filed with the Company's report on Form 10-K for the year ended December 30, 1990). 4.2 Specimen Stock Certificate (incorporated by reference from a similarly numbered exhibit filed with Amendment No. 1 to the Registration Statement). 10.1.1 Lease Agreement dated May 24, 1991 between Milpitas-Hillview and Komag, Incorporated (incorporated by reference from Exhibit 10.1.2 filed with the Company's report on Form 10-K for the year ended December 29, 1991). 10.1.3 Lease Agreement dated July 29, 1988 by and between Brokaw Interests and Komag, Incorporated (incorporated by reference from Exhibit 10.1.6 filed with the Company's report on Form 10-K for the year ended January 1, 1989). 10.1.4 Lease Agreement dated May 2, 1989 by and between Stony Point Associates I and Komag Material Technology, Inc. (incorporated by reference from Exhibit 10.1.6 filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.1.6 Second Amendment to Lease dated December 28, 1990 by and between Milpitas- Hillview and Komag, Incorporated (incorporated by reference from Exhibit 10.1.12 filed with the Company's report on Form 10-K for the year ended December 30, 1990). 10.1.7 First Amendment to Lease dated November 1, 1993 by and between Wells Fargo Bank et al and Komag Material Technology, Inc. (incorporated by reference from Exhibit 10.1.14 filed with the Company's report on Form 10-K for the year ended January 2, 1994). 10.1.9 Lease Agreement dated August 4, 1995 by and between Great Oaks Interests and Komag, Incorporated (incorporated by reference from Exhibit 10.1.12 filed with the Company's report on Form 10-Q for the quarter ended October 1, 1995). 10.1.10 First Amendment to Lease dated November 3, 1995 by and between Great Oaks Interests and Komag, Incorporated (incorporated by reference from Exhibit 10.1.10 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.1.11 Lease Agreement (B10) dated May 24, 1996 between Sobrato Development Companies #871 and Komag, Incorporated (incorporated by reference from Exhibit 10.1.11 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.1.12 Lease Agreement (B11) dated May 24, 1996 between Sobrato Development Companies #871 and Komag, Incorporated (incorporated by reference from Exhibit 10.1.12 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.2 Form of Directors' Indemnification Agreement (incorporated by reference from Exhibit 10.9 filed with the Company's report on Form 10-K for the year ended December 30, 1990). 66 10.3.1 Joint Venture Agreement by and among Komag, Inc.; Asahi Glass Co., Ltd.; and Vacuum Metallurgical Company dated November 9, 1986, as amended January 7, 1987 and January 27, 1987 (incorporated by reference from Exhibit 10.10.1 filed with the Registration Statement on Form S-1--File No. 33-13663) (confidential treatment obtained as to certain portions). 10.3.2 General Partnership Agreement for Komag Technology Partners dated January 7, 1987 (incorporated by reference from Exhibit 10.10.2 filed with the Registration Statement on Form S-1--File No. 33-13663). 10.3.3 Technology Contribution Agreement dated January 7, 1987 by and between Komag, Incorporated and Komag Technology Partners (incorporated by reference from Exhibit 10.10.3 filed with the Registration Statement on Form S-1--File No. 33-13663) (confidential treatment obtained as to certain portions). 10.3.4 Technical Cooperation Agreement dated January 7, 1986 by and between Asahi Glass Company, Ltd. and Komag, Incorporated (incorporated by reference from Exhibit 10.10.4 filed with the Registration Statement on Form S-1--File No. 33-13663). 10.3.5 Third Amendment to Joint Venture Agreement by and among Komag, Inc.; Asahi Glass Co., Ltd.; Vacuum Metallurgical Company; et al dated March 21, 1990 (incorporated by reference from Exhibit 10.10.5 filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.3.6 Fourth Amendment to Joint Venture Agreement by and among Komag, Inc.; Asahi Glass Co., Ltd.; Vacuum Metallurgical Company; et al dated May 24, 1990 (incorporated by reference from Exhibit 10.10.11 filed with the Company's report on Form 10-K for the year ended January 1, 1995). 10.3.7 Fifth Amendment to Joint Venture Agreement by and among Komag, Inc., Asahi Glass Co., Ltd.; Vacuum Metallurgical Company; et al dated November 4, 1994 (incorporated by reference from Exhibit 10.10.12 filed with the Company's report on Form 10-K for the year ended January 1, 1995). 10.3.8 Joint Venture Agreement dated March 6, 1989 by and between Komag, Incorporated; Komag Material Technology, Inc.; and Kobe Steel USA Holdings Inc. (incorporated by reference from Exhibit 10.10.6 filed with the Company's report on Form 10-K for the year ended December 31, 1989) (confidential treatment obtained as to certain portions). 10.3.9 Joint Development and Cross-License Agreement dated March 10, 1989 by and between Komag, Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc. (incorporated by reference from Exhibit 10.10.7 filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.3.10 Blank Sales Agreement dated March 10, 1989 by and between Komag, Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc. (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.3.11 Finished Substrate Agreement dated March 10, 1989 by and between Komag, Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc. (incorporated by reference from Exhibit 10.10.9 filed with the Company's report on Form 10-K for the year ended December 31, 1989) (confidential treatment obtained as to certain portions). 67 10.3.12 Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA Holdings Inc. dated November 17, 1995 (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1995). 10.3.13 Substrate Agreement by and between Kobe Steel, Ltd. and Komag, Incorporated dated November 17, 1995 (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1995) (confidential treatment obtained as to certain portions). 10.3.14 License Amendment Agreement among Komag, Incorporated; Komag Material Technology, Inc.; and Kobe Steel, Ltd. dated November 17, 1995 (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1995). 10.3.15 Substrate Sales Amendment Agreement among Komag, Incorporated; Komag Material Technology, Inc.; and Kobe Steel, Ltd. dated November 17, 1995 (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1995). 