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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 April 4, 2004
Commission File Number 0-16852 KOMAG, INCORPORATED  Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1710 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 [   ] Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act rule 12b-2). Yes [ X ] No [   ] Indicate by check mark whether the Registrant has filed all reports
required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under
a plan confirmed by a court. Yes [X] No [   ] On April 4, 2004, 27,502,080 shares of the Registrants common
stock, $0.01 par value, were issued and outstanding. 1




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INDEX
KOMAG, INCORPORATED Page No.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Statements of Income - three months ended April 4, 2004, and  March 30, 2003
    
    
    3Condensed Consolidated Balance Sheets - April 4, 2004 and December 28, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows - three months ended April 4, 2004 and March 30, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-30Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    31Item 2.
    
    Changes in Securities
    
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) KOMAG, INCORPORATED 
 CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
 Three Months
    
    Three MonthsEnded
    
    EndedApr 4, 2004
    
    Mar 30, 2003Net sales
    
    $
    123,585
    
    
    $
    105,515Cost of sales
    
    
    86,656
    
    
    
    82,739Gross profit
    
    
    36,929
    
    
    
    22,776Operating expenses:Research, development, and engineering
    
    
    11,622
    
    
    
    9,909Selling, general, and administrative
    
    
    5,354
    
    
    
    4,562Gain on disposal of assets
    
    
    (190
    )
    
    
    (861
    )16,786
    
    
    
    13,610Operating income
    
    
    20,143
    
    
    
    9,166Other income (expense):Interest income
    
    
    281
    
    
    
    108Interest expense
    
    
    (1,862
    )
    
    
    (3,385
    )Other, net
    
    
    (50
    )
    
    
    196(1,631
    )
    
    
    (3,081
    )Income before income taxes
    
    
    18,512
    
    
    
    6,085Provision for income taxes
    
    
    539
    
    
    
    1,031Net income
    
    $
    17,973
    
    
    $
    5,054Basic net income per share
    
    $
    0.68
    
    
    $
    0.22Diluted net income per share
    
    $
    0.65
    
    
    $
    0.21Number of shares used in basic per share computations
    
    
    26,307
    
    
    
    23,297Number of shares used in diluted per share computations
    
    
    27,662
    
    
    
    23,934
 See notes to condensed consolidated financial statements. 3




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KOMAG, INCORPORATED 
 CONSOLIDATED BALANCE SHEETS
(In thousands)
 Apr 4, 2004
    
    Dec 28, 2003ASSETSCurrent assetsCash and cash equivalents
    
    $
    80,858
    
    
    $
    70,058Accounts receivable (less allowances of
$1,490 and $1,064, respectively)
    
    
    72,565
    
    
    
    60,628Inventories
    
    
    38,644
    
    
    
    25,501Prepaid expenses and deposits
    
    
    1,712
    
    
    
    2,756Total current assets
    
    
    193,779
    
    
    
    158,943Property, plant, and equipment, net
    
    
    198,582
    
    
    
    184,536Intangible assets, net
    
    
    3,358
    
    
    
    4,257Other assets
    
    
    3,124
    
    
    
    71$
    398,843
    
    
    $
    347,807LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    
    
    
    $
    20,247Trade accounts payable
    
    
    48,964
    
    
    
    40,117Accrued expenses and other liabilities
    
    
    16,934
    
    
    
    25,054Total current liabilities
    
    
    65,898
    
    
    
    85,418Long-term debt
    
    
    80,500
    
    
    
    95,801Total liabilities
    
    
    146,398
    
    
    
    181,219Stockholders equityCommon
stock, $0.01 par value per share:Authorized50,000 sharesIssued and outstanding27,502 and 23,753 shares, respectively
    
    
    275
    
    
    
    238Additional paid-in capital
    
    
    240,277
    
    
    
    172,457Deferred stock-based compensation
    
    
    (201
    )
    
    
    (228
    )Retained earnings (accumulated deficit)
    
    
    12,094
    
    
    
    (5,879
    )Total stockholders equity
    
    
    252,445
    
    
    
    166,588$
    398,843
    
    
    $
    347,807
 See notes to condensed consolidated financial statements. 4




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KOMAG, INCORPORATED 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months
    
    Three MonthsEnded
    
    EndedApr 4, 2004
    
    Mar 30, 2003Operating ActivitiesNet income
    
    $
    17,973
    
    
    $
    5,054Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization of property, plant, and equipment
    
    
    9,464
    
    
    
    10,590Amortization and adjustments of intangible assets
    
    
    1,060
    
    
    
    933Stock-based compensation
    
    
    235
    
    
    
    812Non-cash interest charges
    
    
    321
    
    
    
    1,642Gain on disposal of assets
    
    
    (190
    )
    
    
    (861
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (11,937
    )
    
    
    (2,059
    )Inventories
    
    
    (13,143
    )
    
    
    82Prepaid expenses and deposits
    
    
    324
    
    
    
    1,929Trade accounts payable
    
    
    9,220
    
    
    
    (961
    )Accrued expenses and other liabilities
    
    
    (7,773
    )
    
