-----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, APxkBWT+sDr73sOMoh40rqqpQX3TkAhOBkzdVTlWUKDpPhptZaf7aPXQnT9cf2nj nfIE/n9bzADNc7jjKujg7w== 0000950005-99-000689.txt : 19990805 0000950005-99-000689.hdr.sgml : 19990805 ACCESSION NUMBER: 0000950005-99-000689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990804 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: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16852 FILM NUMBER: 99677673 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended July 4, 1999 Commission File Number 0-16852 KOMAG, INCORPORATED (Registrant) Incorporated in the State of Delaware I.R.S. Employer Identification Number 94-2914864 1704 Automation Parkway, San Jose, California 95131 Telephone: (408) 576-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. On July 4, 1999, 65,448,887 shares of the Registrant's common stock, $0.01 par value, were issued and outstanding. INDEX KOMAG, INCORPORATED Page No. PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated statements of operations--Three- and six-months ended July 4, 1999 and June 28, 1998 ............................ 3 Consolidated balance sheets--July 4, 1999 and January 3, 1999 ............................................. 4 Consolidated statements of cash flows--Six months ended July 4, 1999 and June 28, 1998 ............................ 5 Notes to consolidated financial statements-- July 4, 1999 .................................................... 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................12-21 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................... 22 Item 2. Changes in Securities ........................................... 22 Item 3. Defaults Upon Senior Securities ................................. 22 Item 4. Submission of Matters to a Vote of Security Holders .............22-23 Item 5. Other Information ............................................... 24 Item 6. Exhibits and Reports on Form 8-K ................................ 24 SIGNATURES .............................................................. 25 -2- PART I. FINANCIAL INFORMATION KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended ------------------------- ------------------------- July 4 June 28 July 4 June 28 1999 1998 1999 1998 --------- --------- --------- --------- Net Trade Sales $ 23,913 $ 78,808 $ 113,926 $ 154,865 Net Sales to Related Party 69,313 -- 69,313 -- --------- --------- --------- --------- NET SALES 93,226 78,808 183,239 154,865 Cost of sales 97,857 114,445 187,123 222,097 --------- --------- --------- --------- GROSS PROFIT (LOSS) (4,631) (35,637) (3,884) (67,232) Operating expenses: Research, development and engineering 12,151 18,085 24,166 33,029 Selling, general and administrative 5,612 4,942 11,090 9,553 Amortization of Intangibles 7,359 -- 7,359 -- Restructuring charges 4,321 187,768 4,321 187,768 --------- --------- --------- --------- 29,443 210,795 46,936 230,350 --------- --------- --------- --------- OPERATING LOSS (34,074) (246,432) (50,820) (297,582) Other income (expense): Interest income 1,345 2,381 2,961 4,933 Interest expense (5,935) (4,755) (10,939) (9,309) Other, net 869 (409) 1,530 3,914 --------- --------- --------- --------- (3,721) (2,783) (6,448) (462) Loss before income taxes, minority interest, --------- --------- --------- --------- and equity in joint venture loss (37,795) (249,215) (57,268) (298,044) Provision for income taxes 350 703 750 703 --------- --------- --------- --------- Loss before minority interest and equity in joint venture loss (38,145) (249,918) (58,018) (298,747) Minority interest in net income of consolidated subsidiary 89 592 340 497 Equity in net loss of unconsolidated joint venture -- (11,374) (1,402) (20,798) --------- --------- --------- --------- NET LOSS $ (38,234) $(261,884) $ (59,760) $(320,042) ========= ========= ========= ========= Basic loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05) ========= ========= ========= ========= Diluted loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05) ========= ========= ========= ========= Number of shares used in basic computation 64,246 52,916 59,080 52,866 ========= ========= ========= ========= Number of shares used in diluted computation 64,246 52,916 59,080 52,866 ========= ========= ========= ========= See notes to consolidated financial statements.
-3- KOMAG, INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands)
July 4 January 3 1999 1999 --------- --------- ASSETS (unaudited) (note) Current Assets Cash and cash equivalents $ 30,506 $ 64,467 Short-term investments 63,965 63,350 Accounts receivable (including $40,295 and $512 due from related parties in 1999 and 1998, respectively) less allowances of $3,076 in 1999 and $2,847 in 1998 51,682 43,434 Inventories: Raw materials 6,625 8,434 Work-in-process 11,913 10,672 Finished goods 25,728 14,534 --------- --------- Total inventories 44,266 33,640 Prepaid expenses and deposits 4,214 4,348 Income taxes receivable 2,216 2,216 Deferred income taxes 7,883 7,883 --------- --------- Total current assets 204,732 219,338 Investment in Unconsolidated Joint Venture -- 1,399 Property, Plant and Equipment Land 7,785 7,785 Building 129,344 128,359 Equipment 704,884 686,169 Furniture 10,921 10,911 Leasehold Improvements 86,780 86,565 --------- --------- 939,714 919,789 Less allowances for depreciation and amortization (495,734) (449,772) --------- --------- Net property, plant and equipment 443,980 470,017 Net Intangible Assets 77,258 -- Deposits and Other Assets 2,629 3,341 --------- --------- $ 728,599 $ 694,095 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 260,000 $ 260,000 Trade accounts payable 27,465 27,274 Accounts payable to related parties 1,854 1,848 Accrued compensation and benefits 16,446 15,544 Other liabilities 27,337 7,382 Income taxes payable 163 134 --------- --------- Total current liabilities 333,265 312,182 Note Payable to Related Party 21,186 -- Deferred Income Taxes 52,564 52,564 Other Long-term Liabilities 16,230 1,403 Minority Interest in Consolidated Subsidiary 4,479 4,139 Stockholders' Equity Preferred stock -- -- Common stock 654 539 Additional paid-in capital 444,262 407,549 Accumulated deficit (144,620) (84,860) Accumulated other comprehensive income 579 579 --------- --------- Total stockholders' equity 300,875 323,807 --------- --------- $ 728,599 $ 694,095 ========= ========= Note: The balance sheet at January 3, 1999 has been derived from the audited financial statements at that date. See notes to consolidated financial statements.
-4- KOMAG, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended ---------------------------- July 4 June 28 1999 1998 --------- --------- OPERATING ACTIVITIES Net loss $ (59,760) $(320,042) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 48,608 68,496 Amortization of Intangibles 7,359 -- Provision for losses on accounts receivable 225 (1,320) Equity in net loss of unconsolidated joint venture 1,402 20,798 (Gain) Loss on disposal of property, plant and equipment 229 (1,116) Impairment charge related to property, plant and equipment -- 175,000 Deferred rent 1,095 216 Minority interest in net income of consolidated subsidiary 340 497 Changes in operating assets and liabilities: Accounts receivable 31,310 46,184 Accounts receivable from related parties (39,783) 3,997 Inventories (8,477) 16,273 Prepaid expenses and deposits 131 1,000 Trade accounts payable 191 (8,696) Accounts payable to related parties 6 (2,434) Accrued compensation and benefits 902 1,853 Other liabilities (1,482) 2,971 Income taxes receivable 29 22,180 Restructuring liability (367) 7,779 --------- --------- Net cash provided by (used in) operating activities (18,042) 33,636 INVESTING ACTIVITIES Acquisition of property, plant and equipment (17,564) (74,329) Purchases of short-term investments (1,965) (38,300) Proceeds from short-term investments at maturity 1,350 -- Proceeds from disposal of property, plant and equipment 30 5,325 Deposits and other assets (25) 414 --------- --------- Net cash used in investing activities (18,174) (106,890) FINANCING ACTIVITIES Increase in long-term obligations -- 15,000 Sale of Common Stock, net of issuance costs 2,255 3,585 --------- --------- Net cash provided by financing activities 2,255 18,585 Increase (decrease) in cash and cash equivalents (33,961) (54,669) Cash and cash equivalents at beginning of year 64,467 133,897 --------- --------- Cash and cash equivalents at end of period $ 30,506 $ 79,228 ========= ========= See notes to consolidated financial statements.
-5- KOMAG, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 4, 1999 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended July 4, 1999 are not necessarily indicative of the results that may be expected for the year ending January 2, 2000. The financial statements have been prepared on a going concern basis. The Report of Independent Auditors on the Company's financial statements for the year ended January 3, 1999 included in the Company's Annual Report on Form 10-K contained an explanatory paragraph which indicated substantial doubt about the Company's ability to continue as a going concern because of recent operating losses and lack of compliance with certain covenants of its various bank agreements. Such non-compliance constitutes an event of default under the agreements. The Company has not been in payment default under these credit facilities and has continued to pay all interest charges and other fees associated with these facilities on their scheduled due dates. Amounts outstanding under these unsecured credit agreements at July 4, 1999 amounted to $260 million. To date, the Company's lenders have not accelerated any principal payments under these facilities. The Company is currently negotiating with its lenders for amendments to its existing credit facilities. There can be no assurance that the Company will be able to obtain such amendments to its credit facilities on commercially reasonable terms. In the event that the Company does not successfully amend its credit facilities or restructure its debt obligations, the Company could be required to significantly reduce or possibly suspend its operations, and/or sell additional securities on terms that would be highly dilutive to current stockholders of the Company. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of assets and liabilities that may result from the outcome of this uncertainty. -6- For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended January 3, 1999. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The three- and six-month reporting periods included in this report are comprised of thirteen and twenty-six weeks, respectively. NOTE 2 - INVESTMENT IN DEBT SECURITIES The Company invests its excess cash in high-quality, short-term debt and equity instruments. None of the Company's investments in debt securities have maturities greater than one year. The following is a summary of the Company's investments by major security type at amortized cost which approximates fair value: Jul 4 Jan 3 (in thousands) 1999 1999 -------- -------- Municipal auction rate preferred stock $ 62,000 $ 63,350 Corporate debt securities 9,526 33,765 Mortgage-backed securities 23,181 34,060 -------- -------- $ 94,707 $131,175 ======== ======== Amounts included in cash and cash equivalents $ 30,742 $ 67,825 Amounts included in short-term investments 63,965 63,350 -------- -------- $ 94,707 $131,175 ======== ======== The Company utilizes zero-balance accounts and other cash management tools to invest all available funds including bank balances in excess of book balances. NOTE 3 - INCOME TAXES The Company's income tax provisions of approximately $0.4 million and $0.8 million for the three- and six-month periods ended July 4, 1999 primarily represent foreign withholding taxes. The Company's wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS") received an extension of its initial five-year tax holiday for an additional five years commencing July 1998. KMS has also been granted a ten-year tax holiday for its second and third plant sites in Malaysia. The commencement date for this new tax holiday has not been determined as of August 4, 1999. -7- NOTE 4 - COMPREHENSIVE LOSS The following are the components of comprehensive loss:
Three Months Ended Six Months Ended ------------------------------ ------------------------------ July 4 June 28 July 4 June 28 1999 1998 1999 1998 --------- --------- --------- --------- (in thousands) Net loss $ (38,234) $(261,884) $ (59,760) $(320,042) Foreign currency translation adjustments -- (633) -- (2,560) --------- --------- --------- --------- Comprehensive loss $ (38,234) $(262,517) $ (59,760) $(322,602) ========= ========= ========= =========
Accumulated foreign currency translation adjustments on the accompanying Consolidated Balance Sheets account for all of the Company's accumulated other comprehensive loss at July 4, 1999 and January 3, 1999. NOTE 5 - LOSS PER SHARE The net loss per share was computed using only the weighted-average number of shares of common stock outstanding during the period. The following table sets forth the computation of net loss per share.
Three Months Ended Six Month Ended ------------------------------ ------------------------------ July 4 June 28 July 4 June 28 1999 1998 1999 1998 --------- --------- --------- --------- (in thousands, except per share amounts) Numerator: Net loss $ (38,234) $(261,884) $ (59,760) $(320,042) --------- --------- --------- --------- Denominator for basic loss per share - weighted-average shares 64,246 52,916 59,080 52,866 --------- --------- --------- --------- Effect of dilutive securities: Employee stock options -- -- -- -- Denominator for diluted --------- --------- --------- --------- loss per share 64,246 52,916 59,080 52,866 --------- --------- --------- --------- Basic loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05) ========= ========= ========= ========= Diluted loss per share $ (0.60) $ (4.95) $ (1.01) $ (6.05) ========= ========= ========= =========
-8- Incremental common shares attributable to the exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) of 60,803 and 412,795 for the three months ended July 4, 1999 and June 28, 1998, respectively, and of 1,069,004 and 620,610 for the six months ended July 4, 1999 and June 28, 1998, respectively, were not included in the net loss per share computation because the effect would be antidilutive. NOTE 6 - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 7 - PURCHASE OF WESTERN DIGITAL CORPORATION'S MEDIA OPERATIONS In April 1999, the Company purchased the assets of Western Digital Corporation's ("WDC's") media operations through the issuance of approximately 10.8 million shares of the Company's Common Stock and a note in the principal amount of $30.1 million. The shares issued in the transaction, which represented 16.7% of the Company's outstanding shares on a post-issuance basis, are unregistered and subject to trading restrictions. WDC may resell these shares in specified increments over a three and one-half year period under registration rights granted by the Company or under SEC rules after expiration of the required holding periods. Principal and interest accrued on the note are due in three years and the note is subordinated to the Company's senior credit facilities. In the event WDC realizes a return on its Komag equity holdings in excess of a targeted amount within three years, the excess amount will reduce the balance due under the note. The Company discounted the principal amount of the subordinated note payable to $21.2 million based on the Company's estimated incremental borrowing rate of 18% for this class of financial instrument. Additionally, the Company and WDC signed a volume purchase agreement under which the Company agreed to supply a substantial portion of WDC's media needs over the next three years. Under the volume purchase agreement WDC began to purchase substantially all of its media requirements from the Company after the closing date. The Company initially expected that second quarter 1999 unit sales from the combined operations would grow sequentially in the range of 20-35% compared to the Company's first quarter of 1999 results. Actual unit shipments for the second quarter fell considerably short of these expectations as customer order reductions (including those from WDC) and lower-than-expected volumes on certain new product programs restricted -9- sequential unit sales growth to approximately 10%. In response to competitive market conditions the Company's customers reduced the number of disks per drive to support the delivery of lower priced disk drives to the rapidly expanding, low-cost segment of the PC market. These customer actions, the continuing imbalance between the supply and demand for disk products, and the lack of new data-intensive applications continue to depress the Company's financial performance. Due to this weak unit demand the Company closed the former WDC media operation at the end of June 1999, nearly fifteen months ahead of the Company's original transition plan. The Company's acquisition of WDC's media operation was recorded in the second quarter of 1999 as a business combination using the purchase method of accounting. Under this method the Company recorded the following (in millions): Purchase Price Paid: Common Stock $ 34.6 Note Payable 21.2 ------- Direct Costs $ 55.8 ======= Assets Acquired: Goodwill $ 79.2 Volume Purchase Agreement 4.7 Equipment 5.3 Inventory 2.1 Liabilties Assumed: Remaining Lease Obligations for Equipment Removed from Service (26.5) Facility Closure Costs (5.6) Purchase Order Cancellation Liabilities (2.6) Other Liabilities (0.8) ------- Net Assets Acquired $ 55.8 ======= The Company recognized goodwill and other intangibles in the amount of $83.9 million in connection with the acquisition of WDC's media operations. Goodwill typically reflects the difference between the fair value of the assets acquired and consideration paid. Under purchase accounting rules the Company also recorded liabilities that increased the amount of goodwill recognized. These liabilities included estimated costs for the closure of the former WDC media operation as well as costs related to the remaining lease obligations for equipment taken out of service due to the closure. The Company is amortizing the goodwill over the three-year life that coincides -10- with the term of the Company's volume purchase agreement with WDC. During the second quarter of 1999 the Company paid approximately $2.9 million against these liabilities primarily for equipment lease obligations ($2.4 million) and other liabilities ($0.5 million). Equipment lease obligations are expected to be paid monthly through mid-2002. At July 4, 1999 the current portion of the equipment lease obligations was approximately $10.3 million. Facility closure costs, purchase order cancellation costs and other liabilities associated with the WDC transaction are expected to be paid by mid-2000. -11- KOMAG, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: The following discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," and similar expressions. While this discussion represents the Company's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested herein. In particular, the actions taken to restructure it U.S. operations might disrupt the Company's ability to execute against customer obligations and operational improvement plans. Such failures to execute would jeopardize the anticipated improvements in the Company's financial performance outlined below. Due to the volume purchase agreement with Western Digital Corporation ("WDC"), the Company's results continue to remain highly dependent on the relative success of WDC in the data storage market. Other factors that could cause actual results to differ include the following: disk consumption per drive based on the relative growth rates of areal density and overall storage usage; pricing levels determined by the continuing imbalance between supply and demand for disk products; growth rate of the merchant disk market as influenced by the level of captive disk production; structural changes within the disk media industry created by combinations, failures, and joint venture arrangements; unit volumes derived from new product qualifications; changes in manufacturing efficiencies, in particular product yields and material input costs; factory utilization levels; and capital expenditure levels required to maintain or acquire process equipment with capabilities to meet more stringent future product requirements. Moreover, the Company must maintain sufficient cash resources to operate efficiently. The Company's ability to raise additional funding, if required, will be dependent upon improvement in the Company's financial performance and the status of the Company's credit facilities. Improvement in the Company's financial performance remains highly dependent on macro industry fundamentals. Other risk factors that may affect the Company's financial performance are listed in the Company's various SEC filings, including its Form 10-K for the fiscal year ended January 3, 1999 which was filed on April 2, 1999. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview: Adverse market conditions, which began in mid-1997, continued to impact the thin-film media market throughout 1998 and the first half of 1999. Demand for disk drives grew rapidly during the mid-1990s and industry forecasts were for continued -12- strong growth. The Company and a majority of its competitors (both independent disk manufacturers and captive disk manufacturers owned by vertically integrated disk drive customers) committed to expansion programs in 1996 and substantially increased their media manufacturing capacity in 1997. In 1997 the rate of growth in demand for disk drives fell. Disk drive manufacturers abruptly reduced orders for media from independent suppliers and relied more heavily on internal capacity to supply a larger proportion of their media requirements. The media industry's capacity expansion, coupled with the decrease in the rate of demand growth, has resulted in excess media production capacity. This excess media production capacity caused sharp declines in average selling prices for disk products as independent suppliers struggled to utilize their capacity. In addition to adversities caused by the excess supply of media, 1998 was a year of tremendous transition for the Company and the disk drive industry. Disk drive programs utilizing newer, more advanced, magnetoresistive ("MR") media and recording heads replaced older generation programs utilizing inductive media and heads. By the end of 1998 most disk drives were manufactured with MR components. The transition to MR disk drives has led to significant, unprecedented increases in areal density and, therefore, the amount of data that can be stored on a single disk platter. In the first and second quarters of 1999 the majority of the Company's 3 1/2-inch disks were capable of storing at least 4.3 gigabytes (GB) per platter. This represented a 34% increase in disk capacity relative to a product mix of predominately 3.2 GB platters in the fourth quarter of 1998. The Company expects 3 1/2-inch disks capable of storing 6.8 GB per platter will account for the majority of the Company's unit shipments during the second half of 1999. Increased disk storage capacity per disk allows drive manufacturers to offer lower-priced disk drives at given capacity points, especially in the price-sensitive desktop segment, through the incorporation of fewer components into their disk drives. The rapid advancement in storage capacity per disk platter has further slowed disk demand throughout the industry. According to industry market analysts, this resulting reduction in the average number of disks per drive will likely slow the growth rate of disk shipments below the growth rate of disk drives during 1999. The significant amount of captive capacity employed by certain disk drive manufacturers also continues to reduce the market opportunities for independent disk suppliers such as the Company. In April 1999, the Company acquired the thin-film media operations of Western Digital Corporation ("WDC"). As part of the acquisition the Company and WDC also entered into a volume purchase agreement under which the Company agreed to supply a substantial portion of WDC's thin-film media requirements. Under the volume purchase agreement WDC began to purchase substantially all of its media requirements from the Company after the closing date. The Company initially expected that second quarter 1999 unit sales from the combined operations would grow sequentially in the range of 20-35% compared to the Company's first quarter of 1999 results. Actual unit shipments for the second quarter fell considerably short of these expectations as customer order -13- reductions (including those from WDC) and lower-than-expected volumes on certain new product programs restricted sequential unit sales growth to approximately 10%. In response to competitive market conditions the Company's customers reduced the number of disks per drive to support the delivery of lower priced disk drives to the rapidly expanding, low-cost segment of the PC market. These customer actions, the continuing imbalance between the supply and demand for disk products, and the lack of new data-intensive applications continue to depress the Company's financial performance. Due to this weak unit demand the Company closed the former WDC media operation at the end of June 1999, nearly fifteen months ahead of the Company's original transition plan. Disk industry conditions remain very difficult. Increased storage capacity per disk is limiting growth in unit volumes while excess production capacity within the disk industry continues to push average selling prices for disk products lower. As a result of these negative industry trends the Company has reduced its expectations for revenue growth in the immediate future. In July 1999, the Company implemented a reorganization of its U.S. operations which will result in a reduction of approximately one-third of its U.S. employees. The Company's U.S. operations will focus on activities related to research, process development, product prototyping, and pilot production. Due to the revised expectations for slower growth in unit volumes the Company will be able to shift production to its Malaysian facilities faster than previously planned. The Company expects that the cost advantages of its Malaysian facilities will improve its cost structure and ability to respond to the continuing price pressures for thin-film media. As part of its reorganization the Company is consolidating the separate engineering and managerial staffs of its U.S.-based manufacturing and R&D organizations into a single organization. Staff reductions in these functions and in selling and administrative functions total approximately 500 people. This work force reduction, combined with the June 1999 work force reduction of 400 people at the former WDC media operation, is expected to reduce the employment base at the Company's U.S. operations from 1,950 people in April (subsequent to the acquisition of WDC's media operation) to 1,050 people by the end of the third quarter of 1999. The Company employs approximately 2,750 people in its Malaysian manufacturing operations. The Company expects to record a significant charge in the third quarter of 1999 for severance pay related to the reorganization and for the write down of various assets that will be idled due to the lower production level at its U.S. operations. The Company is in the process of determining the extent of the charge. Revenue: Net sales increased to $93.2 million in the second quarter of 1999, up 18% compared to $78.8 million in the second quarter of 1998. The year-over-year increase was due to the net effect of a 41% increase in unit sales volume and a 16% decrease in the overall average selling price. Net sales in second quarters of 1999 and 1998 included $2.2 million and $2.1 million of substrate sales, respectively. The Company periodically sells -14- substrate products but does not currently anticipate that such sales will become a significant portion of its revenue. Second quarter 1999 unit sales (excluding sales of substrate products) increased to 11.1 million disks from 7.8 million disks in the second quarter of 1998. Unit sales for the second quarter 1998 were unusually low due to weakened demand for desktop media products as several disk drive manufacturers sharply reduced their desktop product production during the first half of 1998 in response to supply/demand imbalances within the industry. The severe pricing pressures generated by the continuing imbalance in supply and demand for thin-film media in the second quarter of 1999 resulted in the significant year-over-year decrease in the overall average selling price. Net sales in the first half of 1999 also increased 18% relative to the first half of 1998. Net sales in first six months of 1999 and 1998 included $6.1 million and $4.2 million of substrate sales, respectively. Percentage increases in unit sales (excluding sales of substrate products) and decreases in the overall average selling prices were comparable to those percentages discussed in the quarterly comparison. In addition to sales of internally produced disk products, the Company has periodically resold products manufactured by its 50%-owned Japanese joint venture, Asahi Komag Co., Ltd. (AKCL). Distribution sales of thin-film media manufactured by AKCL were negligible in both the second quarter of 1999 and 1998. Distribution sales of these products were negligible in the first half of 1999 and accounted for $2.4 million in the first half of 1998. The Company expects that distribution sales of AKCL product will be minimal for the remainder of 1999. During the second quarter of 1999 two customers accounted for approximately 92% of consolidated net sales: Western Digital Corporation (74%) and Maxtor Corporation (18%). The Company expects that it will continue to derive a substantial portion of its sales from relatively few customers. The distribution of sales among customers may vary from quarter to quarter based on the match of the Company's product capabilities with specific disk drive programs of customers. Additionally, as a result of the April 1999 acquisition of WDC's media operation and related volume purchase agreement, the Company's sales remain highly dependent upon WDC's performance in the disk drive industry. Gross Margin: The Company recorded a negative gross margin percentage of 5.0% in the second quarter of 1999 compared to a negative gross margin of 45.2% in the second quarter of 1998. The substantial improvement in the gross margin percentage resulted from the combination of improvements in manufacturing efficiencies, higher unit production volumes, and reductions in fixed manufacturing costs. These favorable manufacturing cost reductions more than offset the 16% decline in the overall average selling price. Manufacturing efficiency improvements included both improvements in production yields and reductions in product input costs. The Company produced 11.3 million units in the second quarter of 1999 compared to 8.9 million units in the second quarter of 1998. -15- The higher unit production volume reduced the Company's unit production cost as fixed costs were spread over more units. Additionally, fixed manufacturing costs were lower in the second quarter of 1999, compared to the comparable period of 1998, as a result of a $175.0 million asset impairment charge recorded in June 1998. The asset impairment charge effectively reduced asset valuations to reflect the economic effect of industry price erosion for disk media and the projected underutilization of the Company's production equipment and facilities. Due to the reduced asset valuations depreciation expense was approximately 27% lower in the second quarter of 1999 compared to the second quarter of 1998. The gross margin improved to a negative 2.1% for the first half of 1999 from a negative 43.4% for the first half of 1998. Unit production increased to 21.4 million disks in the first half of 1999 compared to 15.4 million disks in the first half of 1998. The Company operated well below capacity in the first half of 1998 in order to match unit production to the sharply lower demand for its products. Improvements in manufacturing efficiencies, higher unit production volumes, and reductions in fixed manufacturing costs favorably impacted the Company's gross margin in 1999. Depreciation charges in the first half of 1999 were approximately 29% lower than in the first half of 1998 primarily due to the asset impairment charge recorded in June 1998. The effect of these manufacturing cost reductions more than offset the effect of the decline in the overall average selling price on the Company's gross margin. Operating Expenses: Research and development ("R&D") expenses decreased to $12.2 million in the second quarter of 1999 from $18.1 million in the second quarter of 1998. R&D expenses decreased to $24.2 million in the first half of 1999 from $33.0 million in the first half of 1998. Decreased R&D staffing and lower facility and equipment costs (primarily due to the 1998 impairment charge) accounted for most of the decrease in R&D expenses in both the three- and six-month periods of 1999. Selling, general and administrative ("SG&A") expenses increased to $5.6 million in the second quarter of 1999 from $4.9 million in the second quarter of 1998. SG&A expenses increased to $11.1 million in the first half of 1999 from $9.6 million in the first half of 1998. The increases for both the three- and six-month periods of 1999 were primarily due to higher bad debt provisions in the three- and six-month periods of 1999 relative to the comparable periods of 1998. Excluding provisions for bad debt, SG&A expenses increased less than $0.1 million in both the three- and six-month periods of 1999 compared to the three- and six-month periods of 1998. -16- Goodwill Amortization: The Company's acquisition of WDC's media operation was recorded in the second quarter of 1999 as a business combination using the purchase method of accounting. Under this method the Company recorded the following (in millions): Purchase Price Paid: Common Stock $ 34.6 Note Payable 21.2 ------- Direct Costs $ 55.8 ======= Assets Acquired: Goodwill $ 79.2 Volume Purchase Agreement 4.7 Equipment 5.3 Inventory 2.1 Liabilties Assumed: Remaining Lease Obligations for Equipment Removed from Service (26.5) Facility Closure Costs (5.6) Purchase Order Cancellation Liabilities (2.6) Other Liabilities (0.8) ------- Net Assets Acquired $ 55.8 ======= The Company recognized goodwill and other intangibles in connection with the acquisition of the WDC media operation in the amount of $83.9 million. Goodwill typically reflects the difference between the fair value of the assets acquired and consideration paid. Under purchase accounting rules the Company also recorded liabilities that increased the amount of goodwill recognized. These liabilities included estimated costs for the closure of the former WDC media operation as well as costs related to the remaining lease obligations for equipment taken out of service due to the closure. The Company is amortizing the goodwill over the three-year life that coincides with the term of the Company's volume