10.3.16 Joint Venture Amendment Agreement among Komag, Incorporated; Komag Material Technology, Inc.; and Kobe Steel USA Holdings Inc. dated November 17, 1995 (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended December 31, 1995) (confidential treatment obtained as to certain portions). 10.4.1 Restated 1987 Stock Option Plan, effective January 31, 1996 and forms of agreement thereunder (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-Q for the quarter ended June 30, 1996). 10.4.2 Komag, Incorporated Management Bonus Plan As Amended and Restated January 22, 1997. 10.4.3 1988 Employee Stock Purchase Plan Joinder Agreement dated July 1, 1993 between Komag, Incorporated and Komag USA (Malaysia) Sdn. (incorporated by reference from Exhibit 10.11.11 filed with the Company's report on Form 10-K for the year ended January 2, 1994). 10.4.4 Komag, Incorporated Discretionary Bonus Plan (incorporated by reference from Exhibit 10.4.4 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.4.5 Komag, Incorporated 1997 Supplemental Stock Option Plan Amended June 12, 1998. 10.5.1 Komag, Incorporated Deferred Compensation Plan (incorporated by reference from a similarly numbered exhibit filed with the Company's report on Form 10-K for the year ended January 1, 1995). 10.5.2 Amendment No. 1 to Komag, Incorporated Deferred Compensation Plan dated January 1, 1997 (incorporated by reference from Exhibit 10.5.2 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 68 10.5.3 Komag Material Technology, Inc. 1995 Stock Option Plan (incorporated by reference from Exhibit 10.11.12 filed with the Company's report on Form 10-Q for the Quarter ended October 1, 1995). 10.6 Common Stock Purchase Agreement dated December 9, 1988 by and between Komag, Incorporated and Asahi Glass Co., Ltd. (incorporated by reference from Exhibit 1 filed with the Company's report on Form 8-K filed with the Securities and Exchange Commission on December 20, 1988). 10.7 Common Stock Purchase Agreement dated February 6, 1990 by and between Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by reference from Exhibit 10.17 filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.8 Registration Rights Agreement dated March 21, 1990 by and between Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by reference from Exhibit 10.18 filed with the Company's report on Form 10-K for the year ended December 31, 1989). 10.9 Amendment No. 1 to Common Stock Purchase Agreement dated March 21, 1990 by and between Komag, Incorporated and Asahi Glass Co., Ltd. (incorporated by reference from Exhibit 10.19 filed with Amendment No. 1 to the Registration Statement filed with the Securities and Exchange Commission on May 26, 1987). 10.10 Amended and Restated Registration Rights Agreement dated March 21, 1990 by and between Komag, Incorporated and Asahi Glass Co., Ltd. (incorporated by reference from Exhibit 10.20 filed with Amendment No. 1 to the Registration Statement filed with the Securities and Exchange Commission on May 26, 1987). 10.11 Letter dated February 10, 1992 from the Malaysian Industrial Development Authority addressed to Komag, Incorporated approving the "Pioneer Status" of the Company's thin-film media venture in Malaysia (incorporated by reference from Exhibit 10.28 filed with the Company's report on Form 10-K for the year ended January 3, 1993). 10.12 Credit Agreement between Komag, Incorporated and The Industrial Bank of Japan, Limited, San Francisco Agency dated December 15, 1995 (incorporated by reference from Exhibit 10.16 filed with the Company's report on Form 10-K for the year ended December 31, 1995). 10.13 First Amendment to Credit Agreement by and between Komag, Incorporated and The Industrial Bank of Japan, Limited, San Francisco Agency dated November 19, 1996 (incorporated by reference to Exhibit 10.17 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.14 Second Amendment to Credit Agreement by and between Komag, Incorporated and The Industrial Bank of Japan, Limited, San Francisco Agency dated January 31, 1997 (incorporated by reference to Exhibit 10.18 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.15 Credit Agreement between Komag, Incorporated and The Dai-Ichi Kangyo Bank, Limited, San Francisco Agency dated October 7, 1996 (incorporated by reference to Exhibit 10.19 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 69 10.16 First Amendment to Credit Agreement between Komag, Incorporated and The Dai-Ichi Kangyo Bank, Limited, San Francisco Agency dated November 25, 1996 (incorporated by reference to Exhibit 10.20 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.17 Credit Agreement dated as of February 7, 1997 among Komag, Incorporated, institutional lenders and The Industrial Bank of Japan, Limited, San Francisco Agency, as agent for the lenders(incorporated by reference to Exhibit 10.22 filed with the Company's report on Form 10-K for the year ended December 29, 1996). 10.18 Amended and Restated Credit Agreement Among Komag, Incorporated and BankBoston, N.A. as agent (incorporated by reference from Exhibit 10.23 filed with the Company's report on Form 10-Q for the quarter ended June 29, 1997). 10.19 First Amendment to Amended and Restated Credit Agreement dated October 9, 1997 among Komag, Incorporated and BankBoston, N.A. as agent (incorporated by reference from Exhibit 10.24 filed with the Company's report on Form 10-Q for the quarter ended September 28, 1997). 10.20 Second Amendment to Amended and Restated Credit Agreement dated March 23, 1998 among Komag, Incorporated and BankBoston, N.A. as agent (incorporated by reference from Exhibit 10.20 filed with the Company's report on Form 10-Q for the quarter ended March 29, 1998). 21 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Chuo Audit Corporation. 24 Power of Attorney. Reference is made to the signature pages of this Report. 27 Financial Data Schedule. - ----------------- The Company agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company. (b) Reports on Form 8-K. Not Applicable 70 Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered on the Form S-8 identified below, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. The preceding undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19, 1987), 33-19851 (filed January 28, 1988), 33-25230 (filed October 28, 1988), 33-41945 (filed July 29, 1991), 33-45469 (filed February 3, 1992), 33-53432 (filed October 16, 1992), 33-80594 (filed June 22, 1994), 33-62543 (filed September 12, 1995), 333-06081 (filed June 14, 1996), 333-23095 (filed March 11, 1997), 333-31297 (filed July 15, 1997) and 333-48867 (filed March 30, 1998). 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California on this 31st day of March, 1999. Komag, Incorporated By /s/ Stephen C. Johnson ---------------------- Stephen C. Johnson President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears herein constitutes and appoints Stephen C. Johnson and William L. Potts, Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 72 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