    
    (846
    )Net cash provided by operating activities
    
    
    5,554
    
    
    
    16,315Investing ActivitiesAcquisition of property, plant and equipment
    
    
    (23,706
    )
    
    
    (4,005
    )Proceeds from disposal of property, plant and equipment
    
    
    386
    
    
    
    861Other
    
    
    (161
    )
    
    
    (140
    )Net cash used in investing activities
    
    
    (23,481
    )
    
    
    (3,284
    )Financing ActivitiesPayment of debt
    
    
    (116,341
    )
    
    
    (215
    )Proceeds from the issuance of long-term debt
    
    
    77,419
    
    
    
    Proceeds from sale of common stock, net of issuance costs
    
    
    67,649
    
    
    
    Net cash provided by (used in) financing activities
    
    
    28,727
    
    
    
    (215
    )Increase in cash and cash equivalents
    
    
    10,800
    
    
    
    12,816Cash and cash equivalents at beginning of period
    
    
    70,058
    
    
    
    23,520Cash and cash equivalents at end of period
    
    $
    80,858
    
    
    $
    36,336
 See notes to condensed consolidated financial statements 5




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KOMAG, INCORPORATED 
 
 Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America. In the opinion
of management, all normal recurring adjustments considered necessary for a fair
presentation of the condensed consolidated financial position, operating
results, and cash flows for the periods presented, have been included.
Operating results for the three months ended April 4, 2004, are not necessarily
indicative of the results that may be expected for the year ending January 2,
2005. Certain reclassifications have been made to prior period balances in order
to conform to the current period presentation. Fiscal Year:The Company uses a 52-53 week fiscal year ending on the
Sunday closest to December 31. Because the Companys 2004 fiscal year will
contain 53 weeks, the three-month reporting period ended April 4, 2004 included
in this report includes 14 weeks. All other quarters of 2004 will include 13
weeks. The three-month reporting period ended March 30, 2003 included in this
report consisted of 13 weeks. Inventories:Inventories are stated at the lower of cost (first-in,
first-out method) or market, and consist of the following (in thousands): Apr 4, 2004
    
    Dec 28, 2003Raw materials
    
    $
    18,309
    
    
    $
    13,525Work in process
    
    
    8,397
    
    
    
    6,134Finished goods
    
    
    11,938
    
    
    
    5,842$
    38,644
    
    
    $
    25,501
 Stock-Based Compensation:The Company uses the intrinsic value method to
account for employee stock-based compensation. The intrinsic value method is in
accordance with the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation cost is recorded on the date of grant to the extent
that the fair value of the underlying share of common stock exceeds the
exercise price for a stock option or the purchase price for a share of common
stock. 6




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In accordance with Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of SFAS No. 123, the Company provides
pro forma disclosure of the effect on net income and earnings per share had the
fair value method, as prescribed by SFAS No. 123, been used. The following table reflects the effect on the Companys net income and
income per share had the fair value method been applied to all outstanding and
unvested awards. The table is in thousands, except per share data. Three Months EndedApr 4, 2004
    
    Mar 30, 2003Net income, as reported
    
    $
    17,973
    
    
    $
    5,054Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects of zero
    
    
    235
    
    
    
    812Deduct: Stock-based compensation
expense determined under the fair value
method for all awards, net of
related tax effects of zero
    
    
    (987
    )
    
    
    (922
    )Pro forma net income
    
    $
    17,221
    
    
    $
    4,944Net income per share:Basic - as reported
    
    $
    0.68
    
    
    $
    0.22Diluted - as reported
    
    $
    0.65
    
    
    $
    0.21Basic - pro forma
    
    $
    0.65
    
    
    $
    0.21Diluted - pro forma
    
    $
    0.62
    
    
    $
    0.21
 For pro forma disclosure purposes, the Company used the Black-Scholes
option pricing model to estimate the fair value of each option and stock
purchase right grant on the date of grant. The following assumptions were used to estimate the fair value of option
grants in the first three months of 2004 and 2003: risk-free interest rates of
2.46% and 2.68%, respectively; volatility factors of the expected market price
of the Companys common stock of 82.6% and 87.1%, respectively; and a
weighted-average expected option life of 4.0 years. The weighted-average fair
value of options granted during the first three months of 2004 and 2003 was
$11.58 and $4.32, respectively. The following assumptions were used to estimate the fair value of employee
purchase rights under the Amended and Restated 2002 Employee Stock Purchase
Plan (ESPP) for the first three months of 2004 and 2003: risk-free interest
rates of 1.00% and 1.18%, respectively; volatility factors of 73.5% and 62.2%,
respectively; and weighted-average expected purchase rights lives of six
months. The weighted-average fair value of those purchase rights granted in
the first three months of 2004 and 2003 was $4.64 and $1.77, 7