purchase agreement with WDC. During the second quarter of 1999 the Company paid approximately $2.9 million against theses liabilities primarily for equipment lease obligations ($2.4 million) and other liabilities ($0.5 million). Equipment lease obligations are expected to be paid monthly through mid-2002. At July 4, 1999 the current portion of the equipment lease obligations was approximately $10.3 million. Facility closure costs, purchase order cancellation costs and other liabilities associated with the WDC transaction are expected -17- to be paid by mid-2000. Restructuring Charge: The Company recorded restructuring charges of $4.3 million in the second quarter of 1999 and $187.8 million in the second quarter of 1998. The 1999 restructuring charge primarily related to the severance of approximately 400 employees. Approximately $3.4 million was paid to these employees during the second quarter of 1999 and the remaining $0.9 million is expected to be paid during the third quarter of 1999. The 1998 restructuring charge consisted primarily of a $175.0 million non-cash asset impairment charge. The cash component of the 1998 charge was $12.8 million for employee severance costs, equipment order cancellations costs, and facility closure costs. Interest and Other Income/Expense: Interest income decreased $1.0 million in the second quarter of 1999 relative to the second quarter of 1998 and $2.0 million in the first half of 1999 relative to the first half of 1998 due to lower average cash and short-term investment balances in the current year periods. Interest expense increased $1.2 million in the second quarter of 1999 compared to the second quarter of 1998 and increased $1.6 million in the first half of 1999 compared to the first half of 1998. The increases for both the three- and six-month periods were primarily due to an additional $0.9 million in interest expense under the Company's $21.2 million note payable to WDC in connection with the acquisition of WDC's media operation. The note payable to WDC has been discounted to the Company's estimated incremental borrowing rate of 18% for subordinated debt instruments. Other income increased $1.3 million in the second quarter of 1999 compared to the second quarter of 1998. The increase was primarily due to lower losses on disposals of property, plant and equipment in the second quarter of 1999 compared to the second quarter of 1998. Other income decreased $2.4 million in the first half of 1999 relative to the first half of 1998. Other income in first half of 1998 included a $3.1 million gain on the March 1998 sale of vacant land located in Milpitas, California. Income Taxes: The Company's income tax provision was approximately $0.4 million and $0.8 million for the three- and six-month periods of 1999, respectively, compared to $0.7 million for both the three- and six-month periods of 1998. The income tax provisions for both the 1999 and 1998 periods primarily represented foreign withholding taxes. The Company's wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn. ("KMS"), received an extension of its initial five-year tax holiday for an additional five years commencing in July 1998. KMS has also been granted a ten-year tax holiday for its second and third plant sites in Malaysia. The commencement date for this new tax holiday has not been determined as of August 4, 1999. Minority Interest in KMT/Equity in Net Income (Loss) of AKCL: The minority interest in the net income of consolidated subsidiary represented -18- Kobe Steel USA Holdings Inc.'s ("Kobe USA's") 20% share of Komag Material Technology, Inc.'s ("KMT's") net income. KMT recorded net income of $0.4 million and $1.7 million in the second quarter and first half of 1999, respectively, compared to $3.0 million and $2.5 million in the second quarter and first half of 1998, respectively. The Company owns a 50% interest in AKCL and records its share of AKCL's net income (loss) as equity in net income (loss) of unconsolidated joint venture. During the first three months of 1999, the Company's investment in AKCL was reduced to zero as a result of recording a portion of the Company's share of AKCL's losses for the first quarter of 1999. Approximately $0.6 million of the Company's share of AKCL's first quarter loss was not recorded as it would have reduced the net book value of the investment in AKCL below zero. AKCL recorded net income of $0.3 million for the second quarter of 1999. The Company has not recorded its share of this income as the Company's cumulative unrecorded equity in AKCL is a loss of approximately $0.4 million. Assuming AKCL reports net income in future periods, the Company will record its share of such income only to the extent by which the income exceeds the losses incurred subsequent to the date on which the investment balance became zero. Year 2000 Issue: Many computer systems were not designed to properly handle dates beyond the year 1999. Such systems were designed using two digits rather than four to define the applicable year. Any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. Disruptions may also occur if key suppliers or customers experience disruptions in their ability to transact with the Company due to Year 2000 issues. The Company's global operations rely heavily on the infrastructures of the countries in which it conducts business. The Year 2000 readiness within infrastructure suppliers (utilities, government agencies such as customs, shipping organizations) will be critical to the Company's ability to avoid disruption of its operations. The Company is working with industry trade associations to evaluate the Year 2000 readiness of infrastructure suppliers. The Company has completed the assessment phase of its Year 2000 program. The Company has committed personnel and resources to resolve potential Year 2000 issues and is working with key suppliers and customers to ensure their Year 2000 readiness. The Company's Year 2000 efforts are focused on three primary areas of potential impact: internal information technology ("IT") systems, internal non-IT systems, and the readiness of third parties with whom the Company has critical business relationships. Testing and remediation of internal IT and non-IT systems is approximately 90% complete. The Company expects to complete the testing and remediation for these systems by October 1, 1999. The Company has developed a process for identifying and assessing Year 2000 -19- readiness of its critical suppliers. This process generally involves the following steps: initial supplier survey, follow-up supplier review, and contingency planning. The Company is following up with critical suppliers that either did not respond initially or whose responses were unsatisfactory. To date, the Company has received responses from a majority of its critical suppliers, most of whom have responded that they expect to address all of their significant Year 2000 issues on a timely basis. Remediation costs of the Year 2000 issue have not been material to the Company's results of operations or financial position. The Company has cumulatively incurred remediation costs of approximately $0.5 million. The Company does not separately track the internal costs incurred for the Year 2000 project (primarily the payroll cost for its information systems group). While the Company currently expects that the Year 2000 issue will not pose significant operational problems, a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have material adverse consequences, including delays in the delivery or sales of products. Therefore, the Company is developing contingency plans for continuing operations in the event such problems arise. These contingency plans are expected to be completed by October 1, 1999. The Company is working to identify and analyze the most reasonably likely worst-case scenarios where it may be affected by Year 2000 related interruptions. These scenarios could include possible infrastructure collapse, the failure of power and water supplies, major transportation disruptions, unforeseen product shortages due to hoarding of material and supplies, and failures of communications and financial systems. Any one of these scenarios could have a major and material effect on the Company's ability to produce and deliver products to its customers. While the Company is developing contingency plans to address issues under its control, an infrastructure problem outside of its control or some combination of several of these problems could result in a delay in product shipments depending on the nature and severity of the problems. The Company would expect that most utilities and service providers would be able to restore service within days although more pervasive system problems involving multiple providers could last several weeks or longer depending on the complexity of the systems and the effectiveness of their contingency plans. The Company's products are not date sensitive. Additionally, disk drive manufacturers have generally stated that disk drives as a stand-alone product are not date sensitive. The Company expects that it will have limited exposure to product liability litigation resulting from Year 2000 related failures. -20- Liquidity and Capital Resources: Cash and short-term investments of $94.5 million at the end of the second quarter of 1999 decreased $33.3 million from the end of the prior fiscal year. Working capital decreased $35.7 million from the end of the prior fiscal year. Consolidated operating activities consumed $18.0 million in cash during the first half of 1999. The $59.8 million operating loss for the first half of 1999, net of non-cash depreciation and amortization charges of $56.0 million, the non-cash equity loss from AKCL of $1.4 million and other non-cash/deferred charges totaling $1.9 million, used $0.5 million. Changes in operating assets and liabilities used $17.5 million. Increases in accounts receivable and inventories each consumed $8.5 million. The Company spent $17.6 million on capital requirements during the first half of 1999. Sales of Common Stock under the Company's stock programs generated $2.3 million. Total capital expenditures for 1999 are currently planned at approximately $40 million. Current noncancellable capital commitments total approximately $5 million. In light of the continuing weak disk industry conditions the Company plans to closely monitor its capital needs in order to limit capital spending for the last half of 1999 and future periods. The size of the Company's second quarter of 1998 net loss has resulted in a default under certain financial covenants contained in the Company's various bank credit facilities. The Company currently has $260 million of unsecured bank borrowings outstanding. No additional borrowing capacity is available as a result of the technical default. The Company is not in payment default under any of its credit facilities. The Company is currently negotiating with its lenders for amendments to the existing credit facilities. The Company's ability to successfully conclude these negotiations has been delayed during the past year as a result of changes in the Company's business model due to the acquisition of WDC's media facility and continuing deterioration in the disk industry. There can be no assurance that the Company will be able to obtain such amendments to its credit facilities on commercially reasonable terms. If the Company does not successfully amend these credit facilities, it would remain in technical default of its bank loans and the lenders would retain their rights and remedies under the existing credit agreements. As long as the lenders choose not to accelerate any principal payments, the Company would continue to operate in default for the near term. However, the Company will likely need to raise additional funds to restructure its debt obligations and to operate its business for the long term. There can be no assurance that the Company will be able to secure such financial resources on commercially reasonable terms. If the Company is unable to obtain adequate financing, it could be required to significantly reduce or possibly suspend its operations, and/or to sell additional securities on terms that would be highly dilutive to current stockholders. -21- PART II. OTHER INFORMATION ITEM 1. Legal Proceedings-Not Applicable. ITEM 2. Changes in Securities-Not Applicable. ITEM 3. Defaults Upon Senior Securities- The size of the Company's second quarter of 1998 net loss has resulted in a default under certain financial covenants contained in the Company's various bank credit facilities. The Company currently has $260 million of unsecured bank borrowings outstanding. No additional borrowing capacity is available as a result of the technical default. The Company is not in payment default under any of its credit facilities. The Company is currently negotiating with its lenders for amendments to the existing credit facilities. ITEM 4. Submission of Matters to a Vote of Security Holders-Not Applicable. (a) The Annual Meeting of Stockholders was held May 25, 1999. (b) The meeting included the election of the Board of Directors, submitted as Item No. 1, whose names are as follows: Tu Chen Stephen C. Johnson Chris A. Eyre Irwin Federman George A. Neil Max Palevsky Michael R. Splinter Anthony Sun Masayoshi Takebayashi (c) Other matters voted upon at the stockholders meeting were: Item No. 2, Approval of an amendment to the Company's 1988 Employee Stock Purchase Plan to increase the number of shares issuable thereunder by 2,550,000 shares; Item No. 3, Renewal of authorization to sell and issue up to $250,000,000 of Common Stock in equity or equity-linked private transactions from time to time until October 1, 2000 at a price below book value but at or above the then current market value of the Common Stock; Item No. 4, Approval of an amendment to the Company's Restated 1987 Stock Option Plan to increase the number of stock options granted to non-employee Board members under the Automatic Option Grant Program from 7,500 to 12,000 upon re-election to the Board each year; and Item No. 5, Ratification of the Appointment of Ernst & Young LLP as the Company's Independent Auditors for the year ended January 2, 2000. -22- Shares of Common Stock voted were as follows: Item No. 1 (Election of Board of Directors) Total Vote For Total Vote Withheld Each Director From Each Director ------------- ------------------ Tu Chen 49,189,459 1,164,498 Stephen C. Johnson 49,204,927 1,149,030 Chris A. Eyre 49,202,932 1,151,025 Irwin Federman 42,485,102 7,868,855 George A. Neil 49,205,645 1,148,312 Max Palevsky 42,477,516 7,876,441 Michael R. Splinter 49,203,710 1,150,247 Anthony Sun 42,148,308 8,205,649 Masayoshi Takebayashi 49,211,340 1,142,617
Broker For Against Abstain Non-Vote ---------- ---------- ---------- ---------- Item No. 2 (Amendment to 1988 Employee Stock Purchase Plan) 39,490,535 10,778,148 83,374 1,900 Item No. 3 (Renew authorization to sell up to $250 million of equity below book value) 29,726,612 2,407,519 96,951 18,122,875 Item No. 4 (Amendment to 1987 Restated Stock Option Plan) 37,093,314 13,175,921 82,822 1,900 Item No. 5 (Selection of Independent Auditors) 50,053,519 257,033 43,405 --
(d) Not Applicable -23- ITEM 5. Other Information-Not Applicable. ITEM 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 10.1.13--Asset Purchase Agreement between the Company and Western Digital Corporation dated April 8, 1999. (Confidential treatment requested as to certain portions.) Exhibit 10.1.14--Volume Purchase Agreement dated as of April 8, 1999 by and between the Company and Western Digital Corporation. (Confidential treatment requested as to certain portions.) Exhibit 27--Financial Data Schedule. b) Reports on Form 8-K On July 7, 1999 the Company filed Form 8-K containing the contents of its press release dated June 30, 1999 entitled "Komag Updates Second Quarter 1999 Outlook". -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KOMAG, INCORPORATED (Registrant) DATE: August 4, 1999 BY: /s/ William L. Potts, Jr. ------------------ --------------------------- William L. Potts, Jr. Senior Vice President and Chief Financial Officer DATE: August 4, 1999 BY: /s/ Stephen C. Johnson ------------------ --------------------------- Stephen C. Johnson President and Chief Executive Officer -25- EX-10.1.13 2 ASSET PURCHASE AGREEMENT ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ ASSET PURCHASE AGREEMENT BETWEEN KOMAG, INCORPORATED AND WESTERN DIGITAL CORPORATION April 8, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS.................................................................................................1 1.1 Definitions.........................................................................................1 ARTICLE II PURCHASE AND SALE TRANSACTION.............................................................................10 2.1 Purchase and Sale of Acquired Assets...............................................................10 2.2 Assumption of Liabilities..........................................................................10 2.3 Purchase Price for Acquired Assets; Post Closing Adjustment........................................12 2.4 Transfer Taxes.....................................................................................14 2.5 The Closing........................................................................................14 2.6 Taking of Necessary Action; Further Action.........................................................15 2.7 Nonassignability and Consents......................................................................15 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................16 3.1 Organization.......................................................................................17 3.2 Media Business Contained in the Company............................................................17 3.3 Authority..........................................................................................17 3.4 No Conflict........................................................................................17 3.5 Consents...........................................................................................18 3.6 Financial Matters..................................................................................18 3.7 No Changes.........................................................................................19 3.8 Tax Matters........................................................................................20 3.9 Restrictions on Business Activities................................................................21 3.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment.....................21 3.11 Intellectual Property..............................................................................23 3.12 Agreements, Contracts and Commitments..............................................................25 3.13 Interested Party Transactions......................................................................27 3.14 Governmental Authorization.........................................................................27 3.15 Litigation.........................................................................................27 3.16 Accounts Receivable................................................................................27 3.17 Inventories........................................................................................27 3.18 Minute Books.......................................................................................28 3.19 Brokers'and Finders'Fees...........................................................................28 3.20 Employees; Employee Plans and Compensation.........................................................28 3.21 Insurance..........................................................................................30 3.22 Environmental Matters..............................................................................31 3.23 Compliance with Laws...............................................................................32 3.24 Complete Copies of Materials.......................................................................32 3.25 Suppliers..........................................................................................32 i TABLE OF CONTENTS (continued) Page ---- 3.26 No Insolvency......................................................................................32 3.27 Private Placement..................................................................................32 3.28 Registration Statement Information.................................................................33 3.29 Representations Complete...........................................................................33 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KOMAG...................................................................33 4.1 Organization.......................................................................................33 4.2 Capital Structure of Komag.........................................................................33 4.3 Authority..........................................................................................34 4.4 No Conflict........................................................................................34 4.5 Consents...........................................................................................35 4.6 SEC Documents, Komag Financial Statements..........................................................35 4.7 No Material Adverse Change.........................................................................35 4.8 Litigation.........................................................................................35 4.9 Brokers'Fees.......................................................................................36 ARTICLE V CONDUCT PRIOR TO THE CLOSING...............................................................................36 5.1 Conduct of Business of the Company.................................................................36 5.2 Review of Capital Budget/Spending Plan.............................................................38 5.3 No Solicitation....................................................................................38 ARTICLE VI ADDITIONAL AGREEMENTS.....................................................................................38 6.1 Access to Information..............................................................................38 6.2 Confidentiality....................................................................................39 6.3 Public Disclosure..................................................................................39 6.4 HSR Approval.......................................................................................39 6.5 Consents...........................................................................................39 6.6 Commercially Reasonable Efforts....................................................................40 6.7 Notification of Certain Matters....................................................................40 6.8 Employee Matters...................................................................................41 6.9 NMS Listing........................................................................................43 ARTICLE VII CONDITIONS TO OBLIGATION TO CLOSE........................................................................43 7.1 Conditions to Obligations of each of the Parties...................................................43 7.2 Additional Conditions to Obligation of Komag.......................................................43 7.3 Additional Conditions to Obligation of the Company.................................................45 ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW; INDEMNITY...........................................47 8.1 Survival of Representations and Warranties.........................................................47 8.2 Agreement to Indemnify.............................................................................47 8.3 Limits of Liability................................................................................48 ii TABLE OF CONTENTS (continued) Page ---- 8.4 Indemnification Procedures; Time Limits............................................................48 8.5 Survival of Environmental Covenants................................................................50 ARTICLE IX TERMINATION...............................................................................................50 9.1 Termination of Agreement...........................................................................50 9.2 Effect of Termination..............................................................................51 9.3 Escrow Agreement; Distribution of Property.........................................................51 ARTICLE X MISCELLANEOUS..............................................................................................51 10.1 No Third-Party Beneficiaries.......................................................................51 10.2 Entire Agreement...................................................................................51 10.3 Succession and Assignment..........................................................................52 10.4 Counterparts.......................................................................................52 10.5 Headings...........................................................................................52 10.6 Notices............................................................................................52 10.7 Governing Law......................................................................................53 10.8 Amendments and Waivers.............................................................................53 10.9 Severability.......................................................................................53 10.10 Expenses...........................................................................................53 10.11 Construction.......................................................................................53 10.12 Incorporation of Exhibits and Schedules............................................................54 10.13 Other Remedies.....................................................................................54 10.14 Submission to Jurisdiction.........................................................................54 10.15 Share Legends......................................................................................54 10.16 California Corporate Securities Law................................................................55
iii ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ INDEX OF EXHIBITS Exhibit Description - ------- ----------- Exhibit A List of Acquired Assets Exhibit B Excluded Assets Exhibit C Cash Prepaid Assets Exhibit D Form of Promissory Note Exhibit E Form of Assignment and Assumption Agreement Exhibit F Form of Bill of Sale Exhibit G Form of Volume Purchase Agreement Exhibit H Form of Joint Development Agreement Exhibit I Form of License Agreement Exhibit J Form of Registration Rights Agreement Exhibit K Form of Transitional Services Agreement Exhibit L Form of Legal Opinion of Counsel to the Company Exhibit M Form of Legal Opinion of Counsel to Komag iv ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ v ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ ASSET PURCHASE AGREEMENT THIS Asset Purchase Agreement (this "Agreement") is made and entered into as of April 8, 1999 by and between Komag, Incorporated, a Delaware corporation ("Komag"), and Western Digital Corporation, a Delaware corporation (the "Company"). Komag and the Company are referred to collectively herein as the "Parties." RECITALS A. The Boards of Directors of each of the Company and Komag believe it is in the best interests of each company and their respective stockholders that Komag acquire (the "Acquisition") substantially all of the assets of the Company used or useful in connection with the Company's Santa Clara Disk Media operations (the "Media Business") and, in furtherance thereof, have approved the Acquisition. B. The Company and Komag desire to make certain representations, warranties, covenants and other agreements in connection with the Acquisition. C. In connection with the Acquisition, the Company and Komag desire to enter into a Volume Purchase Agreement pursuant to which, inter alia, the Company shall purchase certain media products from Komag for use in the Company's disk drive operations. NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and as a material inducement to enter into that certain Volume Purchase Agreement (as defined herein), and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. (a) As used in this Agreement, the following terms shall have the following meanings, respectively: "AA Net Book Value" means the Net Book Value for all of the Acquired Assets (other than Finished Goods and Cash Prepaid Assets) as of the Closing Date. "Accounts Receivable" means all trade accounts receivable, all evidences of indebtedness arising out of sales of Inventory (as defined below) or other property, assets or services of any Person and, to the extent earned by performance which has occurred, all rights to receive payments arising out of sales of Inventory or other property, assets or services to any Person. ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ "Accounts Payable" means all trade accounts payable and all evidences of indebtedness arising out of purchases of Inventory and other property, assets or services by any Person. "Acquired Assets" means all right, title and interest in and to all of the assets, properties and rights under agreements, contracts, permits, licenses, leases or otherwise, of any kind and description, wherever located, whether real, personal or mixed, whether tangible or intangible, belonging to the Company used in, intended for use in, or required to be used in connection with, the operation of the Media Business as currently conducted, other than the Excluded Assets (as defined below), which shall include, without limitation, those assets and properties listed on Exhibit A attached hereto and the following: (1) any and all indentures, leases, subleases, licenses, permits, authorizations, commitment obligations or other contracts, agreements or instruments, whether written or oral, and rights thereunder, to which the Company is a party or by which any of the Acquired Assets are bound and which relate to the Media Business including, without limitation, the Contracts (as defined below) marked with an asterisk set forth in Section 3.12(a) of the Company Disclosure Schedule (as defined below) and the Purchase Orders; (2) any of the following which relate to the Media Business: (i) any and all claims, deposits, refunds, causes of action, rights of recovery, rights of set off and rights of recoupment and (ii) any and all franchises, approvals, permits, licenses, orders, registrations, certificates, variances and similar rights obtained from Governmental Entities (as defined below); (3) any and all Inventory relating to the Media Business, wherever located, owned by the Company or subject to open Purchase Orders consisting of parts or work in progress, including the Finished Goods (but excluding all other finished media)("Media Inventory"); (4) any and all supplies owned by the Company used in the Media Business; (5) any and all tangible personal property and fixed assets consisting of any equipment, leasehold improvements, fixtures or fittings, furniture, software, machinery, tooling, dies, instruments, motor vehicles, computers, spare parts, replacements parts and trade fixtures, owned or leased by the Company, either (i) located on the Leased Real Property or (ii) used primarily in or intended for use primarily in, or required to be used primarily in connection with, the operation of the Media Business (together, "Fixed Acquired Assets"); (6) any and all business and financial records, books, ledgers, files, plans, documents, supplier lists, correspondence, lists, plots, architectural plans, drawings, notebooks, specifications, creative materials, studies, reports, equipment repair, maintenance or service records and other proprietary or confidential information or data relating to the Media Business or any other Acquired Assets, whether written or electronically stored or otherwise recorded; 2 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (7) any and all rights under any contracts, licenses and agreements set forth in Section 3.11(a)(ii) of the Company Disclosure Schedules; (8) any and all real property, easements, rights of way and other appurtenant rights thereto (such as appurtenant rights in and to public streets), if any, used in, intended for use in, or required to be used in connection with, the operation of the Media Business; (9) any and all rights with respect to leasehold interests and subleases and rights thereunder relating to the real and personal property, used in, intended for use in, or required to be used in connection with, the operation of the Media Business; (10) any and all Transferred Prepaid Assets; and (11) any and all other tangible property, real, personal or mixed, which have been historically reflected in the books and records of the Company and which are either (i) located on the Leased Real Property or (ii) currently used primarily in the operation of the Media Business. "Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange Act. "Cash" means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto, and the rules and regulations promulgated thereunder. "Collateral Documents" means the Volume Purchase Agreement, the Joint Development Agreement, the Registration Rights Agreement, the License Agreement, the Transitional Services Agreement, the Assignment and Assumption Agreement, the Bill of Sale and the Promissory Note. "Continuing Environmental Conditions" shall mean (i) any Release of any Hazardous Materials that occurred at any time on or before the Closing Date as a result of Pre-Closing Hazardous Materials Activities and which Release continues to occur after the Closing Date from any pipes, conduits, structures, equipment or other improvements which are on or about any Media Business Facility (as defined below), to the extent any of the foregoing are concealed within or below the improvements, foundation, paving, or subsurface soils on or about such Media Business Facility; (ii) any Pre-Existing Contamination (as defined below) present on or about any Media Business Facility as of the Closing Date which continues to be present on or about such Media Business Facility after the Closing Date, and (iii) any violation by the Company of any Environmental Laws applicable to the Pre-Closing Hazardous Materials Activities conducted on any Media Business Facility which occurs on or before the Closing Date and which continues to occur after the Closing Date. 3 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ "Employee" means any current, former, or retired employee, consultant, independent contractor, sales representative, officer or director of the Company or any ERISA Affiliate employed or retained in connection with the operation of the Media Business. "Employee Agreement" means each employment, severance, consulting, relocation, repatriation and expatriation or similar agreement, contract or understanding, whether written or oral, between the Company or any ERISA Affiliate and any Employee. "Employee Plan" means any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether formal or informal, funded or unfunded and whether or not legally binding, including, without limitation, any "employee benefit plan" (within the meaning of Section 3(3) of ERISA) which is or has been maintained, contributed to, or required to be contributed to, by the Company or any ERISA Affiliate (as defined before) for the benefit of any Employee, and pursuant to which the Company or any ERISA Affiliate has or may have any material Liability or obligation, contingent or otherwise. "Environmental Claim" shall mean any notice, claim, act, cause of action or investigation by any third party alleging potential Liability (including potential Liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (A) the presence in the environment, or the Release, of any Hazardous Materials or (B) any violation, or alleged violation, of any Environmental Laws. "Environmental Laws" shall mean all federal, state, local and foreign laws, statutes, ordinances, rules and regulations relating to the protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) including laws, statutes, ordinances and regulations relating to the Release of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto, and the rules and regulations promulgated thereunder. "ERISA Affiliate" means any other Person (as defined below) under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the rules and regulations promulgated thereunder. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute thereto, and the rules and regulations promulgated thereunder. "Excluded Assets" means (i) Cash and Accounts Receivables (and refunds due with respect to the Finished Goods) which relate to the Media Business for sales (or importation with respect to the Finished Goods) of products prior to the Closing Date, (ii) general and administrative 4 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ management information systems of the Company utilized by the Media Business, (iii) any of the rights of the Company under this Agreement or the Collateral Agreements (or under any side agreement between the Company and Komag, entered into on or after the date of this Agreement), (iv) Non-Transferred Prepaid Assets, (v) Intellectual Property of the Company (other than rights under any contracts, licenses and agreements set forth in Section 3.11(a)(ii) of the Company Disclosure Schedules), (vi) all computers or office equipment owned or leased by the Company and used in the Media Business by all Employees who are not Transferred Employees (as defined herein), (vii) all purchase orders of the Company which are not Purchase Orders set forth in Section 1.1(b) of the Company Disclosure Schedule and (viii) all other assets and properties set forth on Exhibit B attached hereto. "Finished Goods" means any finished media goods specifically produced by the Company in connection with the Media Business which meet the standards and specifications for the Company's Hunter disk-drive program. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Entity" means any government, or political subdivisions thereof, court, tribunal, administrative agency or commission or any other federal, state, province, county, local or foreign governmental or regulatory authority, instrumentality, agency or commission. "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, radioactive and biological materials, asbestos-containing materials (ACM), hazardous substances, petroleum and petroleum products or any fraction thereof, including, without limitation, those listed pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended, or the rules or regulations promulgated thereunder. Hazardous Materials shall not include office and janitorial supplies and products properly and safely maintained. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any successor statute thereto, and the rules and regulations promulgated thereunder. "Inventory" means all inventories including all finished goods, work in progress, stock room inventory, packaging and raw materials of whatever nature, wherever located. "Intellectual Property" means any or all of the following and all rights in, arising out of, or associated therewith: (i) all United States and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof, and equivalent or similar rights anywhere in the world in inventions and discoveries ("Patents"); (ii) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation embodying or evidencing any of the foregoing; (iii) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world ("Copyrights"); (iv) all mask works, mask work registrations and applications therefor, and 5 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ any equivalent or similar rights in semiconductor masks, layouts, architectures or topology ("Mask Works"); (v) all industrial designs and any registrations and applications therefor throughout the world; (vi) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world ("Trademarks"); (vii) all databases and data collections and all rights therein throughout the world; and (viii) all computer software including all source code, object code, firmware, development tools, files, records and data, all media on which any of the foregoing is recorded; (ix) all World Wide Web addresses, sites and domain names; and (x) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world. "knowledge" or words of similar import means, (i) with respect to the Company, the knowledge of Charles A. Haggerty, Michael A. Cornelius, A. Keith Plant, Joseph R. Carrillo, Ray Bukaty, Leo Young, Keith Goodson, Mark Schulte, Jack Van Berkel, Duston M. Williams, Thomas Nieto, Terry Hopp, Matt Massengill, Robert Parmelee, Thomas A. Seche and Russ Krapf, and the knowledge such Person would have if he or she had performed his or her services and duties on behalf of such Person in the ordinary course of business, consistent with past practices, in a reasonably diligent manner, but without additional investigation or inquiry beyond that required for the discharge of his or her duties in the ordinary course of business, consistent with past practices, in a reasonably diligent manner and (ii) with respect to Komag, the knowledge of Stephen C. Johnson, William L. Potts, Ted Siegler, Ron Allen, Kathy Bayless, Betsy Lamb, Stacey Layzell, Rick Austin, Chris Bajorek, Ray Martin, Allen McCarthy, Beth McKone, TH Tan, Eric Tu and Tu Chen, and the knowledge such Person would have if he or she had performed his or her services and duties on behalf of such Person in the ordinary course of business, consistent with past practices, in a reasonably diligent manner, but without additional investigation or inquiry beyond that required for the discharge of his or her duties in the ordinary course of business, consistent with past practices, in a reasonably diligent manner. "Komag Common Stock" means shares of the shares of the common stock of Komag, par value $0.01 per share. "Liability" means any liability, indebtedness, obligation, expense, loss, damage, cost, claim, contingent liability, deficiency, guaranty or endorsement (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether direct or indirect, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "Liens" means any mortgage, pledge, lien, security interest, encumbrance, charge, claim, defect in title or other equitable or third-party interest. "Media Business Facilities" shall mean the Leased Real Property listed in Section 3.10(a) of the Company Disclosure Schedule. "Media Intellectual Property" means any Intellectual Property that is owned by or licensed to the Company which is necessary to the operation of the Media Business, including the 6 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ design, manufacture, licensing, sale and use of the products or performance of the services of the Media Business as it currently is conducted. "Multiemployer Plan" means any Pension Plan (as defined below) which is a "multiemployer plan" (within the meaning of Section 3(37) of ERISA). "Net Book Value" means, as to any assets, an amount equal to the aggregate cost of such assets less the accumulated depreciation and amortization of such assets. "Non-Transferred Prepaid Assets" means all Prepaid Assets which are not Transferred Prepaid Assets. "Pension Plan" means each Employee Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA. "Permitted Liens" means (a) Liens for current taxes not yet due for which appropriate accruals in accordance with GAAP have been created, (b) with respect to Leased Real Property only, recorded liens, encumbrances, easements, rights of way, restrictions and other conditions of record affecting the Leased Real Property excluding, however, liens recorded against the Leased Real Property or as a result of any action or inaction by the Company, (c) Liens evidenced by UCC-1 financing statements recorded with respect to Leased Fixed Assets by the lessors of such Leased Fixed Assets and which are set forth in Section 1.1(a) of the Company Disclosure Schedule, and (d) Liens which will be discharged by the Company prior to or concurrently with the Closing and which are set forth in Section 1.1(a) of the Company Disclosure Schedule. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity (or any department, agency or political subdivision thereof). "Pre-Closing Hazardous Materials Activities" means the transportation, transfer, recycling, storage, use, handling, treatment, manufacture, removal, investigation, remediation, Release, sale, or distribution of any Hazardous Materials, or any product or waste containing Hazardous Materials conducted on any Media Business Facility prior to the Closing Date by or at the direction of the Company or otherwise occurring prior to the Closing Date in connection with or to benefit the Media Business. "Pre-Existing Contamination" means the presence on or before the Closing Date of any Hazardous Materials in the soil, groundwater, surface water, air or building materials of any Media Business Facility which results from Pre-Closing Hazardous Materials Activities or for which the Company has contractually assumed liability. "Prepaid Assets" means prepaid rentals, security deposits, lease payments, prepaid sales tax, utilities, payroll obligations paid by the Company with respect to periods after the Closing Date, and other prepaid expenses of the Company relating to the Media Business including, without 7 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ limitation, software licenses, software maintenance fees and property taxes relating to the fixed assets included within the Acquired Assets. "Purchase Orders" means any purchase orders of the Company relating to the Media Business identified in Section 1.1(b) of the Company Disclosure Schedule. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, groundwater, wetlands, land or subsurface strata. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute thereto, and the rules and regulations promulgated thereunder. "Seller's Retained Environmental Liabilities" means any Liability, obligation, judgment, penalty, fine, cost or expense, including without limitation the cost or expense of fulfilling any Environmental Laws, duty to investigate, remediate, remove, or take other action with respect to Hazardous Materials, or duty to indemnify, defend or reimburse any Person with respect to: (i) Pre-Existing Contamination; (ii) Continuing Environmental Conditions; (iii) the migration at any time prior to or after the Closing Date of Pre-Existing Contamination to any other real property, or the soil, groundwater, surface water, air or building materials thereof; (iv) any Pre-Closing Hazardous Materials Activities; (v) the exposure of any Person to Pre-Existing Contamination or to Hazardous Materials in the course of or as a consequence of any Pre-Closing Hazardous Materials Activities, without regard to whether any health effect of the exposure has been manifested as of the Closing Date; (vi) the violation of any Environmental Laws by the Company or its agents, employees, predecessors in interest, contractors, invitees or licensees prior to the Closing Date or in connection with any Pre-Closing Hazardous Materials Activities prior to the Closing Date; and (vii) any actions or proceedings brought or threatened by any third party with respect to any of the foregoing. "Transferred Prepaid Assets" means (i) all Prepaid Assets set forth on the Closing NBV Statement ("NBV Prepaid Assets") and (ii) all Prepaid Assets listed on Exhibit C attached hereto ("Cash Prepaid Assets"). (b) The following terms are defined in the following sections of this Agreement: Terms Sections ----- -------- Acquisition Preamble Agreement Preamble Assignment and Assumption Agreement 7.2(g) Assumed Liabilities 2.2(a) Auditors' Letter 2.3(b)(iv) Authorizations 3.14 Balance Sheet Date 3.6(a) Bill of Sale 7.2(h) 8 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Terms Sections ----- -------- Cash Prepaid Assets Net Book Value 2.3(a)(ii) Charter 3.1 Closing 2.5(a) Closing Date 2.5(a) Closing AA Net Book Value 2.3(b)(iii) Closing CPA Net Book Value 2.3(b)(iv) COBRA 6.8(d) Company Preamble Company Disclosure Schedule Article III Company Indemnifiable Claims 8.2(b) Company Indemnitees 8.2(b) Company SEC Documents 3.6(a) Conflict 3.4 Contract 3.12(b) Damages 8.2 Disposal Sites 3.22(e) DOL 3.20(b) Environmental Covenants 8.5 Environmental Permits 3.22(c) Escrow Agreement 2.7(b) Final Closing NBV Statement 2.3(b)(iv) Indemnifiable Claim 8.4(a) Indemnifying Party 8.4(a) Indemnitee 8.3 Joint Development Agreement 7.2(j) Komag Preamble Komag Common Stock Preamble Komag Disclosure Schedule Article III Komag Financial Statements 4.6 Komag Indemnifiable Claim 8.2(a) Komag Indemnitee 8.2(a) Komag SEC Documents 4.6 Labor Representatives 3.12(a) Leased Fixed Assets 3.10(b) Leased Real Property 3.10(a) License Agreement 7.2(k) Media Business Preamble NBV Accounting Procedures 2.3(c)(i) Non-Offered Employees 6.8(c) Non-Transferable Asset 2.7(a) Note Amount 2.3(a)(i) 9 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Terms Sections ----- -------- Offered Employees 6.8(a) Officer's Certificate 8.4 Original Sale Shares 2.3(c)(ii) Original Note Amount 2.3(c)(iii) Outside Auditors 2.3(b)(iv) Parties Preamble Preliminary Closing NBV Statement 2.3(b)(iii) Promissory Note 2.3(a)(i) Purchase Price 2.3(a) Registration Rights Agreement 7.2(l) Rental Fees 2.4 Retained Liabilities 2.2(b) Revised AA Net Book Value 2.3(b)(iv) Revised CPA Net Book Value 2.3(b)(iv) Sale Shares 2.3(a)(i) Sales Tax 2.2(a) SEC 3.6(a) Share Amount 2.3(a)(i) Share Amount Cap 2.3(a)(i) Share Price 2.3(a)(i) Signing NBV Statement 2.3(b)(i) Tax 3.8(a) Tax Returns 3.8(b) Threshold Amount 8.3 Transferred Employees 6.8(a) Utility Charges 2.4 Volume Purchase Agreement 7.2(i) WARN Act 6.8(c) ARTICLE II PURCHASE AND SALE TRANSACTION 2.1 Purchase and Sale of Acquired Assets. On and subject to the terms and conditions of this Agreement, Komag agrees to purchase from the Company, and the Company agrees to sell, transfer, assign, convey and deliver to Komag, at the Closing, all of the Company's rights, title and interest in and to the Acquired Assets, free and clear of any and all Liens, other than Permitted Liens. 2.2 Assumption of Liabilities. (a) On and subject to the terms and conditions of this Agreement and except as otherwise set forth herein, Komag agrees to assume and become responsible for only the following 10 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Liabilities of the Company: (i) Liabilities under all Leased Real Property only to the extent the rights of such real property leases have been assigned to Komag and to the extent such Liabilities first arise or accrue on or after the Closing Date, (ii) Liabilities under all equipment leases with Comdisco, Leasing Solutions, Inc. and AT&T Corp. which are used or utilized in connection with the Media Business only to the extent the rights of such equipment leases have been assigned to Komag and to the extent such Liabilities first arise or accrue on or after the Closing Date, (iii) Liabilities under all agreements, contracts or Purchase Orders with all vendors and suppliers which have been entered into in the ordinary course of business, consistent with past practices, relating to the Media Business only to the extent the rights of such agreements, contracts or purchase orders have been assigned to Komag and to the extent such Liabilities first arise or accrue on or after the Closing Date, (iv) Liabilities under all third party licenses or other similar agreements related to the Acquired Assets only to the extent the rights under such licenses or similar agreements have been assigned to Komag and to the extent such Liabilities first arise or accrue on or after the Closing Date, (v) Liabilities under all other agreements, contracts or Purchase Orders which have been marked with an asterisk in Section 3.12(a) of the Company Disclosure Schedule only to the extent the rights under such agreements, contracts or purchase orders have been assigned to Komag and to the extent such Liabilities first arise or accrue on or after the Closing Date, (vi) Liabilities of any of the Parties for any sales taxes, use taxes, transfer taxes, recording fees and similar taxes, charges, fees or expenses ("Sales Tax") that may become payable by reason of or in connection with the Acquisition, (vii) Liabilities of any of the Parties for any federal, state, local or foreign Taxes, duties, withholdings or other assessments imposed on any of the Parties as a result of the movement by Komag or any of its Affiliates of the manufacturing lines of the Media Business to Malaysia following the Closing, (viii) Liabilities which may be sustained, suffered or incurred under the WARN Act as specifically allocated to Komag under Section 6.8(c) and (ix) Liabilities arising from the operation of the Media Business following the Closing (together, the "Assumed Liabilities"). (b) Komag will not assume or have any responsibility, however, with respect to any Liability of the Company not included within the definition of Assumed Liabilities, and such Liabilities shall be retained by the Company ("Retained Liabilities"). Without limiting the generality of the foregoing, it is expressly agreed that Komag shall not assume, and the definition of Retained Liabilities shall include, any and all (i) Liabilities for employee benefits including, without limitation, vacation pay and similar accruals, COBRA benefits, severance and termination pay owed to all Employees not employed by Komag immediately following the Closing Date, (ii) Liabilities under any agreements, contracts or commitments of which the Company is a party or by which the Company is bound that are not assigned to Komag, (iii) Liabilities for indebtedness of the Company, (iv) Liabilities for Taxes due and payable by the Company including Taxes with respect to the Media Business and the ownership of the Acquired Assets or otherwise for periods ending on or prior to the Closing Date (other than Sales Tax that may become payable by reason of or in connection with the Acquisition, Taxes which are the obligation of Komag pursuant to, and to the extent set forth in, Section 2.4, and such other Taxes described in Section 2.2(a)(vii)), (v) Liabilities for Accounts Payable or similar obligations incurred by the Company in connection with the operation of the Media Business on or prior to the Closing, (vi) Seller's Retained Environmental Liabilities, (vii) Liabilities for any claims or litigation (including, without limitation, those relating to any infringement of Intellectual Property) which are pending or threatened against the Company or any 11 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ of the Acquired Assets on or prior to the Closing Date or which are brought or threatened to be brought against the Company or the Acquired Assets after the Closing Date, but which are based upon facts or circumstances involving the operation of the Media Business prior to the Closing Date, (viii) Liabilities which may be sustained, suffered or incurred under the WARN Act as specifically allocated to the Company under Section 6.8(c); and (ix) Liabilities relating to the Excluded Assets. 2.3 Purchase Price for Acquired Assets; Post Closing Adjustment. (a) Purchase Price. In consideration for the purchase of the Acquired Assets, Komag agrees to pay to the Company at the Closing a purchase price payable in the following amounts (the "Purchase Price") as follows: (i) With respect to the purchase of all of the Acquired Assets (other than the Finished Goods and the Cash Prepaid Assets), (1) Komag shall deliver to the Company at the Closing [***] shares of unregistered Komag Common Stock (the "Sale Shares"); and (2) Komag shall deliver to the Company at the Closing a promissory note, substantially in the form attached hereto as Exhibit D (the "Promissory Note"), in the aggregate principal amount equal to $[***]. (ii) With respect to the purchase of the Cash Prepaid Assets, Komag shall deliver to the Company at the Closing an amount in cash equal to the [***]. (iii) With respect to the purchase of the Finished Goods, Komag shall deliver to the Company no later than [***] (or such earlier date as the Parties may mutually agree) an amount in cash equal to $[***], which the parties acknowledge and agree represents [***] as of the Closing Date for the Finished Goods. (b) NBV Statements. (i) The Company has delivered to Komag a statement summarized by financial statement caption of the Acquired Assets (the "Signing NBV Statement") as well as supporting detail schedules as of February 20, 1999 which include (A) each item included in the Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets), (B) the cost of each of such items of Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets) when purchased by the Company, (C) the accumulated depreciation and amortization applicable to each item of the Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets), (D) a detailed listing of the cost of the Finished Goods and the Cash Prepaid Assets and (E) the AA Net Book Value and the Cash Prepaid Assets Net Book Value. 12 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (ii) The Company represents and warrants to Komag that the Signing NBV Statement has been prepared from the books and records of the Company in accordance with GAAP, consistent with the accounting principles used in the preparation of the Company's annual audited financial statements. The Company has, and has requested its internal accountants to, make available to Komag and its accountants copies of all customary accounting and other work papers in their respective possession that were prepared in connection with the preparation of the Signing NBV Statement. (iii) On the Closing Date, the Company shall deliver to Komag an updated version of the Signing NBV Statement ("Preliminary Closing NBV Statement") setting forth the items identified in subsection (b)(i) above as of the Closing Date including calculation of the AA Net Book Value ("Closing AA Net Book Value") and the Cash Prepaid Assets Net Book Value ("Closing CPA Net Book Value"), revised in each case, if appropriate, to include any adjustments agreed upon between the Parties since the date of the Signing NBV Statement. The Preliminary Closing NBV Statement shall be accompanied by a certificate signed by a duly authorized officer of the Company certifying as to the accuracy and completeness of the Preliminary Closing NBV Statement as of the Closing Date. The Preliminary Closing NBV Statement shall be prepared from the books and records of the Company in accordance with GAAP, consistent with the accounting principles used in the preparation of the Company's annual audited financial statements. The Company will, and will request its internal accountants to, make available to Komag and its accountants copies of all customary accounting and other work papers in their respective possession that were prepared in connection with the preparation of the Preliminary Closing NBV Statement. (iv) Within thirty (30) calendar days following the Closing, the Company shall submit to Komag in writing any and all changes and adjustments to the Preliminary Closing NBV Statement necessary to reflect properly the actual AA Net Book Value and the Closing Prepaid Assets Net Book Value, each as of the Closing Date (the "Final Closing NBV Statement"), revised in each case, if appropriate, to include any adjustments agreed upon between the Parties since the date of the Preliminary Closing NBV Statement, together with a special purpose report prepared by the Company's outside auditors ("Outside Auditors") which shall confirm that the calculations of the AA Net Book Value and the Closing CPA Net Book Value set forth on the Final Closing NBV Statement have been accurately derived from, and tied to, the books and records of the Company ("Special Purpose Report"). In preparing the Special Purpose Report, the Outside Auditors shall use the procedures set forth in that certain letter (the "Auditors' Letter") from the Outside Auditors to the Company dated April 8, 1999, a copy of which has been provided to Komag. The reasonable fees and expenses of the Outside Auditors shall be borne by Komag. The revision of the AA Net Book Value or the Closing CPA Net Book Value, as applicable, set forth on the Final Closing NBV Statement shall be deemed the "Revised AA Net Book Value" or the "Revised CPA Net Book Value", as applicable. (c) Determination of Cash Prepaid Assets Net Book Value; Adjustment to Cash Portion of Purchase Price. The Cash Prepaid Assets Net Book Value utilized in calculating the amount of cash to be paid by Komag to the Company following the Closing shall be deemed to be the Closing CPA Net Book Value; provided that, following the Closing, if the Cash Prepaid Assets 13 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Net Book Value is revised pursuant to Sections 2.3(b)(iv) hereof and such Revised CPA Net Book Value is less than the Closing CPA Net Book Value, then the Company shall promptly, and in no event more than ten (10) business days after providing Komag the Final Closing NBV Statement, pay to Komag an amount in cash equal to the difference between the Closing CPA Net Book Value and the Revised CPA Net Book Value. No adjustment to the cash portion of the purchase price will be made if the Revised CPA Net Book Value is equal to or greater than the Closing CPA Net Book Value. (d) Acknowledgment regarding AA Net Book Value. The Parties acknowledge and agree that the AA Net Book Value and Closing AA Net Book Value set forth on the Signing NBV Statement and the Closing NBV Statement, respectively, were utilized to determine the portion of the Purchase Price to be paid in consideration for the Acquired Assets (excluding the Finished Goods and Cash Prepaid Assets), which the Parties acknowledge to be approximately $65,000,000. The Parties further acknowledge and agree that, if the actual AA Net Book Value is less than $65,000,000, Komag will have suffered damages or losses for which Komag is entitled to seek indemnification pursuant to Article VIII of this Agreement in such amount that the actual AA Net Book Value is less than the $65,000,000. 2.4 Transfer Taxes. Komag shall pay and promptly discharge when due any and all Sales Taxes that may become payable by reason of or in connection with the Acquisition; provided that the Company shall use commercially reasonable efforts to assist Komag in minimizing any Liability for such Sales Tax. The amount of Sales Tax collectible from Komag by the Company shall be reduced by the amount of the deduction to which the Company is entitled for "Tax-paid purchases resold" as defined in its California Sales and Use Tax Regulation Section 1707, with respect to the Acquired Assets. The Company and Komag shall prorate between them (a) secured and unsecured property Taxes on all Acquired Assets, (b) sewer and water rentals and utility charges applicable to the Leased Real Property ("Utility Charges") and (c) rentals, fees, assessments and similar charges with respect to the agreements, contracts, licenses and permits included in the Acquired Assets ("Rental Fees"). In the case of taxable or other relevant payment periods commencing on or before the Closing Date and ending after the Closing Date, secured and unsecured property Taxes, Utility Charges and Rental Fees which relate to any period on or before the Closing Date or after the Closing Date, as applicable, shall be in the case of Utility Charges, Rental Fees and secured and unsecured property Taxes (that are not based on net income, gross income, sales, premiums or gross receipts), the total amount of such Utility Charges, Rental Fees and secured and unsecured Taxes for the period in question multiplied by a fraction, the numerator of which is the number of days in the portion of such period through the Closing Date or after such date, and the denominator of which is the total number of days in such period. 2.5 The Closing. (a) Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, in Palo Alto, California commencing at 9:00 a.m. local time on the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate 14 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as the Parties may mutually determine (the "Closing Date"). (b) Deliveries at the Closing. At the Closing, (i) the Company will deliver to Komag the various certificates, instruments and documents referred to in Section 7.2 below and will execute and acknowledge (if appropriate) and deliver such other instruments of sale, transfer, conveyance and assignment as Komag and its counsel may reasonably request; (ii) Komag will deliver to the Company the various certificates, instruments and documents referred to in Section 7.3 below and will execute and acknowledge (if appropriate) and deliver such other instruments of assumption as the Company and its counsel may reasonably request; and (iii) Komag will deliver to the Company stock certificates representing the Sale Shares in the amount determined in accordance with Section 2.3 above. 2.6 Taking of Necessary Action; Further Action. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Komag with full right, title and possession to the Acquired Assets, the officers and directors of the Company are fully authorized in the name the Company or otherwise to take, and will take, all such lawful and necessary and/or desirable action. 2.7 Nonassignability and Consents. (a) To the extent that any asset which would otherwise be an Acquired Asset, or any claim, right or benefit arising thereunder or resulting therefrom, is not capable of being sold, conveyed, assigned, transferred or delivered without the approval, consent or waiver of any Person (including any Governmental Entity) other than the Company, or if such sale, conveyance, assignment, transfer or delivery or attempted sale, conveyance, assignment, transfer or delivery would constitute a breach or termination right thereof or a violation of any law, decree, order, regulation or other governmental edict, except as expressly otherwise provided herein, this Agreement shall not constitute a sale, conveyance, assignment, transfer or delivery thereof, or an attempted sale, conveyance, assignment, transfer or delivery thereof. Any such assets shall be a "Non-Transferable Asset." (b) The Company shall not be obligated to sell, assign, transfer, convey or deliver, or cause to be sold, assigned, transferred, conveyed or delivered, to Komag, and Komag shall not be obligated to purchase, any Non-Transferable Asset without first having obtained all such consents, approvals or waivers or removed or eliminated any such potential breach or termination of any contract, agreement or other instrument or potential violation of any law, decree, order, regulation or other governmental edict. To the extent that at the Closing there are any Non-Transferable Assets, from and after the Closing, the Parties will cooperate, at the Company's expense, to effect a lawful and mutually acceptable arrangement under which Komag would obtain the benefit of such Non-Transferable Asset, including subcontracting, sub-licensing, or sub-leasing such Non-Transferable Asset to Komag, and Komag, so long as such benefit is so provided, would satisfy or perform any Liabilities or obligations under or in connection with such Non-Transferable Asset which may arise 15 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ following the Closing which would not otherwise be a Retained Liability if such Non-Transferable Asset were an Acquired Asset. From and after the Closing Date, the Company will promptly pay to Komag when received all monies received by the Company under any Acquired Asset or any claim or right or any benefit arising thereunder, except to the extent the same represents an Excluded Asset. Notwithstanding the foregoing, nothing contained herein shall in anyway affect the rights or obligations of the Parties under that certain Escrow Agreement dated February 19, 1999 ("Escrow Agreement") with respect to the distribution of the Property (as defined therein) in accordance with the terms thereof. (c) At any time after Closing, if any Non-Transferable Asset becomes capable of being sold, assigned, transferred, conveyed or delivered to Komag, or if the benefit can be provided to Komag without the required consent, approval or waiver of any third party, and if such sale, assignment, transfer, conveyance or delivery, or the provision of such benefit would not constitute a breach or termination of any agreement, contract or other instrument or violation of law, decree, order, regulation or other governmental edict, then, at such time, the Company shall sell, assign, transfer, convey and deliver to Komag or cause to be sold, assigned, transferred, conveyed and delivered to Komag, or provide to Komag the benefit of such asset and, if such asset is an agreement, contract, instrument, license or permit, Komag shall assume the Liabilities and obligations of the Company thereunder to the extent such Liabilities and obligations arise from the performance of the agreement, contract, instrument, license or permit from and after the effective date of such assignment and to the extent such Liabilities and obligations would not otherwise be Retained Liabilities if such Non-Transferable Asset were an Acquired Asset. (d) Notwithstanding anything contained in this Agreement to the contrary, in addition to (and not in lieu of) any of the other rights, remedies and obligations of the Parties hereunder, (i) in the event that the Company is unable to obtain prior to the Closing any of the consents, waivers and approval referenced in Section 6.5 of this Agreement (including, without limitation, under any contracts set forth in Section 3.4, 3.5, 3.10(b), 3.10(c), 3.11(a)(ii), 3.12(a) and 3.14 of the Company Disclosure Schedules) as required pursuant to this Agreement, the Company shall, within thirty (30) days following the Closing Date, obtain all such consents, waivers and approvals, in form and substance reasonably acceptable to Komag and (ii) in the event that the Company is unable to discharge or remove prior to the Closing any of the Liens set forth in Section 1.1(a) of the Company Disclosure Schedules as required pursuant to this Agreement, the Company shall, within thirty (30) days following the Closing Date, have all such Liens discharged and/or removed in a manner reasonably acceptable to Komag. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Komag as of the date hereof, and as of the Closing Date, except as specifically set forth in the disclosure schedule accompanying this Agreement (referring to the appropriate section numbers) (the "Company Disclosure Schedule"), as follows: 16 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 3.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has the corporate power and authority to own the Acquired Assets and to carry on the Media Business as now being conducted and as contemplated to be conducted. The Company is duly qualified to do business and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to be so qualified could have a material adverse effect on the Acquired Assets or the Media Business. The Company has delivered to Komag and its counsel true and correct copies of its Certificate of Incorporation and Bylaws, which have not been amended since November 25, 1998 (together, the "Charter"). 3.2 Media Business Contained in the Company. All of the assets, properties and rights under agreements, contracts, licenses and leases constituting the Acquired Assets, and used by or utilized in connection with the Media Business, are owned, leased, held or licensed by the Company and not by any subsidiary or Affiliate thereof. 3.3 Authority. The Company has all requisite corporate power and authority to enter into this Agreement and each of the Collateral Documents and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the Collateral Documents by the Company, and the consummation of the transactions contemplated hereby and thereby by the Company, have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been, and each of the Collateral Documents will be at Closing, duly executed and delivered by the Company and, assuming the due authorization execution and delivery by the other parties hereto and thereto, upon execution, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and to rules of law governing specific performance, injunctive relief or other equitable remedies. 3.4 No Conflict. The execution and delivery of this Agreement and each of the Collateral Documents by the Company does not, and the consummation of the transactions contemplated hereby and thereby by the Company will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation, modification or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict") (a) any provision of the Charter, (b) any Contract or any other mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which any of the Acquired Assets is subject or by which any of the Acquired Assets are bound, (c) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which the Company is subject or by which the Company is bound or (d) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or the Acquired Assets, assuming, in each case, compliance with (x) any applicable requirements under the HSR Act, (y) any applicable requirements under the Exchange Act and (z) such other matters set forth in Section 3.4 of the Company Disclosure Schedule. 17 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 3.5 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any other Person, including a party to any agreement with the Company (so as not to trigger any Conflict), is required by or with respect to the Company in connection with the execution and delivery of this Agreement or any of the Collateral Documents or the consummation of the transactions contemplated hereby or thereby by the Company, except for such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings (a) as may be required under the HSR Act, (b) as may be set forth in Section 3.5 of the Company Disclosure Schedule or (c) which, if not obtained or made, would not materially impair the ability of the Company to consummate the transactions contemplated by the Agreement and the Collateral Documents. 3.6 Financial Matters. (a) The Company has furnished or made available to Komag true and complete copies of all reports or registration statements filed by it with the U.S. Securities and Exchange Commission (the "SEC") under the Exchange Act, for all periods subsequent to December 27, 1997, all in the form so filed (all of the foregoing being collectively referred to as the "Company SEC Documents"). As of their respective filing dates, the Company SEC Documents complied in all material respects with the requirements of the Exchange Act, and none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Company SEC Document. (b) The Signing NBV Statement has been, and the Preliminary Closing NBV Statement and Final Closing NBV Statement shall be, prepared from the accounting books and records of the Company. The Signing NBV Statement has been, and the Preliminary Closing NBV Statement and Final Closing NBV Statement shall be, prepared in accordance with GAAP, consistent with the accounting principles used in the preparation of the Company's annual audited financial statements. The Signing NBV Statement sets forth, and the Preliminary Closing NBV Statement and the Final Closing NBV Statement shall set forth, as of the date indicated therein, a true and accurate summary by financial statement caption as well as supporting detail schedules which include (A) each item included in the Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets), (B) the cost of each of such items of Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets) when purchased by the Company, (C) the accumulated depreciation and amortization applicable to each item of the Fixed Assets, the Media Inventory (excluding Finished Goods) and the NBV Prepaid Assets (excluding Cash Prepaid Assets), (D) a detailed listing of the cost of the Finished Goods and the Cash Prepaid Assets and (E) the AA Net Book Value and the Cash Prepaid Assets Net Book Value. The balance sheet of the Company, including the notes thereto, included in the Company's Form 10-Q filed with the SEC for the period ended December 26, 1998 (the "Balance Sheet Date") complies as to form in all material respects with applicable accounting requirements of the Exchange Act, and with the published rules and regulations of the SEC with respect thereto, has been prepared in accordance with GAAP (except for 18 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ fiscal year-end adjustments) and presents fairly in all material respects the financial position of the Company as of the date indicated therein. 3.7 No Changes. Since the Balance Sheet Date, except as set forth in Section 3.7 of the Company Disclosure Schedule, there has not been, occurred or arisen any: (a) transaction related to or otherwise affecting the Media Business, except in the ordinary course of business, consistent with past practices; (b) expenditure or commitment for expenditure by the Company related to or otherwise affecting the Media Business exceeding $500,000 per transaction except to the extent such expenditure or commitment for expenditure has been previously approved in writing by Komag; (c) labor trouble or claim of wrongful discharge of which the Company has received written notice or of which the Company is aware or other unlawful labor practice or action relating to or otherwise affecting the Media Business; (d) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company; (e) revaluation by the Company of any of the Acquired Assets, other than depreciation and amortization as required by GAAP which is reflected on the Signing NBV Statement; (f) increase in the salary or other compensation payable or to become payable by the Company to any of its officers, employees or advisors engaged in the Media Business or otherwise expected to become any employee of or advisor to Komag as a result of the Acquisition, or the declaration, payment or commitment or obligation of any kind for the payment, by the Company of a bonus or other additional salary or compensation to any such Person, except, in each case, in the ordinary course, consistent with past practices; (g) sale, lease, license or other disposition of any of the assets or properties of any of the Acquired Assets, except sales of Media Inventory in the ordinary course of business, consistent with past practices; (h) amendment or termination or violation of any distribution agreement or any material contract, agreement, Environmental Permit, lease or license to which the Company is a party which relates to the Media Business or by which any of the Acquired Assets is bound, other than termination by the Company pursuant to the terms thereof in the ordinary course of business, consistent with past practices; (i) loan by the Company to any Transferred Employees, other than advances to Transferred Employees for travel and business expenses in the ordinary course of business, consistent with past practices; 19 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (j) waiver or release of any material right or claim arising from or related to the Media Business or the Acquired Assets; (k) commencement, notice or, to the knowledge of the Company, threat of commencement of any lawsuit or proceeding against or investigation of the Company or its affairs arising from or related to the Media Business or any of the Acquired Assets; (l) notice of any claim of ownership by a third party of any Media Intellectual Property or, notice of infringement by the Company in the operation of the Media Business of any third party's intellectual property rights; (m) any event or condition of any character that has or could be reasonably expected to have a material adverse effect on the Acquired Assets or the Media Business; or (n) negotiation or agreement by the Company to do any of the things described in the preceding clauses (a) through (l) (other than by negotiations with Komag and their representatives regarding the transactions contemplated by this Agreement or the Collateral Documents and acts otherwise permitted by such clauses (a) through (l)). 3.8 Tax Matters. (a) Definition of Taxes. For the purposes of this Agreement, "Tax" or, collectively, "Taxes," means (i) any and all federal, state, province, local and foreign taxes, assessments and other governmental charges, duties, impositions and Liabilities, wherever imposed, including, without limitation, taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, goods and services, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts; (ii) any Liability for the payment of any amounts of the type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period; and (iii) any Liability for the payment of any amounts of the type described in clause (i) or (ii) as a result of any express or implied obligation to indemnify any other Person or as a result of any obligations under any agreements or arrangements with any other Person with respect to such amounts and including any Liability for taxes of a predecessor entity. (b) To the extent a failure to do so would adversely impact Komag, the Media Business, the Acquired Assets or Komag's use of the Acquired Assets, (a) the Company has timely filed within the time period for filing, or any extension granted with respect thereto, all required federal, state, province, local and foreign returns, estimates, information statements and reports ("Tax Returns") which it is required to file relating or pertaining to any and all Taxes attributable to or levied upon the Media Business or the Acquired Assets and (b) paid any and all Taxes it is required to pay in connection with the taxable periods to which such Tax Returns relate. There are (and immediately following the Closing there will be) no Liens or similar encumbrances on the Acquired Assets relating or pertaining to Taxes, except with respect to Taxes not yet due and payable. The Company has no knowledge of any basis for the assertion of any claims which, if 20 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ adversely determined, would result in a Lien or other encumbrance on the Acquired Assets or otherwise adversely effect Komag, the Media Business or the Acquired Assets. (c) To the extent relevant to the Acquired Assets and the Media Business, the Company shall (i) provide Komag with such assistance as may reasonably be required in connection with the preparation of any Tax Return and the conduct of any audit or other examination by any Governmental Entity or in connection with judicial or administrative proceedings relating to any Liability for Taxes and (ii) retain and provide Komag with all records or other information that may be relevant to the preparation of any Tax Returns, or the conduct of any audit or examination, or other tax proceeding. The Company shall retain all relevant documents, including prior year's Tax Returns, supporting work schedules and other records or information that may be relevant to such returns and shall not destroy or otherwise dispose of any such records, without the prior written consent of Komag, until the expiration of the applicable statute of limitations. 3.9 Restrictions on Business Activities. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which the Company or, to the Company's knowledge, any of its officers is a party or otherwise binding upon the Company or, to the Company's knowledge, any of its officers that has or reasonably could be expected to have the effect of prohibiting or materially impairing the Acquisition, the conduct of the Media Business by Komag or the performance of the Company's obligations under this Agreement or the Collateral Documents. 3.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment. (a) Section 3.10(a) of the Company Disclosure Schedule sets forth a list of all real property currently leased by the Company in which the Media Business is conducted and which is to be transferred to Komag ("Leased Real Property") and the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and a schedule of future monthly rental and/or other fees payable under any such lease. The leases and amendments thereto listed on the Company Disclosure Schedule set forth all of the terms and conditions of each such lease, and there are no other agreements, written or oral, between lessor and lessee with respect thereto. All such leases are in full force and effect and are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of material default (or event which with notice or lapse of time, or both, would constitute a material default) by the Company or, to the Company's knowledge, any other party thereto. Except as set forth in Section 3.10(a) of the Company Disclosure Schedule or as otherwise expressly set forth in such leases, there are no restrictions, preconditions, prohibitions or limitations on the ability to assign, transfer, pledge, hypothecate or otherwise convey or dispose of the interest of the Company under such leases. (b) Section 3.10(b) of the Company Disclosure Schedule sets forth a list of all the Fixed Acquired Assets currently leased by the Company ("Leased Fixed Assets") and the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and a schedule of future monthly rental and/or other fees payable under any such lease. The leases and 21 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ amendments thereto listed on the Company Disclosure Schedule set forth all of the terms and conditions of each such lease, and there are no other agreements, written or oral, between lessor and lessee with respect thereto. All such leases are in full force and effect and are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of material default (or event which with notice or lapse of time, or both, would constitute a material default) by the Company or, to the Company's knowledge, any other party thereto. Except as set forth on Section 3.10(b) of the Company Disclosure Schedule or as otherwise expressly set forth in such leases, there are no restrictions, preconditions, prohibitions or limitations on the ability to assign, transfer, pledge, hypothecate or otherwise convey or dispose of the interest of the Company under such leases. (c) Section 3.10(c) of the Company Disclosure Schedule sets forth all of the Fixed Acquired Assets owned by the Company included within the Acquired Assets, other than any Fixed Acquired Assets which (i) are not material to the Media Business and (ii) are, individually, less than $5,000 in value. Except as set forth in Section 3.10(c) of the Company Disclosure Schedule, there are no restrictions, prohibitions, or limitations on the ability to transfer, convey or dispose of any of the Fixed Acquired Assets. All Fixed Acquired Assets and all Leased Fixed Assets currently being used, or to be used, in the Media Business, or used in the Media Business within six (6) months prior to the date hereof, are in good operating condition, subject to normal wear and tear and have been reasonably maintained. (d) The Company has good and valid title to, or, in the case of leased properties and assets, valid and enforceable leasehold interests in, all of the Acquired Assets, free and clear of any Liens, except for Permitted Liens or as otherwise reflected in Section 3.10(d) of the Company Disclosure Schedule. All of the Acquired Assets are reflected on the Signing NBV Statement or were acquired since the date of the Signing NBV Statement. All of the properties and assets owned, leased or licensed by the Company included within the Acquired Assets are adequate to conduct the Media Business as now conducted. Upon the consummation of the Acquisition, Komag shall have good and valid title to, or in the case of leased properties and assets, valid and enforceable leasehold interests in, all of the Acquired Assets, free and clear of any Liens, other than Permitted Liens (provided, that, any Liens which are Permitted Liens and which are required to be discharged prior to or concurrently with the Closing shall have been removed prior to or concurrently with the Closing) or as otherwise reflected in Section 3.10(d) of the Company Disclosure Schedule. (e) To the knowledge of the Company, there are no, and at the time of Closing there will not be, any material physical or mechanical defects of the Leased Real Property. To the knowledge of the Company, except as set forth in Section 3.10(e) of the Company Disclosure Schedule, the buildings, structures and improvements located on the Leased Real Property, including, without limitation, the roofs, parking lots, plumbing, heating, air conditioning, water, sewer, gas, electrical and life safety systems are in good condition and repair and are in compliance in all material respects with applicable laws. The Company has no outstanding claims or Liabilities in respect of the construction thereof. All public utilities, including water, electric, sewage or subsurface disposal systems, required for the normal operation of the Media Business as currently conducted, connect into the Leased Real Property through adjoining public roads or, if they pass 22 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ through adjoining private land, do so in accordance with valid permits or easements, all installation and connection charges due and payable with respect thereto have been paid in full or are provided for and all such utilities are sufficient for the operation of the Media Business as currently conducted. To the knowledge of the Company, all improvements forming a part of any of the Leased Real Property are located wholly within the boundaries of the Leased Real Property and do not encroach upon any registered or unregistered easements or rights of way affecting any of the Leased Real Property except with the agreement or consent of the owner of the affected property. Except as set forth in Section 3.10(e) of the Company Disclosure Schedule, there are no pending or, to the knowledge of the Company, threatened condemnations, eminent domain, expropriation, environmental, zoning, land-use or similar proceedings that would affect all or any portion of the Leased Real Property nor has the Company received notice of any proceedings to impose any new taxes or operating restrictions upon any of the Leased Real Property. The Company shall notify Komag promptly of any such proceedings of which the Company becomes aware prior to the Closing. To the knowledge of the Company, the Leased Real Property complies in all material respects with any private covenant, conditions, restrictions, and approvals applicable thereto. (f) On the Closing Date there will be no outstanding written or oral contracts made by the Company for any alterations or improvements on or to the Leased Real Property, which have not been fully paid, and the Company shall cause to be discharged all mechanics' and materialmen's liens arising from any labor or materials furnished to the Leased Real Property prior to the Closing Date. 3.11 Intellectual Property. (a) Intellectual Property Contracts. (i) The contracts, licenses, sublicenses and agreements listed on Section 3.11(a)(i) of the Company Disclosure Schedule include all material contracts, licenses and agreements pursuant to which any Person, including any Affiliate of the Company, has licensed or transferred any Intellectual Property to or from the Company related to magnetic disk technology, including the design or manufacture of any products of the Media Business. (ii) The contracts, licenses, sublicenses and agreements listed on Section 3.11(a)(ii) of the Company Disclosure Schedule include all contracts, licenses and agreements pursuant to which any Person, including any Affiliate of the Company, has licensed any Intellectual Property to the Company related to magnetic disk technology, including the design or manufacture of any products of the Media Business, which are to be assigned to the Company under the terms of this Agreement. All contracts, licenses, sublicenses and agreements listed on Section 3.11(a)(ii) of the Company Disclosure Schedule are in full force and effect. Neither the execution nor delivery of the Agreement or any of the Collateral Documents nor the consummation of the transactions contemplated hereby or thereby will violate or result in the breach, modification, cancellation, termination, or suspension of the contracts, licenses, sublicenses and agreements listed on Section 3.11(a)(ii) of the Company Disclosure Schedule. The Company is in compliance with, and has not breached any term of, the contracts, licenses and agreements listed on Section 3.11(a)(ii) of the Company Disclosure Schedule, and, to the knowledge of the Company, all other parties to the contracts, licenses, sublicenses and agreements listed on Section 3.11(a)(ii) 23 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ of the Company Disclosure Schedule are in compliance with, and have not breached any term of, such contracts, licenses, sublicenses and agreements. Following the Closing Date, Komag will be permitted to exercise all of the Company's rights under the contracts, licenses, sublicenses and agreements listed in Section 3.11(a)(ii) of the Company Disclosure Schedule without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Company would otherwise be required to pay. (iii) Except as listed on Section 3.11(a)(iii) of the Company Disclosure Schedule, there are no contracts, licenses, sublicenses and agreements between the Company and any other Person with respect to the Media Intellectual Property, including those listed on Section 3.11(a)(ii) of the Company Disclosure Schedule, under which there is any dispute known to the Company regarding the scope of such contract, license, sublicense or agreement, or performance under such contract, license, sublicense or agreement, including with respect to any payments to be made or received by the Company thereunder. (b) Intentionally Omitted. (c) Infringement of Third Party Intellectual Property. Except as set forth in Section 3.11(c) of the Company Disclosure Schedule, the Company has not received notice from any Person claiming that such operation or any act, product, technology or service of the Media Business infringes or misappropriates the Intellectual Property of any Person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor is the Company aware of any basis therefor). (d) Restrictions of Use of Media Intellectual Property. No Media Intellectual Property, or product, technology or service of the Media Business, is subject to any proceeding or outstanding decree, order, judgment, or stipulation restricting in any manner the use, transfer or licensing thereof by the Company or which may affect the validity, use or enforceability of such Media Intellectual Property. (e) Protection of Media Intellectual Property. The Company has taken all steps that are reasonable under the circumstances to protect the confidentiality and trade secret status of the Media Business's confidential information and trade secrets or any trade secrets or confidential information of third parties provided to the Company related thereto, and, without limiting the foregoing, the Company has and enforces a policy requiring each Employee and contractor to execute proprietary information and confidentiality agreements substantially in the Company's standard forms and all current and former Employees and contractors of the Company conducting the Media Business have executed such an agreement. The Company knows of no basis on which it could be claimed that the Company has failed to protect the confidentiality of any material confidential information of the Company relating to the Media Business. (f) No Obligations Resulting from Transaction. Neither this Agreement nor the transactions contemplated by this Agreement, including the assignment to Komag by operation of 24 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ law or otherwise of any contracts or agreements to which the Company is a party, will result in (i) Komag's granting to any third party any right to or with respect to any Intellectual Property or Intellectual Property right owned by, or licensed to, either of them, (ii) Komag's being bound by, or subject to, any non-compete or other restriction on the operation or scope of their respective businesses or (iii) Komag's being obligated to pay any royalties or other amounts to any third party in excess of those payable by Komag prior to the Closing. (g) Year 2000 Compliant. Section 3.11(g) of the Company Disclosure Schedule sets forth the Company's Year 2000 Project Schedules with respect to the Media Business which reflect the current status of the Company's efforts to address operating and product line issues related to the "Year 2000 Issue". (h) Effect of Transaction. The consummation of the transactions contemplated by this Agreement will not result in the loss of, or otherwise adversely affect, any ownership rights of the Company in any Media Intellectual Property or result in the breach or termination of any license, contract or agreement to which the Company is a party respecting any material Media Intellectual Property. 3.12 Agreements, Contracts and Commitments. (a) Except as set forth in Section 3.12(a) of the Company Disclosure Schedule, the Company does not have any continuing obligations under, is not a party to or is not bound by: (i) any collective bargaining agreements, or any contract with or commitment to any trade unions, employee bargaining agent or affiliated bargaining agent (collectively, "labor representatives") which relate to Employees employed in connection with, or providing services to, the Media Business, and the Company has not conducted any negotiations with respect to any such future contracts or commitments; (ii) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements which relates to Employees employed in connection with, or providing services to, the Media Business; (iii) any employment or consulting agreement, contract or commitment with an Employee or individual consultant employed by, or providing services to, the Media Business or consulting agreement, contract or commitment with a firm or other organization relating to the Media Business; (iv) any agreement or plan, including any share option plan, share appreciation rights plan or share purchase plan which relates to any Employee employed by, or providing services to, the Media Business; (v) any fidelity or surety bond or completion bond relating to, or arising in connection with, the Acquired Assets or the Media Business; 25 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (vi) any lease of real or personal property relating to, or arising in connection with, the Acquired Assets or the Media Business; (vii) any agreement of indemnification, guaranty or environmental corrective action or clean up obligation relating to, or arising in connection with, the Acquired Assets or the Media Business; (viii) any agreement, contract or commitment containing any covenant limiting the freedom of the Company to engage in any line of business or to compete with any Person, relating to, or arising in connection with, the Acquired Assets or the Media Business; (ix) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $500,000 arising in connection with the Acquired Assets or the Media Business; (x) any agreement, contract or commitment relating to the disposition of any Acquired Assets or the acquisition of material assets or any interest in any business enterprise outside the ordinary course of business, consistent with past practices, relating to, or arising in connection with, the Acquired Assets or the Media Business; (xi) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit arising in connection with, the Acquired Assets or the Media Business; (xii) any Purchase Order or contract for the purchase of raw materials relating to, or arising in connection with, the Acquired Assets or the Media Business; (xiii) any distribution, joint marketing or development agreement relating to, or arising in connection with, the Acquired Assets or the Media Business; (xiv) any other agreement, contract or commitment that involves $100,000 or more relating to, or arising in connection with, the Acquired Assets or the Media Business; or (xv) any agreement, contract or commitment that is not cancelable without material penalty within thirty (30) days relating to, or arising in connection with, the Acquired Assets or the Media Business. (b) Except as noted in Section 3.12(b) of the Company Disclosure Schedule, the Company has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the material terms or conditions of any agreement, contract or commitment required to be set forth in Section 3.12(a) of the Company Disclosure Schedule (collectively, "Contracts" and each, a "Contract"), nor, to the Company's knowledge, are there any events or circumstances that would in the Company's opinion be reasonably likely to give rise to such a breach, violation or default with the lapse of time, giving of notice or both. Each Contract is in full force and effect and, except as otherwise disclosed in Section 3.12(b) of the Company 26 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Disclosure Schedule, is not subject to any default thereunder of which the Company is aware by any party obligated to the Company pursuant thereto. 3.13 Interested Party Transactions. Except as set forth in Section 3.13 of the Company Disclosure Schedule, to the Company's knowledge, no officer or director of the Company (nor any spouse or member of the immediate family of any of such Persons, or any trust, partnership or corporation in which any of such Persons has or has had a material interest), has or had, directly or indirectly (a) any legal or beneficial interest in any Person that sells or furnishes to the Company any goods or services relating to the Media Business or (b) any legal or beneficial interest in any Contract set forth in Section 3.12 of the Company Disclosure Schedule; provided, that passive ownership of no more than five percent (5%) of the outstanding stock of a publicly traded corporation shall not be deemed an "interest in any entity" for purposes of this Section 3.13. 3.14 Governmental Authorization. Section 3.14 of the Company Disclosure Schedule accurately lists each material consent, license, permit, grant or other authorization issued to the Company by a Governmental Entity (a) pursuant to which the Company currently operates or holds any interest in any of the Acquired Assets or (b) which is required for the operation of the Media Business or the holding of any interest in the Acquired Assets (collectively, "Authorizations"). All Authorizations are in full force and effect and constitute all Authorizations required to permit the Company to operate or conduct the Media Business as currently conducted or to hold any interest in the Acquired Assets. 3.15 Litigation. Except as set forth in Section 3.15 of the Company Disclosure Schedule, there is no action, suit, claim, proceeding or arbitration of any nature pending or, to the knowledge of the Company, threatened against the Media Business, any of the Acquired Assets or any of its officers, directors or stockholders in respect of the Media Business or the Acquired Assets. There is no investigation pending or, to the knowledge of the Company, threatened against the Media Business, the Acquired Assets or any of its officers, directors or stockholders in respect of the Media Business or the Acquired Assets by or before any Governmental Entity. No Governmental Entity has challenged or questioned the legal right of the Company to manufacture, offer or sell any of the products of the Media Business in the present manner or style thereof. 3.16 Accounts Receivable. Except as set forth in Section 3.16 of the Company Disclosure Schedule, the Company has no Accounts Receivable which relate to the Media Business other than intercompany Accounts Receivable. 3.17 Inventories. All of the Media Inventory are reflected on the Signing NBV Statement and will be reflected on the Preliminary Closing NBV Statement and the Final Closing NBV Statement as of the dates indicated therein. All such Media Inventory was purchased, acquired or produced in the ordinary course of business, consistent with past practices, and in a manner consistent with the Company's regular inventory practices and are set forth on the Company's books and records in accordance with GAAP. The presentation of the Media Inventory on the Signing NBV Statement was, and on the Preliminary Closing NBV Statement and the Final Closing NBV Statement will be, thereon in accordance with GAAP, consistent with the accounting principles used 27 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ in the preparation of the Company's audited financial statements. The Media Inventory as presented on the Signing NBV Statement is, and on the Preliminary Closing NBV Statement and the Final Closing NBV Statement will be, stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and such value reflects applicable reserves and write-downs for defective or obsolete items to the extent GAAP would so provide. The reserves against such Media Inventory have been established in accordance with GAAP. Except as set forth in Section 3.17 of the Company Disclosure Schedule, the Company does not hold any items of Media Inventory on consignment or have title to any items of Media Inventory in the possession of others, except items of Media Inventory in shipment to the Company. All of items of such Media Inventory are and, from the date hereof until the Closing Date will be, of a quality and quantity that are salable in the ordinary course of business, consistent with past practices (except for damaged, defective or obsolete Inventory which, as of the Closing Date, will not exceed $10,000). 