Name Title Date TU CHEN Chairman of the Board March 31, 1999 - ----------------------- and Director (Tu Chen) STEPHEN C. JOHNSON President and Chief Executive - ---------------------- Officer (Stephen C. Johnson) March 31, 1999 WILLIAM L. POTTS, JR. Senior Vice President, Chief March 31, 1999 - ------------------------ Financial Officer and Secretary (William L. Potts, Jr.) (Principal Financial and Accounting Officer) CRAIG R. BARRETT Director March 31, 1999 - -------------------- (Craig R. Barrett) CHRIS A. EYRE Director March 31, 1999 - ----------------- (Chris A. Eyre) IRWIN FEDERMAN Director March 31, 1999 - ----------------- (Irwin Federman) GEORGE A. NEIL Director March 31, 1999 - ----------------- (George A. Neil) MAX PALEVSKY Director March 31, 1999 - --------------- (Max Palevsky) ANTHONY SUN Director March 31, 1999 - -------------- (Anthony Sun) MASAYOSHI TAKEBAYASHI Director March 31, 1999 - ------------------------ (Masayoshi Takebayashi) *By WILLIAM L. POTTS, JR. ---------------------- (William L. Potts, Jr., Attorney-in-Fact)
73 ITEM 14(d) FINANCIAL STATEMENT SCHEDULES KOMAG, INCORPORATED Schedule II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Col. A Col. B Col. C Col. D Col. E - ------ ------ ------ ------ ------ Additions Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - ----------- --------- -------- ---------- --------- Year ended December 29, 1996 Allowance for doubtful accounts $3,006 $(1,011) $ 11 $ 1,984 Allowance for sales returns 1,273 3,528(1) 3,698(2) 1,103 ------------- -------------- --------------- ----------------- $4,279 $ 2,517 $ 3,709 $ 3,087 ============= ============== =============== ================= Year ended December 28, 1997 Allowance for doubtful accounts $1,984 $ 1,286 ($28) $ 3,298 Allowance for sales returns 1,103 7,145(1) 7,122(2) 1,126 ------------- -------------- --------------- ----------------- Sub total 3,087 8,431 7,094 4,424 Restructuring liability - 52,157(3) 40,904(4) 11,253 ------------- -------------- --------------- ----------------- $3,087 $60,588 $ 47,998 $15,677 ============= ============== =============== ================= Year ended January 3, 1999 Allowance for doubtful accounts $3,298 ($1,125) $ 8 $ 2,165 Allowance for sales returns 1,126 7,654(1) 8,098(2) 682 ------------- -------------- --------------- ----------------- Sub total 4,424 6,529 8,106 2,847 Restructuring liability 11,253 187,768(5) 194,893(6) 4,128 ------------- -------------- --------------- ----------------- $15,677 $194,297 $202,999 $ 6,975 ============= ============== =============== ================= (1) Additions to the allowance for sales returns are netted against sales. (2) Actual sales returns of subsequently scrapped product were charged against the allowance for sales returns. Actual sales returns of product that was subsequently tested and shipped to another customer were netted directly against sales. (3) The Company recorded a restructuring charge of $52,157,000 to consolidate its U.S. manufacturing operations (4) Charges against the restructuring liability included non-cash charges of $33,013,000 for the write-off of the net book value of equipment and leaseholds, and cash charges of approximately $7,891,000 for severance and equipment related costs. (5) The Company recorded a restructuring charge of $187,768,000 which primarily related to an asset impairment charge due to industry price erosion for disk media and the projected underutilization of the Company's production equipment and facilities. (6) Charges against the restructuring liability included non-cash charges of $175,000,000 for the asset impairment charge and cash charges of approximately $19,893,000 for severance and equipment related costs.
74 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Asahi Komag Co., Ltd. We have audited the accompanying consolidated balance sheets of Asahi Komag Co., Ltd. and its subsidiary (the "Company") as of December 31, 1998 and 1997, and the consolidated statements of income, cash flows, and changes in equity for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audit, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles applicable in the United States of America. The consolidated financial statements as of and for the year ended December 31, 1998 have been translated into United States Dollars solely for the convenience of the reader. Our audit included the translation, and in our opinion such translation has been made in accordance with the basis stated in note 2h to the consolidated financial statements. CHUO AUDIT CORPORATION Tokyo, Japan January 22, 1999 75 [This Page Intentionally Left Blank] 76 EX-10.4.2 2 EXHIBIT 10.4.2 Exhibit 10.4.2 KOMAG, INCORPORATED MANAGEMENT BONUS PLAN AS AMENDED AND RESTATED JANUARY 22, 1997 I. PURPOSES OF THE PLAN 1.01 The Komag, Incorporated ("Company") Management Bonus Plan ("Plan") is established to promote the interests of the Company by creating an incentive program to (i) attract and retain employees who will strive for excellence, and (ii) motivate those individuals to set and achieve above-average objectives by providing them with rewards for contributions to the operating profits and earning power of the Company. II. ADMINISTRATION OF THE PLAN 2.01 The Plan is hereby adopted by the Company's Board of Directors (the "Board"), subject to the approval of the Company's stockholders at the 1997 Annual Stockholders Meeting, and shall be administered by the Compensation Committee ("Committee") of the Board. The members of the Committee shall at all times satisfy the requirements established for outside directors under Internal Revenue Code Section 162(m) and the applicable Treasury Regulations. 