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respectively. Because the Company does not pay dividends, there was no dividend yield
included in the pro forma disclosure calculation. Net Income Per Share:The Company determines net income per share in
accordance with SFAS No. 128, Earnings per Share. Basic net income per common share is computed by dividing income available
to common stockholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted net income per share is computed by
dividing income available to common stockholders by the weighted-average number
of shares and dilutive potential shares of common stock outstanding during the
period. The dilutive effect of outstanding options and stock purchase rights is
reflected in diluted net income per share by application of the treasury stock
method. The following table sets forth the computation of net income per share.
The table is in thousands, except per share amounts. Three Months EndedApr 4, 2004
    
    Mar 30, 2003Numerator: Net income
    
    $
    17,973
    
    
    $
    5,054Denominator
for basic income per share - weighted average shares
    
    
    26,307
    
    
    
    23,297Effect of dilutive securities:Stock purchase rights
    
    
    198
    
    
    
    529Stock options
    
    
    629
    
    
    
    108Warrants
    
    
    528
    
    
    
    Denominator for dilutive income per share
    
    
    27,662
    
    
    
    23,934Basic net income per share
    
    $
    0.68
    
    
    $
    0.22Diluted net income per share
    
    $
    0.65
    
    
    $
    0.21
 Incremental common shares attributable to outstanding common stock options
(assuming proceeds would be used to purchase treasury stock) of approximately
17,741 for the three months ended April 4, 2004, and 114,640 for the three
months ended March 30, 2003 were not included in the diluted net income per
share computation because the effect would have been anti-dilutive. Incremental common shares attributable to outstanding warrants (assuming
proceeds would be used to purchase treasury stock) of approximately 1,000,000
for the three months ended March 30, 2003 were not included in the diluted net
income per share computation because the effect would have been anti-dilutive. 8




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Recent Accounting Pronouncements:In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities(FIN 46R), which addresses
how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities(VIE), which was issued in
January 2003. The Company is required to apply FIN 46R to variable interests in
VIEs created after December 31, 2003. For variable interests in VIEs created
before January 1, 2004, the Interpretation will be applied beginning on January
1, 2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company adopted FIN46R on the first
day of its 2004 fiscal year. The adoption of FIN 46R did not have an impact on
the Companys condensed consolidated financial statements. In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104, Revenue Recognition(SAB 104), which
superceded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements(SAB 101). SAB 104 rescinds accounting guidance contained in SAB
101 related to multiple element revenue arrangements, superceded as a result of
the issuance of Emerging Issues Task Force Issue No. 00-21 (EITF 00-21),
Accounting for Revenue Arrangements with Multiple Deliverables. Additionally,
SAB 104 rescinds the SECs Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers(the FAQ) issued with SAB 101 that had
been codified in SEC topic 13, Revenue Recognition. While the wording of SAB
104 has changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
Company adopted SAB 104 on the first day of its 2004 fiscal year. The adoption
of SAB 104 did not have an impact on the Companys condensed consolidated
financial statements. Note 2. Major Customers The following table reflects the percentage of the Companys revenue by
major customer: Three Months EndedApr 4, 2004
    
    Mar 30, 2003Maxtor Corporation
    
    
    45
    %
    
    
    35
    %Hitachi Global Storage Technologies
    
    
    21
    %
    
    
    7
    %Western Digital Corporation
    
    
    19
    %
    
    
    48
    %Seagate
    
    
    8
    %
    
    
    IBM
    
    
    
    
    
    
    9
    %
 9




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Note 3. Income Taxes The Companys wholly-owned thin-film media operation, Komag USA (Malaysia)
Sdn. (KMS), received an eight-year extension of its tax holiday for its first
plant site in Malaysia. The extension provides a tax holiday through June
2011. The extended tax holiday applies to income generated by sales
of disk products
using new technologies. KMS has also been granted additional tax holidays for
its second and third plant sites in Malaysia. These tax holidays are effective
through December 2006 and 2008, respectively. A substantial majority of the
Companys income is generated by sales
of disk products covered by these tax holidays. The Companys estimated annual effective income tax rate for 2004 is 3%
and includes taxes on income generated by sales of product no longer covered
under the tax holiday at the Companys first Malaysian plant site and other tax
expenses related to the Companys international and U.S. operations. The Companys income tax provision of $1.0 million for the first quarter
of 2003 represented foreign withholding taxes on royalty and interest payments.
In the third quarter of 2003, the Company received approval from the Malaysian
Ministry of Finance for the exemption of withholding tax on royalty payments
made by its Malaysian operations to its subsidiary in the Netherlands. The
exemption is for a period of five years effective retroactively from January
2002 through December 2006. Therefore, in the first quarter of 2003, the
Company still had an accrual for foreign withholding taxes on royalty and
interest payments. The Company reversed the accrual and recorded an income tax
benefit of $0.8 million in the third quarter of 2003. The withholding taxes
are no longer payable. In the first quarter of 2004, the Company utilized $1.6 million of
Malaysian capital allowances and net operating loss carryforwards ($0.5 million
tax-effected). Upon emergence from chapter 11 bankruptcy on June 30, 2002, the
Company provided a full valuation allowance against all tax assets; therefore,
upon utilization of the capital allowance and net operating loss carryforwards
in the first quarter of 2004, the Company made a $0.5 million reduction to
intangible assets. The $0.5 million reduction was allocated to reduce the VPA
by $0.3 million and developed technology by $0.2 million. The use of the Companys net operating losses and tax credit carryforwards
generated by the Predecessor Company (prior to emergence from chapter 11
bankruptcy) will be accounted for first as a credit to intangible assets when
they are utilized, and then to additional paid-in capital after the intangible
assets have been reduced to zero. Note 4. Intangible Assets As of April 4, 2004, intangible assets included three items. A volume
purchase agreement (VPA) of $7.7 million (less accumulated amortization of $4.5
million and tax-related adjustments of $1.3 million) is included in intangible
assets. The net book value of the VPA will be amortized on a straight-line
basis over the remaining useful life of twelve months. In addition, developed
technology of $3.1 million (less accumulated amortization of $1.5 million and
tax-related adjustments of $0.7 million) is included in intangible assets. The
net book value of the developed technology will be amortized on a straight-line
basis over its estimated remaining useful life of twenty-one months. Lastly,
patent costs of $0.7 million (less 10