3.18 Minute Books. The minutes of the Company provided to counsel for Komag contain, to the extent applicable to the Media Business or the Acquired Assets, an accurate summary of all meetings of directors (or committees thereof) of the Company or actions by written consent of such directors and committees since March 1, 1998. 3.19 Brokers' and Finders' Fees. The Company has not incurred, nor will it incur, directly or indirectly, any Liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.20 Employees; Employee Plans and Compensation. (a) Schedule. Section 3.20(a) of the Company Disclosure Schedule contains an accurate and complete list of each Employee Plan and each material Employee Agreement. The Company does not have any plan or commitment, whether legally binding or not, to establish any new Employee Plan or Employee Agreement, to modify any Employee Plan or Employee Agreement (except to the extent required by law or to conform any such Employee Plan or Employee Agreement to the requirements of any applicable law, or to enter into any Employee Plan or Employee Agreement, nor does it have any intention or commitment to do any of the foregoing. (b) Documentation. The Company has made available to Komag (i) correct and complete copies of all documents embodying each Employee Plan and each Employee Agreement including all amendments thereto and copies of all forms of agreement and enrollment used therewith; (ii) the most recent annual actuarial valuations, if any, prepared for each Employee Plan; (iii) the most recent summary plan description, together with the most recent summary of material modifications, if any, required under ERISA with respect to each Employee Plan, (iv) all IRS determination letters and rulings relating to Employee Plans and copies of all applications and correspondence to or from the IRS or the Department of Labor ("DOL") with respect to any Employee Plan, (v) all communications material to any Employee or Employees relating to any Employee Plan and any proposed Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to the Company; and (vi) each 28 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code that has either received a favorable determination, opinion, notification or advisory letter from the IRS with respect to each such Plan as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has remaining a period of time under applicable Treasury regulations or IRS pronouncements in which to apply for such a letter and make any amendments necessary to obtain a favorable determination as to the qualified status of each such Employee Plan. (c) Employee Plan Compliance. Except as set forth in Section 3.20(c) of the Company Disclosure Schedule, (i) the Company has performed all material obligations required to be performed by it under each Employee Plan and each Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations including, without limitation, ERISA and the Code; (ii) there are no audits, inquiries or proceedings pending or, to the knowledge of the Company or any ERISA Affiliate, threatened by the IRS or DOL with respect to any Employee Plan and (iii) neither the Company nor any ERISA Affiliate is subject to any penalty or tax with respect to any Employee Plan under Section 402(i) of ERISA or Sections 4975 through 4980 of the Code. (d) Pension Plans. The Company does not now, nor has it ever, maintained, established, sponsored, participated in or contributed to, any Pension Plan affecting any of the Employees which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (e) Multiemployer Plans. At no time has the Company contributed to or been requested to contribute to any Multiemployer Plan. (f) No Post-Employment Obligations. No Employee Plan provides, or has any Liability to provide, life insurance, medical or other employee benefits to any Transferred Employee upon his or her retirement or termination of employment for any reason, except as may be required by statute, and the Company has not represented, promised or contracted (whether in oral or written form) to any Transferred Employee (either individually or to Transferred Employees as a group) that such Transferred Employee(s) would be provided with life insurance, medical or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. (g) Effect of Transaction. Except as set forth on Section 3.20(g) of the Disclosure Schedule, the execution of this Agreement and the Collateral Documents and the consummation of the transactions contemplated hereby and thereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. No payment or benefit which will or may be made by the Company or Komag or any of their respective Affiliates with respect to any 29 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Employee will be characterized as a "parachute payment," within the meaning of Section 280G(b)(2) of the Code. (h) Employment Matters. The Company (i) is in compliance in all material respects with all applicable laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any Taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any Governmental Entity, with respect to unemployment compensation benefits, social security or other benefits for Employees (other than routine payments to be made in the ordinary course of business, consistent with past practices). (i) Labor. No work stoppage or labor strike against the Company is pending or, to the knowledge of the Company, threatened with respect to the Media Business or involving or relating to any of the current Employees. The Company is not involved in or threatened with any labor dispute, grievance or litigation relating to labor, safety or discrimination matters involving any Employee, including charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in Liability to the Company. The Company has not engaged in any unfair labor practices within the meaning of the National Labor Relations Act with respect to the Media Business or involving or relating to any of the current Employees which could, individually or in the aggregate, directly or indirectly result in a Liability to the Company. The Company is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement, contract with or commitment to any labor representatives with respect to the Media Business or involving or relating to any of the current Employees, and the Company has not conducted negotiations with respect to any such future contracts or commitments; no labor representatives hold bargaining rights with respect to any Employees; and there are no current or, to the knowledge of the Company, threatened attempts to organize or establish any trade union or employee association with respect to the Company involving or relating to the Media Business or any of the current Employees. The Company has provided Komag with all information Komag has requested with respect to the names, date of hire or compensation of Employees. 3.21 Insurance. All of the Acquired Assets that are of an insurable nature are insured in amounts normally insured against by Persons carrying on the same classes of business as the Media Business, and the Company is adequately covered against accident, damage, injury, third party public liability, loss of profits and other risks normally insured against by Persons carrying on the same classes of business as the Media Business. All such policies are, and will at Closing be, in full force and effect and nothing has been done or omitted to be done by the Company which would make any policy of insurance void or voidable. All of such insurance policies are listed in Section 3.21 of the Company Disclosure Schedule. There is no material claim by the Company pending under any of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid, and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has no knowledge of any threatened termination of any of such policies. 30 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 3.22 Environmental Matters. (a) Underground Tanks. No underground storage tank, dump, landfill or waste pile containing or used to dispose or store any Hazardous Materials is present in, on or under any Media Business Facility, including the land and the improvements, ground water and surface water thereof. (b) Hazardous Materials Activities. Except as set forth in Section 3.22(b) of the Company Disclosure Schedule, at no time prior to the Closing has the Company transported (or arranged for the transport), stored, used, manufactured, disposed of, released, leaked, emitted or entered into the atmosphere, ground, soil, surface water, ground water or sewer system or exposed its employees or others to Hazardous Materials in violation of any Environmental Law. No Pre-Closing Hazardous Materials Activities have been conducted in violation of any Environmental Laws. (c) Permits. The Company currently holds all environmental approvals, permits, licenses, clearances and consents (the "Environmental Permits") necessary for the conduct of its Hazardous Material Activities as such activities are currently being conducted. All such Environmental Permits are listed in Section 3.22(c) of the Company Disclosure Schedule. (d) Environmental Liabilities. Except as set forth in Section 3.22(d) of the Company Disclosure Schedule, the Company is not in material violation of any Environmental Laws applicable to the Media Business, and neither the Company nor any of its Employees has engaged in any conduct that has given or will give rise to any Environmental Claims, losses or Liabilities under any such laws for which Komag may be held responsible. Except as set forth in Section 3.22(d) of the Company Disclosure Schedule, the Company has not received any written or oral communication from any Governmental Entity or any other Person alleging that the Company is not currently in compliance in any material respect with, or has a Liability under (including being a potentially responsible party or allegedly liable for costs associated for remediation of any site), any such laws in connection with the Media Business. Except as set forth in Section 3.22(d) of the Company Disclosure Schedule, no action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or, to the knowledge of the Company, threatened concerning any Environmental Permit, Hazardous Material or any Pre-Closing Hazardous Materials Activity of the Company. Except as set forth in Section 3.22(d) of the Company Disclosure Schedule, the Company is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any material environmental Liability. (e) Offsite Hazardous Material Disposal. The Company has transferred or released (or arranged for the transfer or release of) Hazardous Materials only to those treatment, storage, transfer or disposal sites described in Section 3.22(e) of the Company Disclosure Schedule ("Disposal Sites") and no action, proceeding, liability or claim exists or, to the knowledge of the Company, is threatened against any such listed disposal site or against or involving the Company with respect to any transfer or release of Hazardous Materials to such Disposal Sites. (f) Environmental Reporting. The Company has not, with respect to any Media Business Facility or Acquired Assets, filed and does not intend to file any notice or report under any 31 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Environmental Laws reporting a violation of any Environmental Laws or any Release of Hazardous Materials to the environment. (g) Asbestos Containing Material. Any asbestos-containing material which is known to the Company to be on or part of any Leased Real Property is in good repair according to the current standards and practices governing such material, and its presence or condition does not violate any applicable Environmental Laws. (h) Environmental Records. The Company has delivered to Komag or made available for inspections by Komag all records pertaining to the Pre-Closing Hazardous Materials Activities associated with the Acquired Assets, the Media Business or any Media Business Facility and all draft or final non-privileged environmental audits and environmental assessments relating to the Media Business or of any Media Business Facility conducted at the request of, or otherwise in the possession or control of the Company. 3.23 Compliance with Laws. The Company and its officers and employees have complied in all material respects with, are not in violation in any material respect of, and have not received any notices of violation with respect to, any foreign, federal, state, province or local statute, law or regulation with respect to the conduct of the Media Business or the ownership or operation of the Acquired Assets. 3.24 Complete Copies of Materials. The Company has delivered to Komag true and complete copies of each agreement, contract, commitment or other document referred to in the Company Disclosure Schedule and that has been requested by Komag or its counsel. 3.25 Suppliers. Section 3.25 of the Company Disclosure Schedule sets forth a true and complete list of the names and addresses of the ten (10) suppliers which each account for the largest net sales to the Company relating to the Media Business. There exists no actual termination or cancellation of the business relationship of the Company with any supplier or group of suppliers listed in Section 3.25 of the Company Disclosure Schedule. 3.26 No Insolvency. The Company will not be rendered insolvent by the sale, transfer and assignment of the Acquired Assets pursuant to the terms of this Agreement. 3.27 Private Placement. The Company is acquiring the Sale Shares for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. The Company acknowledges that the Sale Shares to be received are characterized as "Restricted Securities" and must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The Company is aware of the provisions of Rule 144 promulgated under the Securities Act. Representatives of the Company have had the opportunity to ask questions of and receive answers from Komag or a Person acting on the Company's behalf concerning the terms and conditions of this transaction as well as to obtain any information requested by such representatives. The Company is an "Accredited Investor" as that term is defined in Rule 501 of Regulation D, promulgated by the SEC under the Securities Act. 32 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 3.28 Registration Statement Information. The information supplied by the Company for inclusion in the registration statement contemplated by the Registration Rights Agreement, does not contain, and will not contain at the effective date of such registration statement, any untrue statement of material fact or omit, and will not omit at the effective date of such registration statement, to state any material fact necessary in order to make the statements therein not misleading. 3.29 Representations Complete. To the knowledge of the Company, none of the representations or warranties made in this Article III (as modified by the Company Disclosure Schedule), nor any statement made in any Collateral Document or any Section of the Company Disclosure Schedule furnished by or on behalf of the Company heretofore pursuant to this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. To the knowledge of the Company, there is no event, fact or condition that materially and adversely affects the Media Business or the Acquired Assets that has not been set forth in this Agreement or in the Company Disclosure Schedule. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KOMAG Komag represents and warrants to the Company as of the date hereof, and as of the Closing Date, except as specifically set forth in the disclosure schedule accompanying this Agreement (referring to the appropriate section numbers) (the "Komag Disclosure Schedule") as follows: 4.1 Organization. Komag is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Komag has the corporate power and authority to own its properties and to carry on its business as now being conducted and as contemplated to be conducted. Komag is duly qualified to do business and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to be so qualified could have a material adverse effect on Komag. Komag has delivered to the Company or its counsel true and correct copies of its Certificate of Incorporation and Bylaws, which have not been amended since July 22, 1998. 4.2 Capital Structure of Komag. (a) The authorized capital of Komag consists of 150,000,000 shares of Common Stock, of which 53,920,660 shares are issued and outstanding as of the date hereof, and 1,000,000 shares of Preferred Stock, none of which shares are issued and outstanding as of the date hereof. All of the issued and outstanding capital stock of Komag have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right or other rights to subscribe for or purchase shares created by statute, the Certificate of Incorporation or Bylaws of Komag or any agreement to which Komag is a party or by which it is bound. Komag has reserved 18,140,000 shares of Common Stock for issuance to employees and consultants pursuant to the 1987 Incentive Stock Option Plan, of which 5,754,874 shares are subject 33 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ to outstanding, unexercised options; Komag has reserved 6,100,000 shares of Common Stock for issuance to employees and consultants pursuant to the 1997 Supplemental Stock Option Plan, of which 5,102,340 shares are subject to outstanding, unexercised options; and Komag has reserved 7,400,000 shares of Common Stock for issuance to employees and consultants pursuant to the 1988 Employee Stock Purchase Plan, of which 3,284,927 shares remain available for sale. Except for the options described in this Section 4.2(a) or as set forth on Section 4.2(a) of the Komag Disclosure Schedule, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which Komag is a party or by which it is bound obligating Komag to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Komag or to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. (b) The Sale Shares to be issued pursuant to the Acquisition will be, at the Closing Date, duly authorized, validly issued, fully paid, nonassessable, and not subject to any call, preemptive or similar rights. 4.3 Authority. Komag has all requisite corporate power and authority to enter into this Agreement and each of the Collateral Documents to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the Collateral Documents to which it is a party by Komag and the consummation of the transactions contemplated hereby and thereby by Komag have been duly authorized by all necessary corporate action on the part of Komag. This Agreement has been, and each of the Collateral Documents to which it is a party will be at the Closing, duly executed and delivered by Komag and, assuming the due authorization, execution and delivery by the other parties hereto and thereto, upon execution, will constitute valid and binding obligations of Komag, enforceable in accordance with their respective terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and to rules of law governing specific performance, injunctive relief or other equitable remedies. 4.4 No Conflict. The execution and delivery of this Agreement and each of the Collateral Documents to which it is a party by Komag does not, and, the consummation of the transactions contemplated hereby and thereby by Komag will not, Conflict with (a) any provision of the Certificate of Incorporation or Bylaws of Komag, (b)(i) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which Komag is subject or by which it is bound (other than any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which Komag is subject or by which it is bound set forth on Section 4.4(b)(ii) of the Komag Disclosure Schedule) or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which Komag is subject or by which it is bound set forth on Section 4.4(b)(ii) of the Komag Disclosure Schedule or (c) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Komag or its properties or assets, assuming, in each case, compliance with (x) any applicable requirements under the HSR Act, (y) any applicable requirements under the 34 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Exchange Act and (z) such other matters set forth in Section 4.4(z) of the Komag Disclosure Schedule. 4.5 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any other Person, including a party to any agreement with Komag (so as not to trigger any Conflict), is required by or with respect to Komag in connection with the execution and delivery of this Agreement or any of the Collateral Documents to which it is a party or the consummation of the transactions contemplated hereby or thereby, except for such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings (a) as may be required under the HSR Act, (b) as may be required under applicable federal and state securities laws, (c) as may be set forth in Section 4.5 of the Komag Disclosure Schedule or (d) which if not obtained or made, would not materially impair the ability of Komag to consummate the transactions contemplated by this Agreement or the Collateral Documents. 4.6 SEC Documents, Komag Financial Statements. Komag has furnished or made available to the Company true and complete copies of all reports or registration statements filed by it with the SEC under the Exchange Act, for all periods subsequent to December 28, 1997, all in the form so filed (all of the foregoing being collectively referred to as the "Komag SEC Documents"). As of their respective filing dates, the Komag SEC Documents complied in all material respects with the requirements of the Exchange Act, and none of the Komag SEC Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Komag SEC Document. The financial statements of Komag, including the notes thereto, included in the Komag SEC Documents (the "Komag Financial Statements"), comply as to form in all material respects with applicable accounting requirements of the Exchange Act, and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except as may be indicated in the notes thereto), and present fairly in all material respects the financial position, the results of operation and, where applicable, the cash flows and changes in financial position of Komag as of the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal audit adjustments). 4.7 No Material Adverse Change. Since September 27, 1998, Komag has conducted its business in the ordinary course and, other than as disclosed in the Komag SEC Documents filed with the SEC, there has not occurred (a) any material adverse change in the business, financial condition or results of operation of Komag or (b) any damage to or destruction or loss of any assets of Komag (whether or not covered by insurance) that materially and adversely affects the financial condition or business of Komag. 4.8 Litigation. Except as set forth in Section 4.8 of the Komag Disclosure Schedule, there is no action, suit, claim, proceeding or arbitration of any nature pending or, to the knowledge of Komag, threatened against Komag or any of its properties or any of its officers, directors or stockholders in respect of Komag. There is no investigation pending or, to the knowledge of Komag, threatened against Komag or any of its assets or properties or any of its officers, directors or stockholders in respect of Komag by or before any Governmental Entity. No Governmental Entity 35 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ has challenged or questioned the legal right of Komag to manufacture, offer or sell any of its products in the present manner or style thereof. 4.9 Brokers' Fees. Komag has not incurred, nor will it incur, directly or indirectly, any Liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. ARTICLE V CONDUCT PRIOR TO THE CLOSING 5.1 Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of (i) the termination of this Agreement and (ii) the Closing, the Company agrees (except to the extent that Komag shall otherwise consent in writing) to carry on the Media Business in the normal and ordinary course, to pay the debts related thereto including Accounts Payable and similar obligations in the normal and ordinary course, consistent with past practice, to use all commercially reasonable efforts to preserve intact the Media Business organization, to keep available the services of the present Employees (except Non-Offered Employees) and to preserve its relationships with suppliers and others having business dealings with it, all with the goal of preserving unimpaired the Acquired Assets and the Media Business at the Closing, together with the goodwill associated therewith. The Company shall promptly notify Komag of any event or occurrence or emergency not in the ordinary course of business and any material event involving the Acquired Assets or the Media Business. Except as expressly contemplated by this Agreement or disclosed in Section 5.1 of the Company Disclosure Schedule, the Company shall not, without the prior written consent of Komag (which consent shall not be unreasonably withheld): (a) Waive or release any material right or claim arising from or related to the Media Business or the Acquired Assets; (b) Enter into any commitment or transaction involving, relating to or affecting the Acquired Assets or the Media Business not in the ordinary course of business; (c) Make any expenditures or commitments for expenditures for the acquisition of Inventory or other assets in excess of $500,000 per transaction to the extent that such expenditures or commitments for expenditures involves, relates to or affects the Acquired Assets or Media Business; (d) Transfer to any Person any rights to the Media Intellectual Property which are to be included within the Acquired Assets or to be licensed to Komag pursuant to the License Agreement; provided that the Company may license any Media Intellectual Property to be licensed to Komag pursuant to the License Agreement to the extent that so doing would not materially adversely affect Komag or the operation of the Acquired Assets or the Media Business following the Closing; 36 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (e) Enter into or amend any agreements pursuant to which any other Person is granted marketing, distribution or similar rights of any type or scope with respect to any products of the Company produced in connection with the Media Business; (f) Amend or otherwise modify in any material respect (or agree to do so), or violate the terms of, any of the agreements, contracts, licenses, permits, leases or Environmental Permits set forth or described in the Company Disclosure Schedule; (g) Commence or settle any litigation that could reasonably be expected to adversely affect the Acquired Assets or Media Business; (h) Acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof that includes assets that would constitute Acquired Assets under this Agreement, or otherwise acquire or agree to acquire any assets that would constitute Acquired Assets under this Agreement, other than in the ordinary course of business; (i) Sell, lease, license, grant any Lien on or otherwise dispose of or encumber any of the Acquired Assets, except for intercompany sale of Media Inventory in the ordinary course of business; (j) Adopt or amend any employee benefit plan, or enter into any employment contract or extend employment offers (in each case only to the extent affecting Employees), pay or agree to pay any special bonus or special remuneration to any Employee, or increase the salaries or wage rates of the Employees, except, in each case, in the ordinary course of business, consistent with past practices or to the extent required by law or to conform any Employee Benefit Plan or Employee Agreement to the requirements of applicable law; (k) Revalue any of the Acquired Assets, except as expressly required by the Agreement; (l) To the extent it may affect the Acquired Assets, the Media Business or the Liability of Komag for Taxes under the terms of this Agreement, make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (m) Enter into any strategic alliance, development or joint marketing agreement involving, relating to or affecting the Acquired Assets or the Media Business; (n) Fail to comply in all material respects with any laws, rules or regulations applicable to the Acquired Assets or the Media Business; or 37 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (o) Take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through (n) above, or any other action that would prevent the Company from performing or cause the Company not to perform its covenants hereunder or under the Collateral Documents. 5.2 Review of Capital Budget/Spending Plan. The Company has provided to Komag and its representatives for their review all current capital budgets and spending plans relating to the Media Business. As reasonably practicable following the date hereof, the Company shall provide to Komag and its representatives for their review all updates or amendments to its current capital budgets and spending plans relating to the Media Business. 5.3 No Solicitation. Until the earlier of (i) the Closing and (ii) the date of termination of this Agreement pursuant to the provisions of Section 9.1 hereof, the Company will not (nor will the Company permit any of the Company's officers, directors, agents, representatives or affiliates to) directly or indirectly, take any of the following actions with any party other than Komag and its designees: (a) solicit, encourage, conduct discussions with or engage in negotiations with any Person, other than Komag, relating to the possible acquisition of all or any part of the Media Business (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), (b) provide information with respect to it to any Person, other than Komag, relating to possible acquisition of all or any part of the Media Business (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), (c) enter into an agreement with any Person, other than Komag, providing for the possible sale of all or any part of the Media Business (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or (d) make or authorize any statement, recommendation or solicitation in support of any possible sale of all or any part of the Media Business (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) to any Person, other than by Komag. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Access to Information. (a) Subject to any applicable contractual confidentiality obligations (which the Company shall use all commercially reasonable efforts to cause to be waived), the Company shall afford Komag and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Closing to (a) all of its properties, employees, books, contracts, agreements and records relating to the Media Business or the Acquired Assets and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of it as Komag may reasonably request for the purpose of conducting a due diligence review of the Media Business and the Acquired Assets. No information or knowledge obtained in any investigation pursuant to this Section 6.1(a) shall affect or be deemed to modify any representation or warranty contained herein. 38 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (b) Subject to any applicable contractual confidentiality obligations (which Komag shall use all commercially reasonable efforts to cause to be waived), Komag shall afford the Company and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Closing to all information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of it as the Company may reasonably request for the purpose of evaluating an investment in Komag Common Stock. No information or knowledge obtained in any investigation pursuant to this Section 6.1(b) shall affect or be deemed to modify any representation or warranty contained herein. (c) Subject to any required consents or approvals, Komag and its agents, representatives or consultants shall be permitted reasonable access, during normal business hours and without material interference to the Media Business, to all Leased Real Property prior to the Closing Date for the purpose of performing such investigations of the condition of the Leased Real Property as Komag shall deem necessary, including, but not limited to, investigation of the condition of the subsurface soils and groundwater. 6.2 Confidentiality. Each of the parties hereto hereby agrees to and reaffirms the terms and provisions of the Confidentiality and Nondisclosure Agreement between Komag and the Company dated as of April 6, 1999. 6.3 Public Disclosure. Unless otherwise required by law (including, without limitation, securities laws) or by the rules and regulations of the New York Stock Exchange, Inc. or the NASDAQ Stock Market or other securities exchange, prior to the Closing, no disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement shall be made by any Party hereto unless approved by Komag and the Company prior to release; provided that such approval shall not be unreasonably withheld. In the event any such disclosure is required by law or by the rules and regulations of such exchange or market, the disclosing Party shall afford the other Party a reasonable prior opportunity to review the comment on such disclosure. 6.4 HSR Approval. The Parties hereto have filed with the United States Federal Trade Commission and the United States Department of Justice the pre-merger notifications and reports required to be filed pursuant to the HSR Act. The Parties hereto shall provide any supplemental information that may be requested in connection therewith and shall request early termination of the waiting period. All such notifications, reports and supplemental information, if any, at the time so filed or provided, shall comply, in all material respects, with the requirements of the HSR Act. Each Party shall provide such assistance to the other as it may reasonably request to assist the other in making such filings. The Company and Komag shall each bear fifty percent (50%) of the filing fees required by the HSR Act. 6.5 Consents. The Company shall use all commercially reasonable efforts to obtain the consents, waivers and approvals under any of the Contracts set forth in Sections 3.4, 3.5, 3.10(b), 3.10(c), 3.11(a)(ii), 3.12(a) and 3.14 of the Company Disclosure Schedule as may be required in connection with the Acquisition so as to assign to Komag all rights of the Company to the Acquired Assets and the Media Business including, without limitation, the consents, waivers and approvals of 39 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ all equipment lessors to allow Komag to move all manufacturing equipment included within the Acquired Assets to Malaysia on terms and conditions acceptable to the Company and Komag. Komag shall use all commercially reasonable efforts to obtain the consents and approvals under any contracts set forth in Sections 4.4 and 4.5 of the Komag Disclosure Schedule. Each Party agrees to pay all fees and costs necessary to obtain the consents, waivers and approvals required to be obtained by it; provided that, all fees and costs necessary to obtain any consents, waivers and approvals of any of the equipment lessors or landlords pursuant to any equipment leases or real property leases identified on the Company Disclosure Schedules shall be paid by the Company; provided, further, however, that if the fees and costs necessary to obtain a particular consent, waiver or approval of any such equipment lessor or landlord exceeds $1,500 the parties shall allocate the fees and costs with respect to such consent, waiver or approval, after good faith negotiations, in a manner mutually agreeable to the parties. Notwithstanding anything contained herein to the contrary, if any of the equipment lessors require Komag to issue letter(s) of credit on behalf of such equipment lessor(s) in connection with any of the equipment leases identified on the Company Disclosure Schedules, Komag shall use commercially reasonable efforts to obtain such letter(s) of credit; provided that, if Komag is unable to obtain the letter(s) of credit in the full amount required by such equipment lessor(s), the Company shall obtain one or more letter(s) of credit on behalf of such equipment lessor(s) in the amount of any such shortfall up to a maximum aggregate amount of the lesser of (i) twenty percent (20%) of the value of the letter(s) of credit requested by such equipment lessor(s) and (ii) $5,000,000. 