2.02 The interpretation and construction of the Plan and the adoption of rules and regulations for administering the Plan shall be made by the Committee. Decisions of the Committee shall be final and binding on all parties who have an interest in the Plan. 2.03 Within 90 days after the start of each of the Company's fiscal years, the Committee will determine which of the Company's subsidiaries, if any, will participate in the Plan for such fiscal year. III. DETERMINATION OF PARTICIPANTS 3.01 An individual shall be eligible to participate in the Plan if employed by the Company or any of its participating subsidiaries for a period of not less than six (6) consecutive months at the time the bonus is earned under Article IV, is in job grade E06 or above, and remains eligible for a bonus award under the terms of Section 4.01 or 4.03. An individual who is on a leave of absence or whose employment 19 terminates and is then re-hired in the same fiscal year shall remain eligible, but his or her bonus award shall be adjusted, as provided in Article IV below. 3.02 For purposes of the Plan: A. Except as set forth in Section 3.01, an individual shall be considered an employee for so long as such individual remains employed by the Company or one or more subsidiary corporations. B. Each corporation (other than the Company) in an unbroken chain of corporations beginning with the Company shall be considered to be a subsidiary of the Company, provided each such corporation (other than the last corporation in the unbroken chain) owns, at the time of determination, stock possessing more than fifty percent of the total combined voting power of all classes of stock in one of the other corporations in such chain. IV. BONUS AWARDS 4.01 No eligible employee shall earn any portion of a bonus award made hereunder for any fiscal year until the last day of that fiscal year, and then only if there has been an allocation of a portion of the bonus pool for such fiscal year to that employee in accordance with the procedures set forth in Section 4.03. If an eligible employee receives no allocation under Section 4.03, then that employee shall not earn, and shall not otherwise be entitled to, any bonus under the Plan for that fiscal year. In no event shall any employee receive an allocation under Section 4.03 for a fiscal year if that employee ceases to be employed by either the Company or one or more of its participating subsidiary corporations for any reason, other than retirement after the age of 65, permanent disability or death, on or before the date the allocation of the bonus pool for that fiscal year is made under section 4.03. Notwithstanding the foregoing, if an employee is employed during part of the fiscal year by the Company or any other participating subsidiary in the Plan and for all or part of the remainder of that fiscal year by a subsidiary that is not covered under the Plan, then any bonus to which that employee would otherwise be entitled for such fiscal year had he/she continued in the employ of the Company or participating subsidiary shall be reduced by the proportion of such fiscal year during which the employee was employed by the non-participating subsidiary. 4.02 The Committee shall calculate the aggregate bonus pool to be paid under the Plan for each fiscal year. The specific percentage in effect for the fiscal year shall be determined in accordance with the Company's level of success in achieving the budgeted operating income specified for that fiscal year in the annual Financial Plan ("Budgeted Operating Income") which is approved by the Board and ratified for purposes of the Plan by the Committee not later than 90 days after the start of the fiscal year, as follows: 20 X = The percentage of the Operating Income of the Company and its subsidiaries covered by the Plan that comprises the bonus pool. Y = Actual Operating Income for the fiscal year divided by Budgeted Operating Income. If Y is 0.6667 or greater, then X = 9(Y)-4 If Y is less than 0.6667, then X = 3Y No amount shall be paid if Y is zero (0) or less. The maximum value for X shall be limited to seven percent (7%), and in no event shall X exceed eight percent (8%) of the Company's Consolidated Operating Income. For purposes of this Section 4.02 bonus formula, the following definitions shall be in effect: "Operating Income" means the Company's operating income for the fiscal year attributable to the Company and the participating subsidiaries for that year. "Consolidated Operating Income" means the Company's consolidated operating income for the fiscal year attributable to the Company and all its subsidiaries. In each case, the calculations of Operating Income and Consolidated Operating Income shall be in accordance with generally accepted accounting principles, adjusted to exclude the following: (i) any amounts accrued by the Company or its subsidiaries pursuant to Management Bonus Plans or Cash Profit Sharing Plans and related employer payroll taxes for such fiscal year, (ii) any Discretionary or Matching Contributions made to the Savings and Deferred Profit-Sharing Plan or to the Non-Qualified Deferred Compensation Plan for such fiscal year, (iii) all items of gain, loss or expense for such fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence, or related to the disposal of a segment of a business, all as determined in accordance with the standards established by Opinion No. 30 of the Accounting Principles Board (APB No. 30), (iv) any adjustments to earnings, gain, loss or expense attributable to a change in accounting principles or standards, (v) all items of gain, loss or expense for such fiscal year related to restructuring charges of subsidiaries whose operations are not included in Operating Income for such fiscal year, (vi) all items of gain, loss or expense for such 21 fiscal year related to discontinued operations which do not qualify as a segment of a business as defined under APB No. 30 and (vii) any profit