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accumulated amortization of $0.1 million)
are included in intangible assets. In the first quarter of 2004 and 2003,
amortization and adjustments of intangible assets totaled $1.1 million and $0.9
million, respectively. Note 5. Accrued Expenses and Other Liabilities The following table summarizes accrued expenses and other liabilities
balances at April 4, 2004 and December 28, 2003 (in thousands): Apr 4, 2004
    
    Dec 28, 2003Accrued compensation and benefits
    
    $
    13,354
    
    
    $
    20,608Other liabilities
    
    
    3,580
    
    
    
    4,446$
    16,934
    
    
    $
    25,054
 Note 6. Debt and Equity Offerings On January 28, 2004, the Company announced the closing of its offering of
$80.5 million of 2.0% Convertible Subordinated Notes (the Notes). The Notes
mature on February 1, 2024, bear interest at 2.0%, and require semiannual
interest payments beginning on August 1, 2004. The Notes will be convertible,
under certain circumstances, into shares of the Companys common stock based on
an initial effective conversion price of $26.40. Holders of the Notes may
convert the Notes into shares of the Companys common stock prior to maturity
if: 1) the sale price of the Companys common stock exceeds a specified
threshold; 2) the trading price of the Notes falls below a specified threshold
prior to February 19, 2019; 3) the Notes have been called for redemption; or 4)
specified corporate transactions (as described in the Prospectus) occur. The
Company may redeem the Notes on or after February 6, 2007, at specified
declining redemption premiums. Holders of the Notes may require the Company to
purchase the Notes on February 1, 2011, 2014, or 2019, or upon the occurrence
of a fundamental change, at a purchase price equal to 100% of the principal
amount of the Notes, plus accrued and unpaid interest. There are no financial covenants, guarantees, or collateral associated
with the Notes. In connection with the issuance of the Notes, the Company
incurred $3.1 million of loan fees. The loan fees, which are included in other
assets on the condensed consolidated balance sheet, are being amortized on a
straight-line basis over the 20-year life of the Notes. On April 4, 2004,
unamortized loan fees were $3.1 million. On January 28, 2004, the Company sold 3,525,000 shares of its common stock
at $20.00 per share. The proceeds from the sale of the common stock, net of
$4.1 million of issuance costs, were $66.4 million. The combined net proceeds from the issuance of the Notes and the common
stock were $143.8 million. In February 2004, the Company used the proceeds from the January 2004 debt
and equity offerings to repay in full $116.3 million of previously outstanding
Senior Secured Notes and certain other 11




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promissory notes. The previously
outstanding debt bore a weighted-average interest rate of 9.5%. There
was no gain or loss recognized on the repayment of the debt.
Additionally, the Company terminated an unused credit facility with limited
borrowing availability in January 2004. Note 7. Asset Purchase In February 2004, the Company purchased a Malaysian substrate
manufacturing facility for $10.0 million from Trace Storage Technology
Corporation (Trace). The purchase included land, building, and equipment. The
Company is manufacturing aluminum ground substrates and plated and polished
substrates in this factory for its own use. Additionally, the Company is
selling Trace a portion of the output under a supply agreement entered into in
connection with the purchase. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS The following discussion should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Part
I., Financial Information, Item 1. Condensed Consolidated Financial Statements
of this report. The following discussion contains predictions, estimates, and other
forward-looking statements that involve a number of risks and uncertainties
about our business. These statements may be identified by the use of words such
as expects, anticipates, intends, plans, and similar expressions. In
addition, forward-looking statements include, but are not limited to,
statements about our beliefs, estimates, or plans about our ability to maintain
low manufacturing and operating costs and costs per unit, our ability to
estimate revenues, shipping volumes, pricing pressures, returns, reserves,
demand for our disks, selling, general, and administrative expenses, taxes,
research, development, and engineering expenses, spending on property, plant,
and equipment, expected sales of disks and the market for disk drives generally
and certain customers specifically, and our beliefs regarding our liquidity
needs. The Companys business is subject to a number of risks and uncertainties.
While this discussion represents our current judgment on the future direction
of our business, these risks and uncertainties could cause actual results to
differ materially from any future performance suggested herein. Some of the
important factors that may influence possible differences are continued
competitive factors, technological developments, pricing pressures, changes in
customer demand, and general economic conditions, as well as those discussed
below in Risk Factors. We undertake no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of such
statements. Readers should review Risk Factors below, as well as other
documents filed by the Company with the Securities and Exchange Commission from
time to time. Results of Operations Overview 12