6.6 Commercially Reasonable Efforts; Access to Warehouse. Subject to the terms and conditions provided in this Agreement, each of the Parties hereto shall use all commercially reasonable efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the Parties hereto the benefits contemplated by this Agreement; provided that Komag shall not be required to agree to any divestiture by Komag or any of Komag's subsidiaries or Affiliates of shares of capital stock or of any business, assets or property of Komag or its subsidiaries or Affiliates including, without limitation, the Media Business or any of the Acquired Assets, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and capital stock. For a period of thirty (30) days following the Closing Date, the Company shall provide Komag and its employees and agents with reasonable access, during normal business hours and with prior notice, from time to time, to enter into the Five Star Warehouse and the TWI Warehouse in order to determine which equipment and other items it wishes to include within the Acquired Assets and to remove from the warehouses such equipment and other items so designated. 6.7 Notification of Certain Matters. The Company shall give prompt notice to Komag, and Komag shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of 40 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ the Company and Komag, respectively, contained in this Agreement to be materially untrue or inaccurate at or prior to the Closing except as contemplated by this Agreement (including the Company Disclosure Schedule) and (ii) any failure of the Company or Komag, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.7 shall not limit or otherwise affect any remedies available to the party receiving such notice. 6.8 Employee Matters. (a) Selection of Employees. Komag has made, and is prepared to make further, written offers of employment to those Employees at the Company's Santa Clara, California and San Jose, California facilities as Komag deems necessary, in its sole discretion, to operate the Media Business efficiently after the Closing and to meet the Company's volume requirements set forth in the Volume Purchase Agreement (conditional upon the closing of the Acquisition); provided, that Komag shall not be obligated to employ, and shall have no Liability with respect to the continued employment of, any of the Employees. The Company hereby waives, releases and discharges all Employees who shall accept employment from Komag ("Transferred Employees") from any and all noncompetition, confidentiality or employment restrictions, obligations or agreements entered into by such Transferred Employees with the Company to the extent that such Transferred Employees are performing services related to the Media Business for Komag or any of its Affiliates. The Company agrees that any disclosure of confidential information relating to the Media Business by a Transferred Employee to Komag or any of its Affiliates shall not constitute a breach of any confidentiality agreement between such Transferred Employee and the Company. (b) Employee Plans. Komag shall use all commercially reasonable efforts to (i) provide all Transferred Employees with employee health benefits substantially similar in the aggregate in coverage and benefits as to those provided as of the date hereof by the Company, (ii) waive any pre-existing condition requirements or waiting period requirements under such Person's Employee Plans to the extent permitted by the insurance carrier, (iii) credit previous service by the Transferred Employees with the Company under such Person's comparable employee benefit plans, including but not limited to a 401(k) savings plan, for purposes of eligibility to participate, early commencement of benefits and vesting and (iv) apply toward any deductible requirement or "out-of-pocket" maximum limit under any such Person's employee benefit plans any amounts paid (or accrued) by each Transferred Employee under any Employee Plan, to the extent that the plan years of the relevant plan overlap. (c) 401(k) Plan Rollovers. The Company and Komag agree to use their best efforts to enable individual rollovers of Transferred Employees' account balances in the Company's 401(k) Plan to Komag's 401(k) Plan, which balances may include plan loans. In furtherance and not in limitation of the foregoing, provided that Transferred Employees have completed the Company's 401(k) termination distribution request form, the Company shall complete Komag's standard rollover form for each Transferred Employee electing to rollover his or her account balance into Komag's 401(k) Plan in a timely manner. In addition, the Company will provide Komag with a 41 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ discussion of facts in support of the Company's view that the sale of the Media Business by the Company to Komag is the sale of "substantially all of the assets" used in a "trade or business" within the meaning of section 401(k)(10) of the Code. (d) WARN Act. The Company has sent out a notification pursuant to the Workers Adjustment and Retraining Notification Act of 1988, as amended ("WARN Act"), to all Employees who are not Offered Employees ("Non-Offered Employees") to commence the sixty (60) day notification period required under the WARN Act. All Liabilities relating to the employment, termination or employee benefits of Employees including, without limitation, all termination obligations in connection with the WARN Act shall be the responsibility of the Company; provided that Komag shall be responsible for all such termination obligations under the WARN Act with respect to (i) Employees who were designated as Offered Employees by Komag but whose offers of employment were revoked by Komag prior to the Closing and (ii) Offered Employees who are hired by Komag following the Closing to the extent such obligations under the WARN Act arise from actions of Komag following the Closing; provided, further, however, that Komag shall not be responsible for termination obligations under the WARN Act with respect to Offered Employees who do not accept offers of employment from Komag. In addition, the Company shall give advance notice to all Non-Offered Employees under any state statute analogous to the WARN Act. (e) COBRA. The Company shall be solely responsible for providing continuation health coverage, to the extent required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), to all Offered and Non-Offered Employees and their eligible dependents who have experienced a qualifying event before or on the Closing Date and who (i) elect continuation coverage within the time period prescribed by COBRA and (ii) who are otherwise qualified beneficiaries (as defined in Section 4980B(g)(1) of the Code), and the Company shall indemnify Komag for any and all loss, cost or expense relating to any and all outstanding obligations, Liabilities and claims arising under COBRA. (f) Nonsolicitation of Employees. Notwithstanding anything else contained herein to the contrary, (a) unless this Agreement is terminated prior to the Closing for any reason, the Company shall not solicit the continued employment of any of the Transferred Employees for a period of twelve (12) months following the date Komag designated such Employees as Offered Employees and (b) in the event that this Agreement is terminated prior to Closing for any reason, Komag shall not continue to solicit the employment of any of the Offered Employees for a period of twelve (12) months following the date of the termination of the Agreement; provided that, the foregoing restrictions shall not prohibit any of the parties from making general solicitations of employment not specifically directed to the Employees. (g) No Third Party Beneficiary Rights. Notwithstanding anything contained herein to the contrary, no provision in this Section 6.8 shall create any third party beneficiary or other rights to any Employee (including any beneficiary or dependent thereof) in respect of continued employment (or resumed employment) with the Company, Komag or any of their Affiliates, and no provision in this Section 6.8 shall create any rights in any such Person in respect of any benefits that may be provided, directly or indirectly, under any Employee Plan or arrangement 42 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ established by Komag or its Affiliates. No provision of this Agreement shall constitute a limitation on the rights of Komag or its Affiliates to amend, modify or terminate after the Closing Date any such plans or arrangements. 6.9 NMS Listing. Komag shall authorize for listing on the Nasdaq National Market the Sale Shares issuable in connection with the Acquisition, upon official notice of issuance. ARTICLE VII CONDITIONS TO OBLIGATION TO CLOSE 7.1 Conditions to Obligations of each of the Parties. The respective obligations of each Party to this Agreement to consummate the Acquisition shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) HSR Approval. The waiting period applicable to the consummation of the Acquisition under the HSR Act shall have been terminated or shall have expired without the threat of litigation by a Governmental Entity. (b) No Injunctions or Restrains on the Conduct of the Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging the Acquisition shall be in effect nor shall any proceeding brought by a Governmental Entity seeking the foregoing be pending. 7.2 Additional Conditions to Obligation of Komag. The obligation of Komag to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions, any of which may be waived in writing exclusively by Komag: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement. In addition, the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct in all material respects as of such particular date), with the same force and effect as if made on and as of the Closing Date, except in such cases (other than Sections 3.1 through 3.3 and 3.27 through 3.29) where the failure to be so true and correct would not, in the aggregate, have a material adverse effect on the Media Business or the value of the Acquired Assets. Komag shall have received a certificate with respect to the foregoing signed on behalf of the Company by the Vice President, Business Operations and the Chief Financial Officer of the Company. 43 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (b) Agreements and Covenants. The Company shall have performed and complied in all material respects with all agreements and covenants required by this Agreement to be performed and complied with by it on or prior to the Closing Date, and Komag shall have received a certificate to such effect signed on behalf of the Company by the Vice President, Business Operations and the Chief Financial Officer of the Company. (c) Consents and Approvals of the Company. The Company shall have furnished evidence to Komag satisfactory, in its reasonable discretion, that all of the third party consents, approvals and waivers referenced in Section 6.5 have been obtained including, without limitation, (i) acknowledgements and waivers from the landlords under each of the real property leases to be assigned to Komag stating that, among other things, there is no default (and the Acquisition has not caused a default) under such real property lease, (ii) the consents of all equipment lessors of the Leased Fixed Assets to allow Komag to move all manufacturing equipment included within the Acquired Assets to Malaysia on terms and conditions acceptable to Komag and the Company and (iii) the consent of Bank of Boston under the Company's senior credit facility and the removal of all Liens granted to the Bank of Boston with respect to any of the Acquired Assets. (d) Consents and Approvals of Komag. Komag shall have received the written consents, approvals and/or waivers of each of those Persons set forth in Sections 4.4 and 4.5 of the Komag Disclosure Schedule. (e) No Litigation. No action, suit, or proceeding shall be pending or threatened before any Governmental Entity wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or the Collateral Documents, (B) cause any of the transactions contemplated by this Agreement or the Collateral Documents to be rescinded following consummation of the Acquisition, or (C) materially affect in an adverse manner the right of Komag to own the Acquired Assets, and to operate the Media Business (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect). (f) No Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any material adverse effect on the Media Business, any of the Acquired Assets or the financial condition, results of operation or business of the Company. (g) Assignment and Assumption Agreement. The Company shall have entered into an Assignment and Assumption Agreement, in the form set forth in Exhibit E attached hereto (the "Assignment and Assumption Agreement"). (h) Bill of Sale. The Company shall have executed a Bill of Sale, in the form set forth in Exhibit F attached hereto ("Bill of Sale"). (i) Volume Purchase Agreement. The Company shall have entered into a Volume Purchase Agreement with Komag and/or Komag USA (Malaysia) Sdn., in the form set forth in Exhibit G attached hereto (the "Volume Purchase Agreement"). 44 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (j) Joint Development Agreement. The Company shall have entered into a Joint Development Agreement with Komag in the form set forth in Exhibit H attached hereto (the "Joint Development Agreement"). (k) License Agreement. The Company shall have entered into a License Agreement with Komag and/or Komag USA (Malaysia) Sdn. in the form set forth in Exhibit I attached hereto (the "License Agreement"). (l) Registration Rights Agreement. The Company shall have entered into a Registration Rights Agreement with Komag, in the form set forth in Exhibit J attached hereto (the "Registration Rights Agreement"). (m) Transitional Services Agreement. The Company shall have entered into a Transitional Services Agreement with Komag, in the form set forth in Exhibit K attached hereto (the "Transitional Services Agreement"). (n) Preliminary Closing NBV Statement. The Company shall have delivered to Komag the Preliminary Closing NBV Statement. (o) Legal Opinion of Company's Counsel. Komag shall have received from counsel to the Company and the general counsel of the Company opinions, in the form set forth in Exhibit L attached hereto, addressed to Komag, and dated as of the Closing Date. (p) Environmental Audit. Komag shall have obtained, investigated and approved, in its sole discretion, no later than five (5) days prior to the Closing Date, a report of any consultant selected by Komag regarding the Pre-Closing Hazardous Materials Activities; the exposure of the Company's employees or customers to Hazardous Materials arising out of the operation of the Media Business prior to the Closing Date; the presence or absence of Hazardous Materials on any real property as a result of the operation of the Media Business; or the likelihood that Hazardous Materials will migrate onto any Leased Real Property. 7.3 Additional Conditions to Obligation of the Company. The obligation of the Company to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions, any of which may be waived in writing exclusively by the Company: (a) Representations and Warranties. The representations and warranties of Komag contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement. In addition, the representations and warranties of Komag contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct in all material respects as of such particular date), with the same force and effect as if made on and as of the Closing Date, except in such cases (other than Sections 4.2 and 4.3) where the failure to be so true and correct would not, in the aggregate, have a material adverse effect on the financial condition, results of operation or business of Komag. The Company shall have 45 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ received a certificate with respect to the foregoing signed on behalf of Komag by its President and Chief Financial Officer. (b) Agreements and Covenants. Komag shall have performed and complied in all material respects with all agreements and covenants required by this Agreement to be performed and complied with by it on or prior to the Closing Date, and the Company shall have received a certificate to such effect signed on behalf of Komag by its President and Chief Financial Officer. (c) Consents and Approvals of the Company. The Company shall have obtained the following consents, approvals and waivers: (i) acknowledgements and waivers from the landlords under each of the real property leases to be assigned to Komag stating that, among other things, there is no default (and the Acquisition has not caused a default) under such real property lease, (ii) the consents of all equipment lessors of the Leased Fixed Assets to allow Komag to move all manufacturing equipment included within the Acquired Assets to Malaysia on terms and conditions acceptable to Komag and the Company and (iii) the consent of Bank of Boston under the Company's senior credit facility. (d) No Litigation. No action, suit, or proceeding shall be pending before any Governmental Entity wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or the Collateral Documents or (B) cause any of the transactions contemplated by this Agreement or the Collateral Documents to be rescinded following consummation of the Acquisition (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect). (e) Assignment and Assumption Agreement. Komag shall have entered into the Assignment and Assumption Agreement. (f) Volume Purchase Agreement. Komag shall have entered into the Volume Purchase Agreement. (g) Joint Development Agreement. Komag shall have entered into the Joint Development Agreement. (h) License Agreement. Komag shall have entered into the License Agreement. (i) Registration Rights Agreement. Komag shall have entered into the Registration Rights Agreement. (j) Transitional Services Agreement. Komag shall have entered into the Transitional Services Agreement. (k) No Material Adverse Effect. There shall not have occurred any material adverse change in the business, results of operation or financial condition of Komag since the date hereof; provided that, a reduction in the trading price of Komag Common Stock, whether occurring 46 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ at any time or from time to time, as reported by the Nasdaq National Market shall not constitute a material adverse change. (l) Promissory Note. Komag shall have delivered to the Company the Promissory Note. (m) Legal Opinion of Komag's Counsel. The Company shall have received from counsel to Komag an opinion, in form set forth in Exhibit M attached hereto, addressed to the Company, and dated as of the Closing Date. (n) Value of Sale Shares. The Share Amount Cap shall not have been applied to determine the Share Amount. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW; INDEMNITY 8.1 Survival of Representations and Warranties. Except as set forth in Section 8.5 hereof, all of the representations and warranties in this Agreement or in any certificate delivered pursuant to this Agreement shall survive the Acquisition and continue for a period ending on the [***] anniversary of the Closing. 8.2 Agreement to Indemnify. (a) The Company agrees to indemnify and hold Komag and each of its Affiliates, officers, directors, employees and shareholders (collectively, the "Komag Indemnitees") harmless against any and all losses, claims, damages, costs, expenses or other liabilities (including reasonable attorneys' fees and expenses and expenses of investigation and defense) (collectively, "Damages") resulting from (i) any breach of or inaccuracy in any representations and warranties of the Company set forth in this Agreement, the Company Disclosure Schedule or in any other certificate delivered by or on behalf of the Company pursuant to this Agreement, (ii) any breach or default by the Company of any covenant, obligation or other agreement of the Company set forth in this Agreement, the Company Disclosure Schedule or any other certificate delivered by or on behalf of the Company pursuant to this Agreement and (iii) any of the Retained Liabilities (each, a "Komag Indemnifiable Claim"). (b) Komag agrees to indemnify and hold the Company and each of its Affiliates, officers, directors, employees and shareholders (collectively, the "Company Indemnitees") harmless against any and all Damages resulting from (i) any breach of or inaccuracy in any representations and warranties of Komag set forth in this Agreement, the Komag Disclosure Schedule or in any other certificate delivered by or on behalf of 47 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ the Company pursuant to this Agreement, (ii) any breach or default by Komag of any covenant, obligation or other agreement of Komag set forth in this Agreement, the Komag Disclosure Schedule, or any other certificate delivered by or on behalf of the Company pursuant to this Agreement and (iii) any of the Assumed Liabilities (each, a "Company Indemnifiable Claim"). 8.3 Limits of Liability. In no event shall any Komag Indemnitee or Company Indemnitee, as applicable ("Indemnitee"), be reimbursed for any Damages under this Article VIII until the aggregate of all Damages incurred by all Komag Indemnitees or Company Indemnitees, as the case may be, exceeds $[***] ("Threshold Amount") (after which the amount of all Damages, including such $[***], shall become payable in accordance with the provisions of this Article VIII); provided that, (i) the Threshold Amount shall not apply to [***] or (ii) the Threshold Amount shall not apply to [***]. Notwithstanding anything else contained in this Agreement to the contrary, the maximum aggregate amount which Komag Indemnitees or the Company Indemnitees, as the case may be, may recover pursuant to this Article VIII is $[***]; provided that, the indemnities provided in Sections 8.2(a)(iii) and 8.2(b)(iii) shall not be limited by the foregoing $[***] maximum. 8.4 Indemnification Procedures; Time Limits. (a) If any Indemnitee shall incur any Damages, there shall be delivered to the Company or Komag, as the case may be (the "Indemnifying Party"), a certificate signed in good faith by the Company or Komag, as the case may be, on behalf of such Indemnitee (an "Officer's Certificate") stating that such Indemnitee has paid, properly accrued or reasonably anticipates that it will have to pay or accrue Damages in an amount specified in such Officer's Certificate, specifying in reasonable detail the individual items of Damages included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated Liability, and the nature of Komag Indemnifiable Claim or Company Indemnifiable Claim, as the case may be (the "Indemnifiable Claim"), to which such item is related. The Indemnifying Party shall, within thirty (30) days after receipt of the Officer's Certificate, subject to the provisions of Section 8.4(c) hereof, deliver to such Indemnitee in immediately available funds (U.S. Dollars) an amount equal to such Damages. (b) For a period of thirty (30) days after the receipt of such Officer's Certificate by the Indemnifying Party, the Indemnifying Party shall be entitled to review the Officer's Certificate and the basis of the Indemnifiable Claim. If the Indemnifying Party desires to dispute the Indemnifiable Claim or the Damages set forth in the Officer's Certificate, the Indemnifying Party may do so by providing written notice of such dispute to the Company or Komag, as the case may be, on behalf of the Indemnitee prior to the expiration of such thirty (30) day period. (c) If the Indemnifying Party shall so object in writing to any claim or claims made in any Officer's Certificate, the Indemnifying Party and the Company or Komag, as the case may be, on behalf of the Indemnitee shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Indemnifying Party and the Company or Komag, as the case may be, on behalf of the Indemnitee, should so agree, a memorandum setting forth such agreement shall be prepared and signed by Komag, the Company and the Indemnitee and the parties shall resolve the dispute in accordance with such memorandum. If no such agreement can be reached after good faith negotiation, either the Indemnifying Party or the Company or Komag, as 48 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ the case may be, on behalf of the Indemnitee, may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or the Indemnifying Party and Komag or the Company, as the case may be, on behalf of the Indemnitee, agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. The Indemnifying Party and Komag or the Company, as the case may be, on behalf of the Indemnitee, shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, each of which arbitrators shall be independent. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys fees and costs, to the extent as a court of competent law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement and all other Indemnitees. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators. (d) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Santa Clara County, California under the rules then in effect of the Judicial Arbitration and Mediation Services, Inc. For purposes of this Section 8.4, in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, the Indemnitee shall be deemed to be the non-prevailing party of the arbitration in the event that the arbitrators award the Indemnitee less than the sum of one-half (1/2) of the disputed amount plus any amounts not in dispute; otherwise, the Indemnifying Party shall be deemed to be the non-prevailing party. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative costs of the arbitration, and the expenses, including without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration. (e) In the event any Indemnitee becomes aware of a third-party claim which such Indemnitee believes may result in an Indemnifiable Claim, such Indemnitee shall promptly notify the Indemnifying Party of such claim, and, provided that the Indemnifying Party acknowledges that such claim is an Indemnifiable Claim, the Indemnifying Party shall be entitled, at the Indemnifying Party's expense, to participate in any defense of such claim. The Indemnitee shall have the right in its sole discretion to settle any such claim; provided, however, that, except with the consent of the Indemnifying Party, no settlement of any such claim with third-party claimants shall alone be determinative of the amount of any Indemnifiable Claim. In the event that the Indemnifying Party has consented to any such settlement and acknowledged that the claim is a Indemnifiable Claim, the Indemnifying Party shall have no power or authority to object under any provision of this Article VIII to the amount of any Indemnifiable Claim by such Indemnitee with respect to such settlement. 49 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 8.5 Survival of Environmental Covenants. The obligations and rights of Komag and Company with respect to (i) Seller's Retained Environmental Liabilities and (ii) the representations made in Section 3.22 hereof (collectively the "Environmental Covenants") are in addition to, independent from, and severable from the rights and obligations of the Parties under all other provisions of this Agreement. It is expressly acknowledged by all Parties hereto that neither the acts or omissions of any Party hereto, nor any failure of any condition or breach of a representation contained in the Agreement or any related agreements, shall impair the right of Komag to enforce the Environmental Covenants for their benefit, it being understood that the Environmental Covenants are being given consideration of the closing of the transactions contemplated by the Agreement and not in consideration of future performance or any representation, and are intended to allocate risk of loss and to create rights and obligations with respect to the matters covered by the Environmental Covenants between the Parties without regard to the conduct of any Person. No failure of any Person to exercise its rights under the Environmental Covenants and no delay in exercising any right or remedy hereunder, at law or in equity, shall operate as a waiver of the agreements contained in the Environmental Covenants; nor shall the Parties be estopped from exercising any right or remedy at any future time because of any such failure or delay; nor shall any single or partial exercise of any such right or remedy preclude any other or future exercise thereof or the exercise of any other right or remedy. The Environmental Covenants shall survive the sale, transfer, assignment, or hypothecation of any ownership interest in a party benefited hereby or obligated hereunder and the sale, transfer, assignment, or hypothecation of the Acquired Assets or any Media Business Facility, or any portion thereof or interest therein, by Komag to any Person. ARTICLE IX TERMINATION 9.1 Termination of Agreement. This Agreement may be terminated at any time prior to the Closing as provided below: (a) the Parties may terminate this Agreement by mutual written consent at any time prior to the Closing; (b) Komag may terminate this Agreement by giving written notice to the Company at any time prior to the Closing if Komag is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company and as a result of such breach the condition set forth in Section 7.2(a) or 7.2(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by the Company within thirty (30) days through the exercise of its commercially reasonable efforts, then for so long as the Company continues to exercise such commercially reasonable efforts Komag may not terminate this Agreement under this Section 9.1 unless such breach has not been cured within thirty (30) days (but no cure period shall be required for a breach which by its nature cannot be cured); 50 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ (c) the Company may terminate this Agreement by giving written notice to Komag at any time prior to the Closing if the Company is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Komag and as a result of such breach the condition set forth in Section 7.3(a) or 7.3(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by Komag within thirty (30) days through the exercise of its commercially reasonable efforts, then for so long as Komag continues to exercise such commercially reasonable efforts the Company may not terminate this Agreement under this Section 9.1 unless such breach has not been cured within thirty (30) days (but no cure period shall be required for a breach which by its nature cannot be cured); or (d) either Party may terminate this Agreement at any time, if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Acquisition by any Governmental Entity, which would: (i) prohibit Komag's ownership or operation of all or any material portion of the Media Business or the Acquired Assets, (ii) compel Komag to dispose of or hold separate all or a material portion of the Media Business or the Acquired Assets or other businesses or assets of Komag as a result of the Acquisition or (iii) materially limit the benefits accruing to such Party under the Volume Purchase Agreement. 9.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 9.1, this Agreement shall forthwith become void, and there shall be no liability or obligation on the part of Komag or the Company, or their respective officers, directors or shareholders; provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 6.2, 6.3, 6.8(e), 10.10 and 10.14 and Article VIII of this Agreement shall remain in full force and effect and survive any termination of this Agreement. 9.3 Escrow Agreement; Distribution of Property. Notwithstanding anything contained in this Agreement to the contrary, upon consummation of the Acquisition, the Property (as defined in the Escrow Agreement) shall immediately be distributed to Komag; provided, however, that, if this Agreement is terminated prior to the consummation of the Acquisition, the Property shall be distributed in accordance with Section 14(b) of the Escrow Agreement. ARTICLE X MISCELLANEOUS 10.1 No Third-Party Beneficiaries. Except as expressly provided in this Agreement, this Agreement shall not confer any rights or remedies upon any Person other than the Parties, their respective successors and permitted assigns and, with respect to Sections 7.2(i) and 7.2(k) Komag USA (Malaysia) Sdn. 10.2 Entire Agreement. This Agreement (including the Disclosure Schedules and other documents referred to herein) constitutes the entire agreement between the Parties with respect to the 51 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ subject matter hereof and supersedes any prior understandings, agreements or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. 10.3 Succession and Assignment. Except as expressly provided in this Agreement, this Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder by operation of law or otherwise without the prior written approval of each other Party; provided, however, that Komag may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases Komag nonetheless shall remain responsible for the performance of all of its obligations hereunder). 