or loss attributable to the business operations of any entity acquired by the Company during such fiscal year. Operating Income shall not be adjusted for a minority interest holder's share of a consolidated subsidiary's operating income or loss. 4.03 The aggregate bonus pool calculated in the manner provided in Section 4.02 shall be allocated among the eligible employees in accordance with this Section 4.03. A. Each of the Company's executive officers (salary grades E11 and above) will be assigned an index which is the product of his or her base salary, measured as of the close of the fiscal year for which the bonus allocation is made, times a multiplier. The multiplier for the President and Chief Executive Officer and the Chairman of the Board will be two (2). For each Senior Vice President (E12), the multiplier will be one-point-five (1.5), and for every other Vice President (E11) the multiplier will be one (1). B. Bonuses will be awarded to each executive officer by multiplying the aggregate bonus pool for the fiscal year by a fraction the numerator of which will be the individual officer's index and the denominator of which will be the sum of the indices for all executive officers. C. The Committee may, in its sole judgment and discretion, reduce the bonus allocation to any or all of the executive officers. D. The sum of all amounts not paid to executive officers pursuant to Section 4.03C shall serve as a separate bonus pool for the fiscal year which may be allocated in whole or in part to other officers and exempt employees grade E06 and above. One or more executive officers of the Company may make recommendations to the Chairman and the President with respect to the non-executive-officer employees who should share in such bonus pool and the portion of such pool to be allocated to each such individual. The Chairman and the President shall review such recommendations and shall, in their discretion, submit one or more of such recommendations (with such adjustments as they deem appropriate) to the Committee for consideration. On the basis of such recommendations, the Committee shall select one or more such non-executive-officer employees to share in such bonus pool and determine the amount of such pool to be allocated to each selected individual. The determinations of the Committee shall be final. E. The bonus award made under this Plan to any participant for any fiscal year shall not exceed $5 million. 22 4.04 Following completion of the bonus calculation and allocation referenced above, the Committee shall issue a written report containing the final calculation and allocation. V. PAYMENT OF BONUS AWARDS 5.01 The individual bonus award allocated to each employee pursuant to Section 4.03 shall be paid to such employee within thirty (30) days after completion of the annual audit of the Company's financial statements by its independent auditors. VI. GENERAL PROVISIONS 6.01 The Plan shall become effective when adopted by the Board and the Company's stockholders. The Board may at any time amend, suspend or terminate the Plan, provided such action is effected by written resolution and does not adversely affect rights and interests of Plan participants to individual bonuses allocated to them prior to such amendment, suspension or termination. All material amendments to the Plan shall require stockholder approval. 6.02 On January 22, 1997, the Board adopted an amendment to the Plan that changed the bonus formula under Section 4.02 effective for all fiscal years following the 1996 fiscal year ended December 27, 1996 (the "1997 Amendment"). The 1997 Amendment is subject to stockholder approval at the 1997 Annual Meeting. If the stockholders do not approve the 1997 Amendment, then the bonus formula in effect under Section 4.02 immediately prior to the 1997 Amendment shall automatically be reinstated, and the bonus pool shall continue to be calculated in accordance with the reinstated formula. 6.03 No amounts awarded or accrued under this Plan shall actually be funded, set aside or otherwise segregated prior to payment. The obligation to pay the bonuses awarded hereunder shall at all times be an un-funded and unsecured obligation of the Company. Plan participants shall have the status of general creditors and shall look solely to the general assets of the Company for the payment of their bonus awards. 6.04 No Plan participant shall have the right to alienate, pledge or encumber his/her interest in this Plan, and such interest shall not (to the extent permitted by law) be subject in any way to the claims of the employee's creditors or to attachment, execution or other process of law. 6.05 Neither the action of the Company in establishing the Plan, nor any action taken under the Plan by the Committee, nor any provision of the Plan, nor shareholder approval of the Plan itself shall be construed so as to grant any person 23 the right to remain in the employ of the Company or its subsidiaries for any period of specific duration. Rather, each employee will be employed "at-will," which means that either such employee or the Company may terminate the employment relationship at any time for any reason, with or without cause. 6.06 This is the full and complete agreement between the eligible employees and the Company on the terms described herein. 24 EX-10.4.5 3 EXHIBIT 10.4.5 Exhibit 10.4.5 KOMAG, INCORPORATED 1997 SUPPLEMENTAL STOCK OPTION PLAN ----------------------------------- (Amended June 12, 1998) ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSES OF THE PLAN This 1997 Non-Executive Officer Stock Option Plan (the "Plan") is intended to promote the interests of Komag, Incorporated, a Delaware corporation (the "Corporation"), by providing a method whereby eligible individuals may be offered incentives and rewards which will encourage them to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation and continue to render services to the Corporation (or its parent or subsidiary corporations). II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by one or more committees comprised of Board members (the "Committee") or the Board may retain the power to administer the Plan. The members of the Committee shall each serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. B. The