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Our net sales are driven by the level of demand for disks by disk drive
manufacturers and the
average selling prices of our disks. Demand for our disks is dependent on
unit growth in the disk drive market, the growth of storage capacity in disk
drives, which affects the number of disks needed per drive, and the number of
disks our customers purchase from external suppliers. Average selling prices
are dependent on overall supply and demand for disks and our product mix. Our business is capital-intensive and is characterized by high fixed
costs, making it imperative that we sell disks in high volume. Our contribution
margin per disk sold varies with changes in selling price, input material costs
and production yield. As demand for our disks increases, our total contribution
margin increases, improving our financial results because we do not have to
increase our fixed cost structure in proportion to increases in demand and
resultant capacity utilization. Conversely, our financial results would
deteriorate rapidly if the disk market were to worsen and our production volume
were to decrease. Because our 2004 fiscal year will contain 53 weeks, the three-month
reporting period ended April 4, 2004 included in this report includes 14 weeks.
The three-month reporting period ended March 30, 2003 included in this report
consisted of 13 weeks. Net Sales Consolidated net sales increased by 17.1%, to $123.6 million in the first
quarter of 2004, from $105.5 million in the first quarter of 2003. The overall
increase primarily reflected an increase in finished unit sales volume, to 19.2
million units in the first quarter of 2004 from 16.7 million units in the first
quarter of 2003, and an increase in the finished unit average selling price, to
$5.94 in the first quarter of 2004 from $5.57 in the first quarter of 2003.
The finished unit shipment increase in the first quarter of 2004 compared to
the same period in 2003 resulted from a combination of an additional fiscal
week in the first quarter of 2004, an overall improvement in industry
conditions, and an expansion of our customer base. Sales of 80GB per platter disks increased to 79% of net sales in the first
quarter of 2004, compared to 11% in the same period of 2003. The increase
reflected the continued customer evolution to higher storage densities. Our
customers completed the transition from 40 GB to 80 GB programs in the first
quarter of 2004. Finished disk shipments for desktop and consumer applications together
represented 89% of our first quarter of 2004 unit shipment volume. The
remaining finished disk shipments (11%) in the first quarter of 2004 were disks
for high-end server (enterprise) drives. Net other disk sales in the first quarter of 2004 were $9.6 million,
compared to $12.4 million in the first quarter of 2003. Aluminum substrate and
polished disk sales were higher in the first quarter of 2004 compared to the
first quarter of 2003. However, lower textured disk sales accounted for the
overall decrease. Aluminum substrates are now being sold to Trace Storage
Technology Corporation (Trace) under a new supply agreement that began in
January 2004. Disk substrate sales vary from period to period based on
customer requirements. 13




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Based on current customer demand, which reflects the traditional
seasonally soft second quarter,
combined with returning to the normal thirteen-week quarter, we expect
total revenue for the second quarter of 2004 to be down approximately 15% from
the first quarter of 2004. In the first quarter of 2004, sales to Maxtor Corporation (Maxtor),
Hitachi Global Storage Technologies (HGST), Western Digital Corporation
(Western Digital), and Seagate Technology (Seagate) accounted for 45%, 21%,
19%, and 8%, respectively, of our revenues. In the first quarter of 2003,
sales to Maxtor, HGST, Western Digital, and Seagate accounted for 35%, 7%, 48%,
and 0%, respectively, of our revenue. We expect to continue to derive a
substantial portion of our sales from Western Digital, Maxtor, HGST, and
Seagate. Gross Profit Our overall gross profit percentage for the first quarter of 2004 was
29.9%, an 8.3 point increase compared to a gross profit percentage of 21.6% for
the first quarter of 2003. Higher finished unit average selling prices in the
first quarter of 2004 compared to the first quarter of 2003 accounted for 4.9
points of the increase. The economies of scale associated with higher sales and
production volumes (as discussed above) in the first quarter of 2004
significantly lowered our fixed cost per disk, in spite of the fact that we had
an extra week of fixed costs in the first quarter of 2004 compared to the first
quarter of 2003. Further, our variable material costs per disk improved in the
first quarter of 2004 compared to the first quarter of 2003. These
improvements in our fixed and variable costs per disk accounted for the
remaining 3.4 points of the gross profit percentage increase. We expect to maintain our variable cost per unit at levels similar to the
first quarter of 2004 while continuing to advance our technology. We expect our
fixed cost per unit in the remainder of 2004 to vary based on changes in
production volumes from the level achieved in the first three months of 2004. Research, Development, and Engineering Expenses Research, development, and engineering (R&D) expenses of $11.6 million in
the first quarter of 2004 were $1.7 million higher compared to the $9.9 million
in the first quarter of 2003. The increase primarily reflected a $1.4 million
non-recurring payroll-related charge and an additional week of expenses in the
first quarter of 2004 compared to the first quarter of 2003. We expect R&D
spending in the second quarter of 2004 to be lower than the first quarter of
2004 due to the lack of the non-recurring charge and the return to a
thirteen-week fiscal quarter. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses of $5.4 million in
the first quarter of 2004 were $0.8 million higher compared to the $4.6 million
incurred in the first quarter of 2003. The increase primarily reflected an
additional week of expenses in the first quarter of 2004 compared to the first
quarter of 2003. Because we are returning to a thirteen-week quarter, we
expect SG&A spending in the second quarter of 2004 to be lower than the first
quarter of 2004. 14