10.4 Counterparts. This Agreement may be executed, including by facsimile signature, in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 10.5 Headings. The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 10.6 Notices. All notices and other communications required or permitted under this Agreement shall be deemed to have been duly given and made if in writing and if served either by personal delivery or by facsimile (with telephonic confirmation of receipt) to the Party for whom intended (which shall include delivery by Federal Express or similar nationally recognized service) or three business days after being deposited, postage prepaid, certified or registered mail, return receipt requested, in the United States mail bearing the address shown in this Agreement for, or such other address as may be designated in writing hereafter by, such Party: If to the Company: Western Digital Corporation 8105 Irvine Center Drive Irvine, California 92618 Attn: Michael A. Cornelius Telephone: (949) 932-5000 Facsimile: (949) 932-3820 With a Copy to: Gibson, Dunn & Crutcher LLP 1520 Page Mill Road Palo Alto, California 94304-1125 Attn: Gregory T. Davidson, Esq. Telephone: (650) 849-5300 Facsimile: (650) 849-5333 If to Komag: Komag, Incorporated 1704 Automation Parkway San Jose, CA 95131 Attn: Chief Financial Officer 52 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Telephone: (408) 576-2200 Facsimile: (408) 944-9255 With a Copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Attn: Steven V. Bernard, Esq. Telephone: (650) 493-9300 Facsimile: (650) 493-6811 Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. 10.7 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Delaware. 10.8 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Komag and the Company. No waiver of any provisions of this Agreement shall be valid unless the same shall be in writing and signed by the waiving party. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 10.9 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 10.10 Expenses. Whether or not the Acquisition is consummated, all fees and expenses incurred in connection with the Acquisition including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the Collateral Documents and the transactions contemplated hereby and thereby, shall be the obligation of the respective party incurring such fees and expenses; provided that the accounting fees and expenses of the Company in connection with the preparation of audited financial statements with respect to the Media Business, if audited financial statements are requested by Komag, shall be borne by Komag. 10.11 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this 53 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." The word "agreement" when used herein shall be deemed in each case to mean any contract, commitment or other agreement, whether oral or written, which is legally binding. Words using the singular or plural number also include the plural or singular number, respectively. 10.12 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 10.13 Other Remedies. Except as otherwise expressly provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party of any one remedy will not preclude the exercise of any other remedy. 10.14 Submission to Jurisdiction. Each of the Parties irrevocably consents to the exclusive jurisdiction and venue of any state or federal court sitting in Santa Clara County, California, in any action or proceeding arising out of or relating to this Agreement and agrees that, except as otherwise provided in Section 8.4, all claims in respect of the action or proceeding may be heard and determined in any such court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other party with respect thereto. Each Party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or in equity. 10.15 Share Legends. All certificates representing any of the shares of Komag Common Stock to be issued pursuant to this Agreement shall have endorsed thereon a restrictive legend substantially as follows: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." (b) Any legend required to be placed thereon by applicable blue sky laws of any state. (c) "THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL OF THE TERMS AND CONDITIONS OF THAT CERTAIN 54 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ REGISTRATION RIGHTS AGREEMENT DATED AS OF APRIL 8, 1999 BY AND BETWEEN KOMAG, INCORPORATED AND WESTERN DIGITAL CORPORATION, A COPY OF WHICH KOMAG, INCORPORATED WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE." 10.16 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Remainder of page intentionally left blank] 55 ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. KOMAG, INCORPORATED By: _______________________________ Name: Title: WESTERN DIGITAL CORPORATION By: _______________________________ Name: Title: The undersigned, Komag USA (Malaysia) Sdn., agrees to be bound by the terms contained in Sections 7.2(i), 7.2(k) and 10.1 of this Agreement. KOMAG USA (MALAYSIA) SDN. By: _______________________________ Name: Title: EX-10.1.14 3 VOLUME PURCHASE AGREEMENT ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ VOLUME PURCHASE AGREEMENT This Volume Purchase Agreement, dated as of April 8, 1999, is made by and between Komag, Incorporated, a Delaware corporation ("Komag") and Western Digital Corporation, a Delaware corporation ("WDC"). BACKGROUND A. Komag and WDC are entering into an Asset Purchase Agreement of even date herewith pursuant to which Komag is acquiring certain assets used in the production of certain product components (the "Asset Purchase Agreement"). B. The parties acknowledge that this Volume Purchase Agreement is part of a significant strategic relationship, in which Komag is purchasing assets from WDC to produce media and WDC is agreeing to purchase certain of its requirements of media from Komag, and Komag is agreeing to supply such requirements to WDC, to enable Komag to spread costs for media over a greater volume, and to enable Komag to incur the significant research and development costs associated with the historically rapid technology advances and short product cycles for media, and to enable WDC to obtain favorable pricing on a consistent supply of high-quality, state-of-the-art media, all to the mutual benefit of Komag and WDC. C. WDC desires to purchase, and Komag desires to sell to WDC, certain products manufactured using such acquired assets as well as other products manufactured by Komag, all in accordance with the terms of this Volume Purchase Agreement. NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, as well as a portion of the stock issued pursuant to the Asset Purchase Agreement, the parties agree as follows: ARTICLE 1: DEFINITIONS For the purposes of this Volume Purchase Agreement, unless the context otherwise requires, the following terms will have the respective meanings set out below and grammatical variations of such terms will have corresponding meanings: 1.1 "A-Build" of a WDC product has the meaning assigned thereto in WDC's classifications as of the Effective Date, and is the product "build" (e.g. A-0 build, A-1 build), developed before the Pilot Build or PMT Build has been developed. ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 1.2 "Active Program" means a Program for a Product that is being purchased and sold under this Agreement that has not yet undergone an End of Life. 1.3 "Actual Media Requirements" shall have the meaning set forth in Section 4.2. 1.4 "Affiliate" of a party means any entity that directly or indirectly controls, is under common control with, or is controlled by, such party. As used in this definition, "control" means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through beneficial ownership of securities or other ownership interests, by contract or otherwise). 1.5 "Component" means a component of a WDC product. 1.6 "Days" means consecutive calendar days. 1.7 "Delivery Date" or "Scheduled Delivery Date" means the agreed date of delivery of Products as specified in Pull Requests. 1.8 "Disentanglement" means a period of no more than [***] Days after termination of this Agreement to allow for (a) the transfer by Komag to WDC of any non-proprietary documentation of work processes and data that would be needed to allow WDC to continue to obtain Media comparable to the Products from alternate manufacturers; (b) the prompt and orderly conclusion of all work under this VPA, including without limitation the acknowledgment of Purchase Orders and the fulfillment of any Pull Requests during such [***]-Day period; (c) [***]; and (d) the prompt ramp-up to full volume production by an alternative provider or alternative providers of Media for WDC's requirements; provided, however, that nothing in (a) through (d) will be construed to require Komag to disclose or license any proprietary information or other intellectual property to any third party. 1.9 "Effective Date" means the Closing Date, as such term is defined in the Asset Purchase Agreement. 1.10 "End of Life" has the meaning set forth in Exhibit D. 1.11 "Exhibit" means an attachment to this VPA. Exhibits are incorporated herein by reference thereto. 1.12 "FGI" has the meaning set forth in Section 5.1. 1.13 "Fiscal Quarter" means the fiscal quarters of WDC set forth on Exhibit A. 1.14 "Force Majeure Event" means an act of nature, civil disruption, power outage, public enemy, government action, or freight embargo beyond the control of a party. -2- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 1.15 "Inactive Program" means a Program that has undergone an End of Life. 1.16 "JIT Hub Inventory Watermark" means a quantity of Units equal to the product of two times the quotient of (a) WDC's most recent forecasted requirements for the four full calendar weeks following the week in which the computation is made, divided by (b) four. 1.17 "JIT Hubs" has the meaning set forth in Section 5.3. 1.18 "Lead Time" means, for purposes of this VPA, the minimum length of time prior to a specific Delivery Date that Komag must receive a Pull Request to ensure delivery by such date. 1.19 "Material Default" shall mean the occurrence of any of the following: 1.19.1 Failure of Komag to deliver (subject to Section 6.6) in a given Fiscal Quarter the lesser of (a) [***]% of the WDC Actual Media Requirements during such Fiscal Quarter; (b) [***]% of the Units in the Purchase Order for such Fiscal Quarter delivered by WDC under Section 5.2; (c) the number of Units of "Fiscal Quarterly Purchase Requirements" in the chart below for the year in which such Fiscal Quarter falls; and (d) the number of Units equal to (i) Units [***] in such Fiscal Quarter; plus (ii) Units [***]. However, any such failure prior to [***], will not be deemed a Material Default to the extent such failure is attributable to the failure of any Acquired Assets (as such term is defined in the Asset Purchase Agreement) to be year 2000 compliant; - -------------------------------------------------------------------------------- FISCAL QUARTERLY PERIOD PERIOD PURCHASE BEGINNING ENDING REQUIREMENTS - -------------------------------------------------------------------------------- Effective Date Effective Date plus [***] [***] Units months - -------------------------------------------------------------------------------- Effective Date plus [***] Effective Date plus [***] [***] Units months months - -------------------------------------------------------------------------------- Effective Date plus [***] Effective Date plus [***] [***] Units months months - ----------------------------- ----------------------------- -------------------- 1.19.2 A material breach by either party (other than breach of a payment obligation of WDC under Section 6.5) of any obligation, covenant, or condition under this Agreement that is susceptible of cure, and the failure by the breaching party to cure such breach within 30 Days after the breaching party has received notice of such default (which notice must explicitly assert a -3- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Material Default under Section 1.19.2 of this VPA), provided that if the cure requires more than 30 Days, the breaching party fails to (i) promptly take action to cure such breach as quickly as reasonably possible; or (ii) cure such breach within 60 Days after the breaching party has received notice of such default; 1.19.3 A failure of WDC to meet its payment obligations under Section 6.5, and the failure by WDC to meet such obligations within 30 Days after WDC has received notice of Komag's intent to discontinue shipping Product pursuant to Section 6.6; or 1.19.4 An assignment or attempted assignment in violation of Section 12.4. 1.20 "Matrix Build" of a WDC product has the meaning assigned thereto in WDC's classifications as of the Effective Date, and is a request by WDC for Media samples with a specified combination or combinations of coercivity and Mrt values. 1.21 "Media" means recording disks, manufactured by any entity, as used in data storage devices. 1.22 "Pilot Build" of a WDC product has the meaning assigned thereto in WDC's classifications as of the Effective Date, and is typically the large build of a new WDC product in development before it is released to a WDC production facility. 1.23 "PMT Build" of a WDC product has the meaning assigned thereto in WDC's classifications as of the Effective Date, and is typically the first large build of a new WDC product after it has been released to a WDC production facility. 1.24 "Price" means the amount charged for Products, as specified in Section 6.1. 1.25 "Product" means the Media manufactured by Komag. 1.26 "Program" means a WDC product classification, currently including, for example, "Hunter" and "Rebel" disk drives. A Program may include various capacities, numbers of disks per drive, drive performance specifications, or drive interfaces (such as SCSI or ATA). 1.27 "Pull Request" means a request made by WDC to Komag for delivery of Products from a JIT Hub. 1.28 "Purchase Order" means a purchase order placed by WDC to Komag for Products as contemplated by this VPA. 1.29 "Purchase Requirements" means the number of Units WDC is required to purchase and Komag is required to sell under Section 4.1. -4- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 1.30 "Replacement Products" has the meaning set forth in Exhibit D. 1.31 "RMA" means returned material authorization. 1.32 "Section" means a numbered section of this VPA. 1.33 "Specifications" means designs, drawings, prints and written descriptions, specification reviews and requirements for Products that have been developed by WDC and Komag as of the date of this VPA, or which may be developed by WDC and Komag during the term of this VPA. 1.34 "Stop Ship Order" means a stop ship order under WDC's established stop ship procedure 80-005447-000, resulting from a Product failing quality parameters. 1.35 "Subcontract" means an arrangement through which a disk drive supplier has disk drives made or assembled by a subcontractor, and such subcontractor provides such drives to the supplier for sale to third parties. 1.36 "Target FGI" has the meaning set forth in Section 5.3. 1.37 "Unit" means a single Product. 1.38 "VPA" means this Volume Purchase Agreement, including the Exhibits. 1.39 "WIP" means work in process, as such term is generally understood in the Media industry. ARTICLE 2: AGREEMENT STRUCTURE 2.1 Background. Komag and WDC agree that this VPA creates a high degree of mutual dependence between Komag and WDC. Each party agrees to diligently cooperate with the other party to accomplish the objectives of this VPA. 2.2 Agreement Components. This VPA consists of this VPA (including its Exhibits), Purchase Orders and Pull Requests. If there is a conflict among the terms and conditions of the various documents or an ambiguity created by differences therebetween, the order of precedence will be (i) this VPA (excluding its Exhibits), (ii) Exhibits, and (iii) Purchase Orders and Pull Requests. 2.3 Purchase Order. Purchase Orders will be used to convey the Purchase Orders Price and number of Units, and accordingly Purchase Orders must contain the following: part number, Price, Units ordered, customer name, ship to address (destination), bill to address, and Purchase Order number. Delivery Dates shall be determined in accordance with Section 5.2. The parties acknowledge that such Purchase Orders, as well as confirming documents, acknowledgments, forms, -5- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ invoices and the like used in the ordinary course of business may contain other terms and conditions. The parties agree that this VPA will take precedence over any such document or other communication, representation or understanding whether oral or written and that any term or condition relating to the subject matter of this VPA that is inconsistent with this VPA (whether in contradiction to, in addition to, or that would result in any ambiguity with respect to any term or condition in this VPA) will be deemed deleted and be of no force, including, but not limited to, any term or condition purporting to supersede this VPA in whole or in part or purporting to make any offer, acceptance, term, condition or other action conditional upon acceptance of, or indicating agreement to, any inconsistent term or condition. The foregoing may not be modified or waived except by written agreement of the parties, specifically referencing this VPA, and signed by officers of both parties. The parties agree that, without limiting Section 12.1, the foregoing shall not be superseded, altered, or overridden by any provision in the Uniform Commercial Code as it may have been adopted by any competent jurisdiction. 2.4 Exhibits. The following Exhibits are incorporated into this VPA by reference and deemed to be a part hereof: Exhibit A: WDC Fiscal Quarters Exhibit B: Initial Prices Exhibit C: Qualification Sample Prices Exhibit D: Supplier Warranty and Replacement Product Terms ARTICLE 3: PRODUCT QUALIFICATION AND DEVELOPMENT 3.1 Qualification Process. Each of the parties shall use commercially reasonable efforts to qualify Komag's Products on all Programs. Such efforts will require qualification of Products in combination with other Components (such as multiple combinations of Media and recording heads), as well as the subsequent qualification of WDC's disk drives incorporating such combinations at each WDC customer. Subject to Section 4.3, WDC agrees that Product qualifications must include sufficient WDC Programs, Component combinations and customers to allow WDC to meet its Purchase Requirements for Products under this VPA, taking into account that a Product may fail to qualify in a Program or Components combination, or for a customer, from time to time. 3.2 Qualification Locations. Following the Effective Date, Komag intends to manufacture Products under this Agreement using in-line and static sputtering processes at factory locations in Santa Clara and San Jose, California, and in Penang, Malaysia. Both parties recognize that WDC must qualify Products for its Programs specifically by process and factory location in accordance with industry practice. -6- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 3.2.1 Initial Period. To permit a consolidation of WDC's Santa Clara facilities into Komag's manufacturing operations in the most expeditious manner, (i) WDC and Komag each agree during an initial transition period, not to exceed [***] months following the Effective Date, to use commercially reasonable efforts to [***] 3.2.2 Subsequent Period. After the initial transition period described in Section 3.2.1, (i) WDC and Komag each shall use commercially reasonable efforts to [***] 3.3 Qualification Samples. The prices for qualification sample Products during the first three years of the term of this VPA are indicated in Exhibit C. 3.4 Cure of Failure. In the event the parties fail to qualify Products pursuant to Section 3.1, or to resolve a Stop Ship Order, the parties will use their best efforts to cure such failure until the midpoint of life of the Active Program. Thereafter, the parties will be obligated to continue to exert such efforts only as mutually agreed. ARTICLE 4: PRODUCT PURCHASE AND SALE COMMITMENTS 4.1 Minimum Purchases and Sales. WDC shall purchase Media from Komag, and Komag shall sell Media to WDC, in the amounts and for the periods specified in the following table:
- ------------------------------------------------------------------------------------------------ PERIOD BEGINNING PERIOD ENDING PURCHASE REQUIREMENTS - ------------------------------------------------------------------------------------------------ Effective Date Effective Date plus [***] The lesser of [***] Units and months [***]% of WDC's Actual Media Requirements. - ------------------------------------------------------------------------------------------------ Effective Date plus [***] Effective Date plus [***] The lesser of [***] Units and months months [***]% of WDC's Actual Media Requirements. - ------------------------------------------------------------------------------------------------ Effective Date plus [***] Effective Date plus [***] The lesser of [***] Units and months months [***]% of WDC's Actual Media Requirements. - ------------------------------------------------------------------------------------------------
4.2 Actual Media Requirements. For the avoidance of doubt, 4.2.1 "Actual Media Requirements" when used in Section 4.1 includes [***] 4.2.2 "Actual Media Requirements" when used in Section 4.1 does not include [***] -7- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 4.2.3 "Actual Media Requirements" when used in Section 4.1 includes [***] 4.3 Composition of Demand. [***]. 4.4 Quarterly Milestones. The Purchase Requirements are annual requirements. However, without limiting either party's obligations under Section 4.1, WDC shall use commercially reasonable efforts to purchase, and Komag shall use commercially reasonable efforts to sell to WDC, in each Fiscal Quarter, a number of Units consistent with WDC's forecast referenced in Section 5.1. 4.5 Additional Demand. WDC may, but will not be obligated to, request that Komag provide Units in excess of the Purchase Requirements. Purchase Orders for such additional Units may be issued at any time by WDC, but will be subject to acceptance by Komag in its sole discretion. Pricing and other terms for such excess Units shall be separately negotiated and not subject to the Prices and terms set forth in this VPA. ARTICLE 5: PURCHASE OF PRODUCTS BY WDC 5.1 Forecasts and Planning Schedules. By the Effective Date, WDC shall provide to Komag a current written forecast of demand for Products WDC expects to purchase during the first twelve months of the term of this VPA. Thereafter during the term of this VPA, on a monthly basis, WDC shall provide an updated forecast for any quantities of such Product WDC expects to purchase in the following twelve months. The most recently issued forecast will supersede all previous forecasts. No less than five Days from receipt of each of the monthly WDC forecasts, Komag shall confirm supply for a rolling three month period (current month plus two). During the term of this VPA on a monthly basis, Komag shall provide to WDC a current written summary of the Product finished goods inventory ("FGI") intended for WDC. This summary shall list by Komag manufacturing site and JIT Hub location the amounts and types of FGI being held by Komag for each of WDC's Programs. 5.2 Issuing Purchase Orders and Pull Requests. WDC shall, at least 30 Days before the beginning of each Fiscal Quarter, submit to Komag a Purchase Order for such Fiscal Quarter for all Units WDC has forecasted it may require during such Fiscal Quarter. No less than two Business Days after receipt of each Purchase Order, Komag shall issue an acknowledgement confirming the quantity and other terms thereof. WDC shall transmit a Pull Request by facsimile or other agreed upon means to communicate to Komag, at the applicable JIT Hub, the part number, quantity and Delivery Date and time of each Product required. WDC's transmission of a Pull Request is authorization for Komag to ship and invoice WDC against the Purchase Order for the part numbers and quantities set forth in the Pull Request. Komag shall deliver Product from the JIT Hub upon receipt of the Pull Request, in accordance with Lead Times. WDC and Komag shall, prior to the commencement of each Fiscal Quarter, establish mutually acceptable Lead Times for Pull Requests, which Lead Times shall in no event exceed eight hours. -8- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 5.3 Komag Production and Inventory. During the term of this VPA, WDC will be issuing forecasts and Purchase Orders and Komag will be producing FGI to meet WDC's needs shown in the Purchase Orders. WDC's forecast for a certain Fiscal Quarter are not commitments by WDC to buy a specific amount of Product in a specific period of time. Komag will use WDC's forecast for planning of its production capacity to support WDC. Unless given written authorization by a WDC Materials manager to make a temporary exception, Komag shall manage and limit its production of FGI so that on any given date FGI does not exceed WDC's most current forecasted requirements of FGI for the subsequent four week period (the "Target FGI"). Komag shall maintain Products in inventory for WDC at locations close to WDC factories ("JIT Hubs"). Provided WDC has issued a relevant Purchase Order, Komag shall, promptly after the Effective Date, use commercially reasonable efforts to establish a level of Product inventory for each Program at each JIT Hub equal to the JIT Hub Inventory Watermark and to replenish each reduction requested by WDC from such inventory within four weeks from the date of such reduction. 5.4 End of Life. WDC shall use commercially reasonable efforts to notify Komag as soon as possible before the termination of each Program. 5.5 Liability on Cancellation. Subject to WDC's obligations under Section 4, WDC shall have the right to cancel Purchase Orders for Products (except the final Purchase Order issued under Section 9.1) , in whole or in part, placed in accordance with the provisions of this VPA upon written notice to Komag. WDC's maximum liability to Komag for FGI upon such cancellation shall be limited to [***]. Notwithstanding the foregoing, during the ramp period of any Product, not to exceed six weeks, the parties shall first meet and agree on the number equal to "IW" for the purpose of calculating liability under this Section 5.5 for any cancellation of a Purchase Order which occurs during any portion of such a ramp period. Komag shall (i) use all commercially reasonable efforts to find a substitute buyer and mitigate any potential loss; (ii) participate in an audit of lead time efficiency as reasonably requested by WDC; and (iii) negotiate with WDC to adjust the above formula for reductions in the lead time to fabricate Media that are achieved by Komag. ARTICLE 6: PRICE AND PAYMENT TERMS FOR PRODUCTS 6.1 Product Pricing. The initial Unit Prices WDC will pay for Products purchased during the first [***] months of the term of this VPA are set forth in Exhibit B. Commencing with the first [***] after such [***] period, the parties shall, beginning no later than [***] Days before the beginning of such [***], negotiate Prices for the Products on a [***] basis (the "Prices"). The parties shall conclude such negotiations no later than [***] Days before the beginning of such [***]. Komag shall, no later than [***] Days before the beginning of each such [***], notify WDC of the agreed-upon Prices applicable to such [***] by means of a pricing letter. [***] Notwithstanding the foregoing, the parties agree that the review of such prices and terms shall not require the parties [***]. [***]. -9- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 6.2 Pricing Disputes. In the event the parties cannot agree upon pricing as described in Section 6.1, either party may, upon written notice to the other, submit such dispute to the Chief Executive Officer of Komag; and the Chief Executive Officer of WDC, or their respective designees, who shall meet to attempt to resolve the dispute by good faith negotiations. In the event the parties are unable to come to agreement upon Prices within 5 Days after such notice is given, either party may proceed with arbitration as follows. The parties will submit the matter of pricing to binding arbitration in San Francisco, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). Each party shall appoint one arbitrator, and the two arbitrators thus appointed will appoint a third arbitrator. The parties shall instruct the arbitrators to make a determination of pricing using the standards set forth in Section 6.1, but in no event outside of the range of the "bid" and "asked" prices established by the respective positions of the parties in the last good faith negotiations prior to referral to arbitration. The parties shall also instruct them to come to a decision within 20 Days after submission of the dispute to arbitration. During the pendency of such arbitration, the Prices in effect immediately before the arbitration shall remain in effect. If a price change is awarded, the party, if any, which owes a balance shall pay such balance; and in the event such party fails to pay such balance within ten Days after the date of the award, interest will accrue beginning ten Days after the date of the award, at the maximum rate permitted by law in California. Each party shall bear its own arbitration costs and expenses; provided, however, that the arbitrators may modify the allocation of fees, costs and expenses in the award in those cases where fairness dictates other than each party bearing its own fees, costs and expenses. The award shall be final and binding on the parties, and judgment on the award may be entered in and enforced by any court of competent jurisdiction. 6.3 Taxes and Duties. Unless otherwise specifically provided herein, the amount of any present or future sales, revenue, excise or other tax applicable to the Products, will be added to the Price and will be paid by WDC, or in lieu thereof WDC shall provide Komag with a tax exemption certificate acceptable to the taxing authorities. In the event Komag is required to pay any such tax, fee, or charge, at the time of sale or thereafter, WDC shall reimburse Komag therefor. Notwithstanding the foregoing, WDC will not be responsible for any taxes on Komag's income. 6.4 Tax Minimization. The parties acknowledge that Komag's Malaysian manufacturing operations, including the tax holiday status of such operations, provide a path to the industry's lowest cost structure. To ensure that both parties derive benefit from this advantageous manufacturing location, the parties shall adopt business practices (e.g. sales terms, title passage, importer of record, and warehousing practices) that maximize the benefits of Komag's tax holiday position in Malaysia to the extent not inconsistent with WDC's reasonable business objectives. 6.5 Payment Terms. For shipments through Komag's designated JIT Hub, Komag shall invoice WDC upon delivery of Product to the receiving dock of WDC's manufacturing locations in Malaysia and Singapore. For shipments direct to WDC, Komag will invoice upon shipment. Terms for payment of all invoices will be net [***] Days from date of invoice. In the event payment is not received by Komag within such period, Komag shall notify WDC and WDC shall make prompt -10- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ payment of the amount due. WDC will be liable for interest on any overdue payment under any such invoice, up to the maximum legal rate in California. Notwithstanding the foregoing, payment terms shall be payment in advance in the event of the bankruptcy or insolvency of WDC or in the event any proceeding is brought (a) voluntarily by WDC under the bankruptcy or insolvency laws; or (b) involuntarily against WDC under the bankruptcy or insolvency laws, and not dismissed within 90 Days. 6.6 Late Payments. If (a) WDC's account with Komag is past due in any amount, by more than [***] Days; (b) WDC does not make payment in advance as required under Section 6.5; or (c) if WDC's account with Komag is past due in any amount in excess of the greater of (i) $[***]; and (ii) [***]% of WDC's total accounts receivable balance under this Agreement; by more than [***] Days; then Komag may discontinue shipping Products upon [***] Days' advance written notice to WDC and opportunity for WDC to cure within such [***]-Day period. Units that Komag does not ship in accordance with this Section 6.6 shall not count towards the Units purchased by WDC to fulfill its Purchase Requirements, until such Units are shipped by Komag. The parties agree that a senior officer designated by each party will meet to resolve any issues relating to overdue amounts. ARTICLE 7: SHIPMENT AND DELIVERY OF PRODUCTS 7.1 Shipment of Product. Except as otherwise specified with respect to direct shipments under Section 6.5, Delivery will be made DDU (i.e., the ICC standard shipping term for delivery duty unpaid), and liability for loss or damage to Products will pass to WDC upon Komag's delivery of the Products to WDC. As between the parties, Komag will bear the cost for insurance relating to delivery of the Products. For deliveries within Malaysia or Singapore, Western Digital Malaysia SDN. BHD. or Western Digital (Singapore Pte. Ltd.), respectively, will be the "importer of record" for GST purposes. The Products shall be delivered to WDC from a Komag JIT Hub to a WDC factory. Komag may deliver the Products in installments subject to Section 5.2. Unless otherwise agreed, all Products will be packaged, and packed in accordance with Komag's normal practices. All Product packages shall be labeled in accordance with applicable customs regulations. Komag may ship, determine freight forwarder, and provide delivery support by the method it deems most advantageous. WDC shall ensure that the freight forwarder selected by Komag may use WDC's "Manufacturer's Export Status" for shipments on behalf of WDC to Singapore, so long as the parties mutually agree. Transportation charges are included in the Unit Price. Komag shall deliver, upon request from WDC, appropriate import certificates for duties paid on Media purchased from Komag, imported by Komag into the United States and delivered to WDC in the United States. 7.2 On Time Delivery. Komag shall use commercially reasonable efforts to maintain 100% on-time delivery of each Pull Request from a JIT Hub. 7.3 Late Delivery. Komag shall notify WDC immediately if for any reason Komag fails to comply or anticipates that it may fail to comply with the terms of a Pull Request (including, but not limited to, failure to meet a Delivery Date or delivery of less than the ordered Units). In the event of -11- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ a late delivery, the parties will cooperate in good faith to minimize the disruption caused to WDC by such late delivery. 7.4 Export Regulations. WDC and Komag shall comply with all export control laws and regulations applicable to the export or reexport of Products or any related technology. The party undertaking such export or reexport shall be responsible for obtaining any required documents, authorizations and approvals prior to any such export or reexport. ARTICLE 8: WARRANTIES AND INTELLECTUAL PROPERTY INFRINGEMENT 8.1 WDC General Warranties. WDC has the corporate power and authority to own its properties and to carry on its business as now being conducted and as contemplated to be conducted. WDC is duly qualified to do business and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to be so qualified would have a material adverse effect on WDC. 8.2 Product Limited Warranty. Komag's warranty for Products under this Agreement, and the remedies for breach of such warranty, will be as set forth in Exhibit D. 8.3 Disclaimer. THE WARRANTIES AND OBLIGATIONS OF THIS SECTION 8 AND EXHIBIT D WILL BE EXCLUSIVE AND IN LIEU OF ANY AND ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGMENT, ALL OF WHICH ARE HEREBY EXPRESSLY DISCLAIMED. 