Committee (or the Board if no Committee has been designated) shall serve as the Plan Administrator and shall have full power and authority (subject to the express provisions of the Plan) to establish such rules and regulations as it may deem appropriate for the proper administration of such program and to make such determinations under the program and any outstanding option as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties with an interest in the Plan or any options or shares issued hereunder. III. ELIGIBILITY FOR OPTION GRANTS A. The persons eligible to participate in the Plan shall be - employees (excluding officers and directors) of the Corporation (or its parent or subsidiary corporations), or - independent contractors and consultants who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. The Plan Administrator shall have full authority to select the eligible individuals who are to receive option grants under the Plan, the number of shares to be covered by each granted option, the time or times at which such option is to become exercisable and the maximum term for which the option is to be outstanding. C. For purposes of the Plan, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. IV. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of shares which may be issued over the term of the Plan shall not exceed Six Million One Hundred Thousand (6,100,000) shares (subject to adjustment from time to time in accordance with paragraph IV.C of this Article One). B. Should an option be terminated for any reason prior to exercise in whole or in part, the shares subject to the portion of the option not so exercised shall be available for subsequent option grants under this Plan. In addition, unvested shares issued under the Plan and subsequently repurchased by the Corporation at the original exercise price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants under the Plan. C. In the event any change is made to the Common Stock issuable under the Plan (whether by reason of (i) merger, consolidation or reorganization or (ii) recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other similar change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration), then unless such change results in the termination of all outstanding options pursuant to the provisions of paragraph II of Article Two of the Plan, appropriate adjustments shall be made to (i) the aggregate number and/or class of shares issuable under the Plan, and (ii) the number and/or class of shares and price per share in effect under each outstanding option under the Plan. The purpose of such adjustments to the outstanding options shall be to preclude the enlargement or dilution of rights and benefits under such options. 2 ARTICLE TWO OPTION GRANT PROGRAM -------------------- I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to this Article Two shall be authorized by action of the Plan Administrator and shall be Non-Statutory Options. The granted options shall be evidenced by instruments in such form as the Plan Administrator shall from time to time approve; provided, however, that each such instrument shall comply with and incorporate the terms and conditions specified below. A. Option Price. 1. The option price per share shall be fixed by the Plan Administrator. In no event, however, shall the option price per share be less than one hundred percent (100%) of the fair market value per share of Common Stock on the date of the option grant. 2. The option price shall become immediately due upon exercise of the option and shall be payable as follows: (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date (as such term is defined below) equal to the option price; or (iii) full payment through a combination of shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date and cash or check, equal in the aggregate to the option price. (iv) to the extent the option is exercised for vested shares, the option price may also be paid through a broker-dealer sale and remittance procedure pursuant to which the optionee shall provide irrevocable instructions to (I) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, an amount equal to the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm. For purposes of this subparagraph 2, the Exercise Date shall be the date on which notice of the exercise of the option is delivered to the Corporation. Except to the extent 3 the sale and remittance procedure is utilized in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. 3. The fair market value of a share of Common Stock on any relevant date under subparagraph 1 or 2 above (and for all other valuation purposes under the Plan) shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the fair market value shall be the closing selling price per share of Common Stock on the day prior to the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the day prior to the date in question, then the fair market value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on either the New York Stock Exchange or the American Stock Exchange, then the fair market value shall be the closing selling price per share of Common Stock on the day prior to the date in question on such exchange, as such price is officially quoted in the composite tape of transactions on that exchange. If there is no closing selling price for the Common Stock on the day prior to the date in question, then the fair market value shall be the closing selling price on the last preceding date for which such quotation exists. B. Term and Exercise of Options. Each option granted under this Article Two shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the instrument evidencing such option; provided, however, that no option granted under this Article Two shall have a maximum term in excess of ten (10) years from the grant date. C. Limited Transferability of Options. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution following the optionee's death. However, the Plan Administrator may grant one or more options under this Article Two which may, in connection with the optionee's estate plan, be assigned in whole or in part during the optionee's lifetime to one or more members of the optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. 