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Interest Expense Interest expense in the first quarter of 2004 was $1.9 million, including
$1.6 million of interest expense on the Senior Secured Notes and certain
promissory notes, and $0.3 million of interest expense on the new $80.5
million, 2% Convertible Subordinated Notes, which were issued on January 28,
2004. The Senior Secured Notes and promissory notes were redeemed in full,
including accrued interest, in February 2004. There was no gain or loss on
the redemption, and there were no unamortized debt issuance costs. In the first quarter of 2003, we recorded $3.4 million in interest
expense. This amount included interest expense on the Senior Secured Notes and
promissory notes. Income Taxes Our wholly-owned thin-film media operation, Komag USA (Malaysia) Sdn.
(KMS), received an eight-year extension of its tax holiday for its first plant
site in Malaysia. The extension provides a tax holiday through June 2011. The
extended tax holiday applies to income generated by sales of disk products
using new technologies. KMS has also been granted additional tax holidays for
its second and third plant sites in Malaysia. These tax holidays are effective
through December 2006 and 2008, respectively. A substantial majority of our
income is generated by sales
of disk products covered by these tax holidays. Our estimated annual effective income tax rate for 2004 is 3% and includes
taxes on income generated by sales of product no longer covered under the tax
holiday at our first Malaysian plant site and other tax expenses related to our
international and U.S. operations. Our income tax provision of $1.0 million for the first quarter of 2003
represented foreign withholding taxes on royalty and interest payments. In the
third quarter of 2003, we received approval from the Malaysian Ministry of
Finance for the exemption of withholding tax on royalty payments made by our
Malaysian operations to our subsidiary in the Netherlands. The exemption is
for a period of five years effective retroactively from January 2002 through
December 2006. Therefore, in the first quarter of 2003, we had an accrual for
foreign withholding taxes on royalty and interest payments. We reversed the
accrual and recorded an income tax benefit of $0.8 million in the third quarter
of 2003. The withholding taxes are no longer payable. Critical Accounting Policies In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America. Actual results could differ significantly from those estimates if
our assumptions are incorrect. We believe that the following discussion
addresses our most critical accounting policies. These policies are most
important to the portrayal of our financial condition and results and require
managements most difficult, subjective and complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. 15




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Allowance for Sales Returns We estimate our allowance for sales returns based on historical data as
well as current knowledge of product quality. We have not experienced material
differences between our estimated reserves for sales returns and actual
results. It is possible that the failure rate on products sold could be higher
than it has historically been, which could result in significant changes in
future returns. Since estimated sales returns are recorded as a reduction in revenues, any
significant difference between our estimated and actual experience or changes
in our estimate would be reflected in our reported revenues in the period we
determine that difference. Long-lived Assets Long-lived assets are evaluated for impairment whenever events or changes
in circumstances indicate that these assets may be impaired or the estimated
useful lives are no longer appropriate. We consider the primary indicators of
impairment to include significant decreases in unit volumes, unit prices or
significant increases in production costs. We review our long-lived assets for
impairment based on estimated future undiscounted cash flows attributable to
the assets. In the event that these cash flows are not expected to be
sufficient to recover the recorded value of the assets, the assets are written
down to their estimated fair values utilizing discounted estimates of future
cash flows. The discount rate used is based on the estimated incremental
borrowing rate at the date of the event that triggers the impairment. Inventory Obsolescence Our policy is to provide for inventory obsolescence based upon an
estimated obsolescence percentage applied to the inventory based on age,
historical trends, and requirements to support forecasted sales. In addition,
and as necessary, we may provide additional charges for future known or
anticipated events. There were no significant changes from prior quarter estimates during the
first quarter of 2004. Liquidity and Capital Resources Cash and cash equivalents of $80.9 million at the end of the first quarter
of 2004 increased by $10.8 million from the end of the 2003 fiscal year. The
increase primarily reflected the receipt of $77.4 million and $66.4 million in
net proceeds from our January 2004 debt and equity offerings, respectively, and
a $5.6 million increase resulting from consolidated operating activities,
offset by $116.3 million in debt repayments, and $23.7 million of spending on
property, plant, and equipment. Consolidated operating activities generated $5.6 million in cash in the
first three months of 2004. The primary components of this change include the
following: 16