8.4 Infringement Indemnity 8.4.1 Indemnification. Komag shall defend any claim, suit or proceeding brought against WDC to the extent such suit or proceeding is based on a claim that any Product furnished hereunder, alone and not in combination with any other product, constitutes an infringement of any U.S. patent or U.S. copyright, provided WDC gives Komag prompt notice of any such claim, suit or proceeding, in writing and authorizes Komag to settle or defend any such claim, suit or proceeding and assists Komag in so doing (at Komag's expense) upon request by Komag. Komag shall pay WDC's reasonable attorneys fees and all damages and costs awarded against WDC arising out of such claim, suit or proceeding. 8.4.2 Limited Remedies. If the use of a Product is enjoined, Komag shall, in its sole discretion and at its own expense, either (a) procure for WDC the right to continue using such Product; (b) replace same with a noninfringing product; (c) modify the Product so that it becomes noninfringing; or (d) if Komag is unable to reasonably do any of the above, refund the Price for such Product. -12- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 8.4.3 Exclusions. Komag shall not be liable for, and WDC shall indemnify, defend and hold Komag harmless from, any expenses, damages, costs or losses resulting from any suit or proceeding based upon a claim arising from (a) compliance with WDC's designs, specifications, or instructions; (b) a modification of the Product by a party other than Komag; (c) the use of any Product or part thereof furnished hereunder in combination with any other product;; or (d) intellectual property infringements to the extent arising out of the use of the Acquired Assets (as such term is defined under the Asset Purchase Agreement), or any technology or intellectual property licensed or otherwise provided to Komag in connection with the Acquired Assets under the Asset Purchase Agreement, if such infringements would not have arisen using the assets, technology and intellectual property used by Komag prior to the Effective Date. WDC shall pay Komag's reasonable attorneys fees and all damages and costs awarded against Komag arising out of such claim, suit or proceeding. 8.4.4 License. Sale of any Product or any part thereof by Komag does not confer upon WDC any license under any patent rights or copyrights. 8.4.5 SOLE LIABILITY. THIS PROVISION 8.4 IS IN LIEU OF ALL OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTIES AGAINST INFRINGEMENT AND WILL BE THE SOLE AND EXCLUSIVE REMEDY FOR INTELLECTUAL PROPERTY INFRINGEMENT OF ANY KIND. IN NO EVENT SHALL KOMAG'S TOTAL LIABILITY FOR SUCH INFRINGEMENT EXCEED THE AGGREGATE SUM PAID BY WDC FOR THE ALLEGEDLY INFRINGING PRODUCTS. ARTICLE 9: TERM AND TERMINATION 9.1 Term. This VPA will continue in force for an initial term of three years after the Effective Date, and will terminate at the end of such initial term unless otherwise agreed by the Parties in writing. In the event WDC does not wish to renew the term of this Agreement after such initial term, WDC shall notify Komag no later than 30 Days before the beginning of the final Fiscal Quarter of such initial term, and issue to Komag a binding final Purchase Order for such Fiscal Quarter. 9.2 Termination for Cause. Either party may terminate this VPA in the event of a Material Default of this VPA by the other party, upon notice to such other party, which notice must describe the reason for such termination and must specify the termination date, which termination date must be no earlier than 5 Days after the date of such notice. The parties acknowledge that neither party will have the right to terminate this Agreement due to any breach of this Agreement other than a Material Default; and in the case of such other breach, subject to Sections 10.2 and 11.6, the non-breaching party's only remedy under this Agreement will be an action for damages. 9.3 Termination for Insolvency. This VPA may be terminated by either party by notice to the other party upon (i) the commencement by the other party of a voluntary or involuntary -13- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ proceeding under any federal, state, provincial or foreign bankruptcy law or similar law which is not dismissed within 90 Days; (ii) the appointment for the other party of a receiver, trustee or similar official or a general assignment for the benefit of such party's creditors; (iii) the winding up or liquidation of the other party; or (iv) a party becomes unable to pay its debts either because it is subject to a Suspension of Payments order, bankruptcy, or other insolvency proceeding. In the case of (i) to (iv) above, termination may also be effected by serving notice on the liquidator, administrator, or receiver, as the case may be. 9.4 Rights Upon Termination. Upon termination, Komag shall complete and WDC shall pay for all Products in accordance with Section 6.5 and Komag shall continue to perform its obligations with respect to Replacement Products under Exhibit D. Komag and WDC shall cooperate to perform an orderly Disentanglement following termination. 9.5 Survival. The following provisions will survive the termination or expiration of this VPA: Articles 1, 2, 8, 9.4, 10, 11, and 12, as well as any obligations arising before the effective date of termination or expiration. ARTICLE 10: LIMITATION OF LIABILITY 10.1 Limitation of Liability. EXCEPT FOR ARTICLE 11 (CONFIDENTIALITY), NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.2 Performance. Notwithstanding the foregoing, in light of the fact each of the parties entered into the Asset Purchase Agreement and this VPA in reliance on the full and faithful performance by the other party of its obligations (including but not limited to purchase and sale obligations) hereunder, the parties agree that damages would be an inadequate compensation for the breach by the parties of such obligations and accordingly, upon any such breach, in addition to monetary damages, a party shall be entitled to obtain an order for specific performance of such obligations at any court having jurisdiction over the other party. 10.3 Year 2000 Liability. Except for WDC's right to purchase from other suppliers as provided under Section 4.3, in no event shall Komag have any liability for any failure to provide Products hereunder prior to July 1, 2000, if such failure is attributable to the failure of any Acquired Assets (as such term is defined in the Asset Purchase Agreement) to be year 2000 compliant. ARTICLE 11: CONFIDENTIALITY 11.1 "Confidential Information" means any information disclosed by one party (the "Disclosing Party") to the other (the "Receiving Party") in relation to this VPA, which, if in written, graphic, machine-readable or other tangible form is marked as "Confidential" or "Proprietary," or which, if disclosed orally or by demonstration, is identified at the time of initial -14- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ disclosure as confidential and reduced to a writing marked "Confidential" and delivered to the Receiving Party within 30 Days of such disclosure. 11.2 Exclusions. Notwithstanding Section 11.1, Confidential Information will exclude information that the Receiving Party can demonstrate: 11.2.1 was independently developed by the Receiving Party without any use of the Disclosing Party's Confidential Information or by the Receiving Party's employees or other agents (or independent contractors hired by the Receiving Party) who have not been exposed to the Disclosing Party's Confidential Information; 11.2.2 becomes known to the Receiving Party, without restriction, from a source other than the Disclosing Party without breach of this VPA and that had a right to disclose it; 11.2.3 was in the public domain at the time it was disclosed or becomes in the public domain through no act or omission of the Receiving Party; or 11.2.4 was rightfully known to the Receiving Party, without restriction, at the time of disclosure. 11.3 Compelled Disclosure. If a Receiving Party believes that it will be compelled by a court or other authority to disclose Confidential Information of the Disclosing Party, it shall give the Disclosing Party prompt written notice so that the Disclosing Party may take steps to oppose such disclosure, and the Receiving Party shall assist in opposing such disclosure at the Disclosing Party's expense. 11.4 Confidentiality Obligation. During the term of this VPA and for a period of five years thereafter, the Receiving Party shall keep such Confidential Information in strict confidence and shall not disclose such Confidential Information to any third party without prior written consent of the Disclosing Party. 11.5 Confidentiality of Agreement. Each party agrees that the terms and conditions, but not the existence, of this VPA will be treated as the other's Confidential Information and that no reference to the terms and conditions of this VPA or to activities pertaining thereto can be made in any form of public or commercial advertising without the prior written consent of the other party; provided, however, that each party may disclose the terms and conditions of this VPA: (i) subject to the provisions of Section 11.3 as required by any court or other governmental body; (ii) as otherwise required by law; (iii) to legal counsel of the parties; (iv) in connection with the requirements of a public offering, secondary offering, debt offering, or securities filing of the parties, or otherwise as obligated by law; (v) in confidence, to accountants, banks, and financing sources and their advisors; or (vi) in confidence, in connection with the enforcement of this VPA or rights under this VPA. -15- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ 11.6 Remedies. Unauthorized use by a party of the other party's Confidential Information will diminish the value of such information. Therefore, if a party breaches any of its obligations with respect to confidentiality or use of Confidential Information hereunder, the other party will be entitled to seek equitable relief to protect its interest therein, including injunctive relief, as well as money damages. 11.7 Non-disclosure Agreements. Each party shall obtain the execution of proprietary nondisclosure agreements with its Affiliates, including but not limited to the party's and/or Affiliates' respective agents and consultants having access to Confidential Information of the other party, shall diligently enforce such agreements with respect to the Confidential Information, and shall exercise due care to control the actions of such Affiliates, employees, agents and consultants in this respect so long as they have a working relationship with the party obligated hereunder to obtain such nondisclosure agreements. ARTICLE 12: GENERAL 12.1 Governing Law and Jurisdiction. This VPA will be interpreted, and the rights and liabilities of the parties hereto determined, in accordance with the laws of the State of California applicable to agreements executed, delivered and performed within such State, without regard to the principles of conflicts of laws thereof. Each of the parties hereby consents to the jurisdiction of any state or federal court located within the county of Santa Clara in the State of California (except for resolution of pricing disputes as described in Section 6.2), and each of the parties hereby: (i) waives any objection to venue of any action instituted under this VPA, and (ii) consents to the granting of such legal or equitable relief as is deemed appropriate by any aforementioned court. 12.2 Force Majeure. A defaulting party shall provide the nondefaulting party immediate notice of any anticipated delay or failure of compliance due to a Force Majeure Event; provided, however, that any such act will not relieve the defaulting party's obligations hereunder. 12.3 Trademarks. Nothing in this VPA gives either party a right to use the other party's name, trademark(s), or trade name(s), directly or indirectly, without the other party's prior written consent, except as may be required by applicable law or court order. In such a case, the party required to disclose such information shall provide prompt notice of such requirement in order that the other party may seek appropriate protective orders. 12.4 Assignment. Except as set forth in this Section 12.4, neither this Agreement, nor any of the rights or obligations hereunder, may be assigned, transferred, subcontracted or delegated by a party hereto to any third party, including without limitation, by operation of law or pursuant to a Change of Control (as defined below). Notwithstanding the foregoing, (a) Komag may assign this Agreement, and the rights and obligations hereunder, without the prior consent of WDC, in connection with a Change of Control, except to a Prohibited Assignee (as defined below); (b) Komag may assign all or part of this Agreement, or the rights and obligations hereunder, without -16- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ the prior consent of WDC, to Komag USA (Malaysia) SDN; and (c) WDC may assign this Agreement, and the rights and obligations hereunder, without the prior consent of Komag, to a third party in connection with a Change of Control; so long as WDC assigns all obligations under this Agreement to any party that succeeds to all or substantially all of WDC's disk drive production business. For purposes of this Section 12.4, "Change of Control" shall mean (i) any sale, lease, exchange or other transfer (in one transaction or series of transactions) of all, or substantially all, of the assets of such party, (ii) any consolidation or merger or other combination of a party in which such party is not the continuing or surviving corporation or pursuant to which shares of such party's common stock would be converted into cash, securities or other property (other than a merger of such party in which the holders of such party's common stock immediately prior to the merger hold at least a majority of the outstanding securities of the combined entity), or (iii) any transaction (or series of related transactions) pursuant to which any person (as defined in Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of [***]% or more of such party's outstanding common stock. For purposes of this Section 12.4, "Prohibited Assignee" shall mean any third party who (x) [***] Any purported assignment of this VPA or the rights or obligations of a party under this VPA in violation of this Section 12.4 shall be null, void and of no further force or effect and shall constitute a Material Default. 12.5 Severability. If any of the provisions of this VPA are held by a court or other tribunal of competent jurisdiction to be unenforceable, the remaining portions of this VPA will remain in full force and effect. 12.6 Failure to Enforce. The failure of either party to enforce at any time or for any period of time the provisions of this VPA will not be construed to be a waiver of such provisions or of the right of such party to enforce each and every provision of this VPA in the future. 12.7 Agency. This VPA does not create a principal to agent, employer to employee, partnership, joint venture, or any other relationship except that of independent contractors between Komag and WDC. 12.8 Request in Writing. All requests such as Pull Requests, acceptances/rejections, notices, must be made or confirmed in writing. Such writings must take the form of electronic mail (receipt confirmed), facsimile (receipt-confirmed) and/or posted letter (return-receipt). 12.9 Counterparts. This VPA may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which will be considered one and the same instrument. 12.10 Notices. Except as otherwise provided herein, all notices hereunder will be deemed given if (a) in writing and delivered personally; or (b) sent by facsimile transmission that is -17- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ confirmed by return facsimile or e-mail; to the parties at the following addresses (or at such other addresses as will be specified by like notice): (i) if to WDC, to: Western Digital Corporation 8105 Irvine Center Drive Irvine CA 92618 Attention: Michael A. Cornelius, VP, Law & Administration, Secretary Fax No.: (949) 932-7837 (ii) if to Komag to: Komag, Incorporated 1704 Automation Parkway San Jose, California 95131 Attention: Chief Financial Officer Fax No.: 408 944-9234 Any notice given by mail will be effective when received. Any notice given by electronic mail or facsimile transmission will be effective when the appropriate electronic mail or facsimile transmission acknowledgment is received. 12.11 Amendments. This VPA may only be amended in writing signed by authorized representatives of each of the parties. To be effective, such amendments must specifically reference this VPA. 12.12 Complete Agreement. This VPA, Exhibits, and specific Purchase Orders and Pull Requests set forth the complete agreement between the parties regarding their subject matter and replace all prior or contemporaneous communications, understandings or agreements, written or oral, about this subject. 12.13 Performance During Pendency of Disputes. If a dispute arises between the parties, regardless of whether such dispute requires the use of the arbitration procedures described in Section 6.2, subject to the terms and conditions of this Agreement, (a) in no event nor for any reason shall Komag interrupt the provision of Products to WDC, delay manufacture or delivery of Products or perform any other action that prevents, slows down, or reduces in any way the provision of Products or WDC's ability to conduct its business; and (b) each party shall continue to perform its obligations under this Agreement, unless: (x) authority to do so has been granted by the other party or conferred by a court of competent jurisdiction; or (y) this Agreement has been terminated pursuant to Section 9.2 or 9.3 and a Disentanglement has occurred. -18- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ IN WITNESS WHEREOF, the parties have caused this VPA to be signed and accepted by their duly authorized representatives, effective as of the Effective Date. Western Digital Corporation, Komag, Incorporated, a Delaware corporation. a Delaware corporation ___________________________ ___________________________ Name:______________________ Name:______________________ Title:_____________________ Title:_____________________ -19- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ EXHIBIT A WDC FISCAL QUARTERS FY'99 MONTH Start Date End Date Weeks in Qtr. ----------------------------------------------------------------- Q4 14 April 03/28/99 04/24/99 4 May 04/25/99 05/29/99 5 June 05/30/99 07/03/99 5 FY'00 MONTH Start Date End Date Weeks in Qtr. ----------------------------------------------------------------- Q1 13 July 07/04/99 07/31/99 4 August 08/01/99 08/28/99 4 September 08/29/99 10/02/99 5 Q2 13 October 10/03/99 10/30/99 4 November 10/31/99 11/27/99 4 December 11/28/99 01/01/00 5 Q3 13 January 01/02/00 01/29/00 4 February 01/30/00 02/26/00 4 March 02/27/00 04/01/00 5 Q4 13 April 04/02/00 04/29/00 4 May 04/30/00 05/27/00 4 June 05/28/00 07/01/00 5 FY'01 MONTH Start Date End Date Weeks in Qtr. ----------------------------------------------------------------- -20- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ Q1 13 July 07/02/00 07/29/00 4 August 07/30/00 08/26/00 4 September 08/27/00 09/30/00 5 Q2 13 October 10/01/00 10/28/00 4 November 10/29/00 11/25/00 4 December 11/26/00 12/30/00 5 Q3 13 January 12/31/00 01/27/01 4 February 01/28/01 02/24/01 4 March 02/25/01 03/31/01 5 Q4 13 April 04/01/01 04/28/01 4 May 04/29/01 05/26/01 4 June 05/27/01 06/30/01 5 FY'02 MONTH Start Date End Date Weeks in Qtr. ----------------------------------------------------------------- Q1 13 July 07/01/01 07/28/01 4 August 07/29/01 08/25/01 4 September 08/26/01 09/29/01 5 Q2 13 October 09/30/01 10/27/01 4 November 10/28/01 11/24/01 4 December 11/25/01 12/29/01 5 Q3 13 January 12/30/01 01/26/02 4 February 01/27/02 02/23/02 4 March 02/24/02 03/30/02 5 Q4 13 April 03/31/02 04/27/02 4 May 04/28/02 05/25/02 4 -21- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ June 05/26/02 06/29/02 5 Note: WDC's fiscal year is reported in a 52/53-week period and will end on the Saturday closest to June 30. Each fiscal year will be divided into four quarters. Each quarter will consist of three months, the first and second of which will be four weeks long and the last, five weeks. Each week will begin on Sunday and end on Saturday. -22- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ EXHIBIT B Initial Unit Prices WD Fiscal Quarter: Fiscal Quarter ending [***] Fiscal Quarter Ending [***] Double Sided Disks ("DSD"): [***] Single Sided [***] Notes: 1. Above prices are based on WDC specification and Komag specification reviews that exist as of 3/5/99. 2. The above prices are dependent on terms listed herein. -23- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ EXHIBIT C Prices for Qualification Sample Products Year 1999 2000 2001 [***] [***] [***] [***] -24- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ EXHIBIT D SUPPLIER WARRANTY AND REPLACEMENT PRODUCT TERMS This Exhibit D sets forth the terms of warranty for Products sold by Komag to WDC under the VPA. Further, this Exhibit D sets forth certain of the terms for Komag's supply to WDC of Products used by WDC to replace Product which may have failed, or which may be required due to failure of WDC disk drives, or Components of WDC's disk drives other than the Products. All terms not defined in this Exhibit D will have the meaning assigned them in the VPA. The terms and conditions of this Exhibit D will supersede any conflicting terms in the VPA, but only with respect to Replacement Products. ARTICLE I: DEFINITIONS 1.1 "Replacement Product" means a Unit ordered by WDC, to replace another Unit, which is identical to the Unit being replaced in design, process, and location, and either (a) due to a defect in manufacture or workmanship, did not, at the time of delivery to WDC, conform to the Specifications in effect at the time the Purchase Order for such Unit was issued; or (b) due to any other cause, including without limitation a failure of or damage by WDC disk drives or any Components thereof, fails or no longer conforms to the Specifications in effect at the time the Purchase Order for such Unit was issued. 1.2 "End of Life" of a WDC Program means the earlier of (a) the beginning of the first of two sequential Fiscal Quarters when WDC discontinues high volume purchasing of a Product for such Program, where high volume is defined as greater than [***] Units per Fiscal Quarter; or (b) when WDC first begins to purchase a Product used in such Program primarily for disk drive repair purposes. 1.3 "Replacement Product Period" means the relevant Replacement Product Period as set forth in Section 3.3. ARTICLE II: LIMITED WARRANTY 2.1 Limited Warranty. Komag warrants that during the period of one year after the WDC disk drive build date (but in no event later than 15 Days after the date of Komag's invoice) for a Unit of a Product ("Warranty Term"), each such Unit shall (a) be new and conform to the Specifications in effect at the time the Purchase Order for such Unit is issued; and (b) be free from defects in materials, workmanship and title under normal use and operation (the "Limited Warranty"). WDC's sole remedy for a breach of the foregoing warranty will be limited to Komag issuing a credit to WDC in accordance with the terms set forth in Section 3.8. OTHER THAN AS SET FORTH IN THIS SECTION 2.1, KOMAG DISCLAIMS ANY WARRANTY, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ PURPOSE. THE WARRANTY IN THIS SECTION 2.1 NEITHER ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME FOR KOMAG ANY OTHER LIABILITIES IN CONNECTION WITH THE SALE OF THE PRODUCTS. The aforesaid warranty and WDC's remedies thereunder are solely for the benefit of WDC and its subsidiaries and will not be extended or construed to extend to any other entity whatsoever. 2.2 Limitation of Liability. EXCEPT AS SPECIFICALLY PROVIDED IN SECTION 5.2 OF THIS EXHIBIT D, INDEPENDENTLY OF ANY OTHER REMEDY LIMITATION HEREOF AND NOTWITHSTANDING ANY FAILURE OF THE ESSENTIAL PURPOSE OF ANY SUCH LIMITED REMEDY, KOMAG WILL NOT BE LIABLE FOR ANY LIABILITY UNDER THIS EXHIBIT D, INCLUDING WITHOUT LIMITATION LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS OR FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION LOSS OF DATA HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY RESULTING FROM THIS EXHIBIT D OR FROM THE USE OF THE PRODUCTS IN ANY MANNER, AND WHETHER OR NOT KOMAG HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. 2.3 Warranty Procedure. The parties agree to use the process described in the Warranty Verification and Disposition flow chart set forth in Attachment 1 to manage and dispose of the Products returned to WDC under warranty. ARTICLE III: REPLACEMENT PRODUCTS 3.1 Prices. On a quarterly basis, the parties shall agree to Replacement Product prices for the upcoming Fiscal Quarter, within the parameters set forth in Attachment 2 hereto. 3.2 Procedure for Returns. WDC shall return or destroy, according to Komag's instruction, all Units for which WDC seeks replacement by Komag, whether or not such Units are covered by the Limited Warranty. Komag shall issue an RMA for all Units WDC wishes to return. 3.3 Replacement Product Period. During the Replacement Product Period for each Product, Komag shall make available Replacement Products to WDC under the terms of this Exhibit D. The Replacement Product Periods for the Products and Programs listed on Attachment 2 will be as indicated therein. For any Products or Programs whose Replacement Product Period is not listed therein, Komag shall provide Replacement Products for two years following the End of Life of the applicable Program. Notwithstanding the foregoing, (a) upon the occasion of a major process change, or a change that requires Komag to maintain a set of equipment which is not being used for volume production of other Komag products; or (b) if Komag intends to discontinue operation of a factory or production line for such Product or Program; then (w) Komag shall notify WDC as soon in advance as reasonably practical; (x) the parties shall meet -2- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ and agree on a one-time, firm, non-cancelable purchase order for such Replacement Products; (y) notwithstanding the provisions of Section 4.2 of this Exhibit D, such purchase order may be for less than the minimum of Units required in Section 4.2 of this Exhibit D, but the maximum prices and maximum price increases of Attachment 2 will nevertheless apply; and (z) WDC shall purchase all the Units ordered thereunder within an agreed-upon period of time. Thereafter, Komag shall have no obligation to supply such Replacement Products. The parties acknowledge that for the Products listed in Attachment 2, there may be occasions which, due to material changes in Komag's production process (such as the shift from Tucson / Phase 0 to Chandler / ILE; or aluminum substrate to glass substrate) may require a change in the Replacement Product Period, and if so, the parties shall negotiate in good faith a Replacement Product Period that reflects such material change. 3.4 Tracking. The parties acknowledge that pursuant to the Asset Purchase Agreement, at Closing (as such term is defined in the Asset Purchase Agreement), Komag will take over from WDC production of certain Product inventory and WIP. On or before Closing, WDC shall develop a method to track Media made by those processes used by WDC at its "Santa Clara Media Operation" prior to the Closing ("WDC Processes"), sufficient to differentiate between Media made by the WDC Processes prior to Closing (such units, "Santa Clara Pre-Closing Units") and Product made by the WDC Processes after Closing. Such method will include [***] Until WDC establishes such method of tracking, all Units that Komag and WDC reasonably determine are made using WDC Processes will be deemed Santa Clara Pre-Closing Units. 3.5 Supply of Replacement Product for Santa Clara Pre-Closing Units. For Santa Clara Pre-Closing Units of Products included in Attachment 2, Komag will supply Replacement Product as indicated therein. The terms of this Exhibit D with respect to forecasting, placement of purchase orders and pricing will apply to such Replacement Product. Notwithstanding the foregoing, nothing in this VPA shall require Komag to supply the following Products to WDC: [***]. 3.6 Calculating the Percentage of WDC Liability. The parties acknowledge that Units may not conform to the Specifications due to various causes, including without limitation (a) defects covered by the Limited Warranty and occurring within the Warranty Term; (b) damage to such Units caused by WDC disk drives or by Components thereof other than the Products; and (c) defects or damage not occurring within the Warranty Term. For Units that do not conform to the Specifications, for whatever reason, during the Replacement Product Term, WDC shall provide reasonably sufficient data on Units that are removed from failed drives to assess (x) cause of failure and (y) whether the Units are within the Warranty Term. By mutual engineering analysis of such data, WDC and Komag shall agree on the percentage of WDC's liability ("%BL") for such failures. Such determination will be based on a percentage equal to the number of Units of a Product that fail, due to all causes other than failure of the Units to conform to the Limited Warranty during the Warranty Term, divided by the total Units of a Product that fail. %BL will be determined for each Program through the use of the Media Warranty Verification and Disposition Process specified in Attachment 1. Any Unit that is -3- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ modified, misused, or damaged after delivery of such Unit to WDC will be included in the numerator of fraction that determines the %BL. 3.7 Pricing for Replacement Product. Prices for Replacement Products ("Base Line Price" or "BP"), whether such Products are subject to the Limited Warranty or not, will be [***]. 3.8 Credit Value. The credit value ("CV") will be calculated for each Product and Program as shown below. [***] 3.9 Issuance of Credit Voucher. No later than seven days after the end of each month, Komag shall issue to WDC a credit voucher in the amount of the CV for Units returned during such month. ARTICLE IV: FORECASTING, PURCHASE ORDERS AND FULFILLMENT 4.1 Replacement Product Forecast. Each month commencing on the Effective Date, for each Product, WDC shall provide Komag with a forecast of WDC's requirements for each Replacement Product during the Replacement Product Period, which forecast must be based on an estimated failure rate for the relevant Product. WDC's Replacement Product forecast will include weekly requirements for the first 13 weeks, monthly requirements for the 14th to 26th weeks, and Fiscal Quarterly requirements for the balance of the Replacement Product Period. This Replacement Product forecast does not constitute a purchase order. Within five Business Days of receiving WDC's forecast, Komag shall provide feedback to WDC to support or challenge the validity of the forecast, including a tentative delivery schedule. 4.2 Purchase Orders. WDC shall, no later than 60 Days before the beginning of each Fiscal Quarter, submit to Komag a firm, non-cancelable purchase order for Replacement Products for such Fiscal Quarter. Komag will not be obligated to supply Units of Replacement Products ordered for each Program by WDC for any Fiscal Quarter, in excess of 25% over the Units of Replacement Products forecasted by WDC for such Program for such Replacement Product for such Fiscal Quarter, but Komag shall use commercially reasonable efforts to supply such Replacement Products. Except as otherwise expressly provided herein, each purchase order for a particular Product shall be for at least (a) [***] Units for Products made using in-line sputtering; and (b) [***] for Products made using static sputtering. Except as otherwise provided in Section 3.3 following Komag's notice as required therein, in the event that WDC desires to place an order for a last-time buy of fewer than such number of Units, the parties shall first agree to an appropriate Price for such purchase order, which Price shall not be limited by the maximum percentage price increases and maximum prices set forth in Attachment 2. 4.3 Liability Limitation. WDC's liability for cancellation of purchase orders for Replacement Products shall not exceed the quantities and Prices specified in the applicable purchase order. -4- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ ARTICLE V: DELIVERY OBLIGATIONS 5.1 Komag Failure Analysis Obligations. Komag shall use commercially reasonable efforts to ensure that Komag is capable of executing failure analysis for Products corresponding to the relevant Replacement Products during the Replacement Product Period. 5.2 [***] 5.3 Increased Forecasts. If WDC's Replacement Product requirements forecasted under Section 4.1 of this Exhibit D for a Fiscal Quarter increases by more than [***]% from the previous Fiscal Quarter's forecast, then [***] 5.4 [***] Exception. Section 5.2 of this Exhibit D will apply to the [***] Program for only so long as WDC places purchase orders for and purchases [***] Units or more of Replacement Product for the [***] in each Fiscal Quarter. In the event that WDC does not do so, Komag will notify WDC that WDC may make a last-time buy and will not be obligated to reimburse WDC under Section 5.2 of this Exhibit D for forecasts based on sales of disk drives in the [***] for any cost in or after the first Fiscal Quarter in which WDC fails to do so. In the event that WDC desires to place an order for a last-time buy of fewer than [***] of such Units, the parties shall first agree to an appropriate Price for such purchase order, which Price shall not be limited by the maximum percentage price increases and maximum prices set forth in Attachment 2. -5- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ ATTACHMENT 1 Warranty verification and disposition flow chart [***] -6- ------------------------------------------ "[***]" INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ------------------------------------------ ATTACHMENT 2 Media-Pricing Table
- ---------------- -------------------- ---------------- ----------------------------------------------- ------------------- Program Price at Start of Maximum % Start of Replacement Product Period Maximum Price End of Life Period Price Increase End of Replacement Product Period During per Fiscal Replacement Quarter Product Period - ---------------- -------------------- ---------------- ----------------------------------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- ------------------- [***] [***] [***] [***] [***] [***] - ---------------- -------------------- ---------------- ------------------------- --------------------- -------------------
[***] -7- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-02-2000 APR-05-1999 JUL-04-1999 30,506 63,965 50,728 3,076 44,266 204,732 939,714 495,734 728,599 333,265 0 0 0 654 300,221 707,413 93,226 93,226 97,857 97,857 29,443 194 5,935 (37,795) 350 (28,234) 0 0 0 (38,234) (0.60) (0.60)
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