4 D. Termination of Service. 1. Should an optionee cease to remain in Service for any reason (including death, permanent disability or retirement at or after age 65) while the holder of one or more outstanding options granted to such optionee under the Plan, then such option or options shall not (except to the extent otherwise provided pursuant to paragraph VII below) remain exercisable for more than a twelve (12)-month period (or such shorter period as is determined by the Plan Administrator and set forth in the option agreement) following the date of cessation of Service; provided, however, that under no circumstances shall any such option be exercisable after the specified expiration date of the option term. Except to the extent otherwise provided pursuant to subparagraph I.D.4 below, each such option shall, during such twelve (12)-month or shorter period, be exercisable for any or all vested shares for which that option is exercisable on the date of such cessation of Service. Upon the expiration of such twelve (12)-month or shorter period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable for any such vested shares for which the option has not been exercised. However, the option shall, immediately upon the optionee's cessation of Service, terminate and cease to be outstanding with respect to any option shares in which the optionee is not otherwise at that time vested or for which the option is not otherwise at that time exercisable. 2. Should the optionee die while in Service, or cease to remain in Service and thereafter die while the holder of one or more outstanding options under the Plan, each such option may be exercised by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution but, except to the extent otherwise provided pursuant to subparagraph I.D.4 below, only to the extent of the number of vested shares (if any) for which the option is exercisable on the date of the optionee's death. Such exercise must be effected prior to the earlier of (i) the first anniversary of the date of the optionee's death or (ii) the specified expiration date of the option term. Upon the occurrence of the earlier event, the option shall terminate and cease to be exercisable. 3. If (i) the optionee's Service is terminated for cause (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement or any unauthorized disclosure or use of confidential information or trade secrets) or (ii) the optionee makes or attempts to make any unauthorized use or disclosure of confidential information or trade secrets of the Corporation or its parent or subsidiary corporations, then in any such event all outstanding options granted the optionee under the Plan shall terminate and cease to be exercisable immediately upon such cessation of Service or (if earlier) upon such unauthorized use or disclosure of confidential or secret information or attempt thereat. 4. The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at the time the optionee dies, retires at or after age 65, or ceases to remain in Service, to establish as a provision applicable to the exercise of one or more options granted under the Plan that during the limited period of exercisability following death, retirement at or after age 65, or cessation of Employee status as provided in subparagraph I.D.1 or I.D.2 above, the option may be exercised not only with respect to the number of vested shares for which it is exercisable at the time of the optionee's cessation of Service, but also with respect to one or more subsequent installments in which the optionee would have otherwise vested had such cessation of Service not occurred. 5. For purposes of the foregoing provisions of this paragraph I.D (and all other provisions of the Plan), 5 - The optionee shall be deemed to remain in the Service of the Corporation for so long as such individual renders services on a periodic basis to the Corporation (or any parent or subsidiary corporation) in the capacity of an Employee, a non-employee member of the Board or an independent consultant or advisor. - The optionee shall be considered to be an Employee for so long as such individual remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer not only as to the work to be performed but also as to the manner and method of performance. D. Stockholder Rights. An option holder shall have none of the rights of a stockholder with respect to any shares covered by the option until such individual shall have exercised the option, paid the option price and been issued a stock certificate for the purchased shares. No adjustment shall be made for dividends or distributions (whether paid in cash, securities or other property) for which the record date is prior to the date the stock certificate is issued. E. Repurchase Rights. The shares of Common Stock acquired upon the exercise of options granted under this Article Two may be subject to repurchase by the Corporation in accordance with the following provisions: The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under this Article Two. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase any or all of those unvested shares at the option price paid per share. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the instrument evidencing such repurchase right. All of the Corporation's outstanding repurchase rights shall automatically terminate, and all shares subject to such terminated rights shall immediately vest in full, upon the occurrence of any Corporate Transaction under paragraph II of this Article Two, except to the extent: (i) any such repurchase right is to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (ii) such termination is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. The Plan Administrator shall have the discretionary authority, exercisable either before or after the optionee's cessation of Service, to cancel the Corporation's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the optionee under this Article Two and thereby accelerate the vesting of such shares in connection with the optionee's cessation of Service. II. CORPORATE TRANSACTIONS 6 A. In the event of any of the following stockholder-approved transactions (a "Corporate Transaction"): (i) a merger or acquisition