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
    
    net income of $18.0 million, net of non-cash depreciation and
amortization of property, plant
and equipment of $9.5 million, $0.6 million of non-cash amortization of
intangible assets, a $0.5 million non-cash income tax-related
adjustment, $0.3 million of non-cash interest expense, and $0.2 million
of amortization of deferred stock-based compensation, less a $0.2
million gain on asset disposals;  
    
    an accounts receivable increase of $11.9 million primarily
due to the timing of sales during the first quarter of 2004 compared
to the timing of sales during the fourth quarter of 2003;  
    
    an inventory increase of $13.1 million in anticipation of a
planned manufacturing shutdown in the second quarter of 2004 for
annual maintenance;  
    
    an accounts payable increase of $9.2 million related to the
inventory increase; and  
    
    an accrued expenses and other liabilities decrease of $7.81
million, which primarily reflected payment of accrued incentive
compensation. Our total capital spending in the first quarter of 2004 was $23.7 million,
which included a portion of the capital expenditures for our capacity expansion
as well as the $10.0 million purchase price for the acquisition of the Trace
substrate facility. Current non-cancelable capital commitments as of April 4,
2004 totaled $2.9 million. For the remainder of 2004, we plan to spend
approximately $37.0 million on property, plant, and equipment for projects
designed to increase capacity and improve yield and productivity, as well as to
improve equipment capability for the manufacture of advanced products. On January 28, 2004, we completed the offering of 4.0 million shares of
our common stock at $20.00 per share, of which selling security holders sold
0.5 million shares, and $80.5 million of 2.0% Convertible Subordinated Notes
(the Notes). The Notes mature on February 1, 2024, bear interest at 2.0%, and require
semiannual interest payments beginning on August 1, 2004. The Notes will be
convertible, under certain circumstances, into shares of the Companys common
stock based on an initial effective conversion price of $26.40. Holders of the
Notes may convert the Notes into shares of the Companys common stock prior to
maturity if: 1) the sale price of the Companys common stock exceeds a
specified threshold; 2) the trading price of the Notes falls below a specified
threshold prior to February 19, 2019; 3) the Notes have been called for
redemption; or 4) specified corporate transactions (as described in the
offering prospectus) occur. The Company may redeem the Notes on or after
February 6, 2007, at specified declining redemption premiums. Holders of the
Notes may require the Company to purchase the Notes on February 1, 2011, 2014,
or 2019, or upon the occurrence of a fundamental change, at a purchase price
equal to 100% of the principal amount of the Notes, plus accrued and unpaid
interest. There are no financial covenants, guarantees, or collateral
associated with the Notes. On February 26, 2004, we used $116.3 million of the $143.8 million in net
proceeds from the offerings to redeem in full the Senior Secured Notes and
certain promissory notes, including accrued interest. We lease our research and administrative facility in San Jose, California
under an operating lease. We also lease, and have sublet, another building in
San Jose. Both of these leases expire in 2007, and have 17




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renewal options for
five years. We also lease a building, which we no longer occupy, in Santa Rosa,
California. This lease expired in April 2004. Additionally, we lease
certain equipment under operating leases. These leases expire on various dates
through 2008. We have no capital leases. At April 4, 2004, our long-term debt obligations, operating lease
obligations, and unconditional purchase obligations, were as follows (in
thousands): Remainderof2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    80,500
    
    
    $
    80,500Operating Lease Obligations (1)
    
    
    2,878
    
    
    
    3,482
    
    
    
    3,341
    
    
    
    415
    
    
    
    5
    
    
    
    
    
    
    
    10,121Unconditional Purchase Obligations (2)
    
    
    6,095
    
    
    
    700
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,835Total Contractual Cash Obligations
    
    $
    8,973
    
    
    $
    4,182
    
    
    $
    3,381
    
    
    $
    415
    
    
    $
    5
    
    
    $
    80,500
    
    
    $
    97,456
  (1)
    
    These represent gross operating lease obligations, and are
not reduced by sublease income.(2)
    
    Unconditional purchase obligations are defined as agreements
to purchase goods or services that are enforceable and legally
binding, and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum, or variable
pricing provisions; and the approximate timing of the transactions.
The amounts are based on our contractual commitments; however, it is
possible we may negotiate lower payments if we choose to exit these
contracts earlier. RISK FACTORS These risks and uncertainties are not the only ones facing our company.
Additional risks and uncertainties that we are unaware of or currently deem
immaterial may also become important factors that may harm our business. If any
of the following risks actually occur, or other unexpected events occur, our
business, financial condition or results of operations could be materially
adversely affected, the value of our stock could decline, and you may lose part
or all of your investment. Further, thisForm 10-Qcontains forward-looking
statements and actual results may differ significantly from the results
contemplated by our forward-looking statements. Risks Related to Our Business We have a history of operating losses and emerged from chapter 11 bankruptcy in
2002. Despite operating profitability during each of our five most recent
fiscal quarters, we cannot assure you that we will be able to maintain or
improve our profitability in the future. In 2001, after defaulting on our debt obligations, we filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy Code. We
emerged from chapter 11 bankruptcy in June 2002. Although we have been
profitable in our most recent five quarters, we have a history of losses. Due
to the factors discussed below in this Risk Factors section, including the very
competitive, capital intensive and
historically cyclical nature of the disk and disk drive markets on which
our business is dependent, we 18