in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Corporation's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, or (iii) any reverse merger in which the Corporation is the surviving entity, then each option outstanding under this Article Two shall automatically become exercisable, during the five (5) business day period immediately prior to the specified effective date for the Corporate Transaction, with respect to the full number of shares of Common Stock purchasable under such option and may be exercised for all or any portion of such shares as fully vested shares of Common Stock. An outstanding option under the Plan shall not be so accelerated, however, if and to the extent (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof or (ii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of grant. B. Immediately following the consummation of the Corporate Transaction, all outstanding options under the Plan shall, to the extent not previously exercised or assumed by the successor corporation or its parent company, terminate and cease to be exercisable. C. Each outstanding option under this Article Two which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan following the consummation of the Corporate Transaction shall be appropriately adjusted. D. Option grants under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. CANCELLATION AND REGRANT The Plan Administrator shall have the authority to effect, at any time and from time to time, with consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different numbers of shares of Common Stock but having an exercise price per share 7 equal to one hundred percent (100%) of the fair market value of the Common Stock on the new grant date. IV. EXTENSION OF EXERCISE PERIOD The Plan Administrator shall have full power and authority, exercisable from time to time in its sole discretion, to extend, either at the time the option is granted or at any time while such option remains outstanding, the period of time for which the option is to remain exercisable following the optionee's cessation of Service or death from the twelve (12)-month or shorter period set forth in the option agreement to such greater period of time as the Plan Administrator shall deem appropriate; provided, however, that in no event shall such option be exercisable after the specified expiration date of the option term. 8 ARTICLE THREE MISCELLANEOUS ------------- I. AMENDMENT OF THE PLAN The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall, without the consent of the holders, adversely affect rights and obligations with respect to options at the time outstanding under the Plan. II. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective upon its adoption by the Board. Unless sooner terminated in accordance with paragraph II of Article Two, the Plan shall terminate upon the earlier of (i) September 26, 2007 or (ii) the date on which all shares available for issuance under the Plan shall have been issued or cancelled pursuant to the exercise or surrender of options granted hereunder. If the date of termination is determined under clause (i) above, then options outstanding on such date shall not be affected by the termination of the Plan and shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. B. On January 30, 1998, the Board approved an amendment to the Plan to increase the number of shares of Common Stock reserved for issuance over the term of the Plan by an additional 1,000,000 shares. C. On June 12, 1998, the Board approved an amendment to the Plan to increase the number of shares of Common Stock reserved for issuance over the term of the Plan by an additional 1,500,000 shares. III. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to options granted under the Plan shall be used for general corporate purposes. IV. TAX WITHHOLDING The Corporation's obligation to deliver shares or cash upon the exercise or surrender of any option granted under the Plan shall be subject to the satisfaction of all applicable federal, state and local income and employment tax withholding requirements. V. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing or restating the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the restated Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. 9 VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option hereunder, and the issuance of stock upon the exercise or surrender of any such option shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. 10 EX-21 4 LIST OF SUBSIDIARIES KOMAG, INCORPORATED Exhibit 21 List of Subsidiaries Asahi Komag Co., Ltd., a Japanese corporation Komag USA (Malaysia) Sdn., a Malaysian corporation EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-31297, 333-23095, 333-06081, 33-62543, 33-80594, 33-53432, 33-45469, 33-41945, 33-25230, 33-19851, 33-16625, and 33-48867) pertaining to the Komag, Incorporated Deferred Compensation Plan, the Komag, Incorporated Restated 1987 Stock Option Plan, the Komag Material Technology, Inc. 1995 Stock Option Plan, the Komag, Incorporated Employee Stock Purchase Plan, the Komag, Incorporated Restated 1987 Stock Option Plan, the Dastek International Stock Option Plan, the Dastek, Inc. 1992 Stock Option Plan, and the 1997 Supplemental Stock Option Plan of our report dated January 22, 1999, with respect to the consolidated financial statements and schedule of Komag, Incorporated included in this Annual Report (Form 10-K) for the year ended January 3, 1999. ERNST & YOUNG LLP San Jose, California April 1, 1999 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this annual report on Form 10-K of our report dated January 22, 1999 on our audit of the consolidated financial statements of Asahi Komag Co., Ltd. and subsidiary as of December 31, 1998 and 1997 and for the three years in the period ended December 31, 1998. CHUO AUDIT CORPORATION Tokyo, Japan March 31, 1999 EX-27 7 ARTICLE 5 FDS FOR 1998 10-K
5 0000813347 KOMAG, INCORPORATED 1000 U.S. DOLLARS 12-MOS JAN-03-1999 DEC-29-1997 JAN-03-1999 1 133,897 32,300 86,313 4,424 66,778 371,689 1,082,394 403,798 1,084,664 75,590 245,000 0 0 528 685,656 1,084,664 631,082 631,082 537,536 537,536 54,513 1,286 9,116 (37,820) (20,982) (22,103) 0 0 0 (22,103) (0.42) (0.42)
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