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cannot assure you that we will be able to sustain
or improve our profitability in the future. Downturns in the disk drive manufacturing market and related markets may
decrease our revenues and margins. The market for our products depends on economic conditions affecting the
disk drive manufacturing and related markets, particularly the desktop personal
computer market. We believe that a substantial majority of our finished unit
sales were incorporated into disk drives manufactured by our customers for the
desktop personal computer market. Because of this concentration in a single
market, which we expect to continue, our business is tightly linked to the
success of the personal computer market. The personal computer market has
historically been seasonal and cyclical and has experienced periods of
oversupply and reduced production levels, resulting in significantly reduced
demand for disks and pricing pressures. The effect of these cycles on
suppliers, including disk manufacturers, has been magnified by disk drive
manufacturers practice of ordering components, including disks, in excess of
their needs during periods of rapid growth, thereby increasing the severity of
the drop in the demand for components during periods of reduced growth or
contraction. Accordingly, downturns in the desktop personal computer market may
cause disk drive manufacturers to delay or cancel projects, reduce their
production or reduce or cancel orders for our products. This, in turn, may lead
to longer sales cycles, delays in payment and collection, pricing pressures,
and unused capacity, causing us to realize lower revenues and margins. If our production capacity is underutilized, our gross margin will be adversely
affected and we could sustain significant losses. Our business is characterized by high fixed overhead costs including
expensive plant facilities and production equipment. Our per unit costs and our
gross margin are significantly affected by the number of units we produce and
the amount of our production capacity that we utilize. Our production capacity
was approximately 20 million disks per quarter in 2003. We are in the process
of increasing our production capacity by approximately 20% through capital
expansion. If we underutilize our production capacity for any reason including
lack of customer demand or cancellation or delay of customer orders, we could
experience significantly higher unit production costs, lower margins and
potentially significant losses. Underutilization of our production capacity
could also result in equipment write-offs, restructuring charges and employee
layoffs. For example, from our 1997 fiscal year to the third quarter of our
2002 fiscal year, our gross margin was severely adversely affected by the
underutilization of our capacity. If our production capacity is underutilized
for any reason, our financial results and our business would be severely
harmed. We receive a large percentage of our net sales from only a few disk drive
manufacturing customers, the loss of any of which would adversely affect our
sales. Our customers are disk drive manufacturers. A relatively small number of
disk drive manufacturers dominate the disk drive market. According to
TrendFOCUS, four of these manufacturers accounted for 84% of disk drive sales
during the fourth quarter of 2003. Accordingly, we expect that the success of
our business will continue to depend on a limited number of customers who have
comparatively
strong bargaining power in negotiating contracts with us. 19




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In the first quarter of 2004, 45% of our net sales were to Maxtor, 21%
were to HGST, 19% were to Western Digital, and 8% were to Seagate. In fiscal
2003, 38% of our net sales were to Western Digital, 37% were to Maxtor and 17%
were to HGST. During fiscal 2002, 61% of our net sales were to Western Digital
and 30% were to Maxtor. During fiscal 2001, 59% of our net sales were to
Western Digital and 27% were to Maxtor. If any one of our significant customers
reduces its disk requirements or develops or expands capacity to produce disks
for its internal use, and we are unable to replace these orders with sales to
new customers, our sales would be reduced and our business would suffer. Price competition may force us to lower our prices, causing our gross margin
to suffer. We face significant price competition in the disk industry. High levels of
competition have historically put downward pressure on prices per unit.
Additionally, the average selling price of disks and disk drives rapidly
declines over their commercial life as a result of technological enhancements,
productivity improvements and industry supply increases. We may be forced to
lower our prices or add new products and features at lower prices to remain
competitive, and we may otherwise be unable to introduce new products at higher
prices. We cannot assure you that we will be able to compete successfully in
this kind of price competitive environment. Lower prices would reduce our
ability to generate sales, and our gross margin would suffer. If we fail to
mitigate the effect of these pressures through reducing the cost of our
products or changing our product mix, our net sales and gross margin could be
adversely affected. Price declines are also affected by any imbalances between demand and
supply. For most of 2002, as in the several years prior, disk supply exceeded
demand. As independent suppliers like us struggled to utilize their capacity,
the excess disk supply caused average selling prices for disks to decline.
Pricing pressure on component suppliers was also compounded by high consumer
demand for inexpensive personal computers and consumer devices. In the fourth
quarter of 2002, throughout 2003, and in the first quarter of 2004, disk prices
were relatively stable, but there is no certainty that this trend will
continue. These supply and demand factors and industry-wide competition could
adjust again and force disk prices down, which, in turn, would put pressure on
our gross margin. If future demand for our products exceeds the production capability of our
existing facilities, we may be required to invest significant capital
expenditures to increase capacity or else risk losing market share. We believe that we have limited capability to further expand our
production capacity using our existing facilities to meet incremental increases
in future demand for our disk products. If demand for our products were to
significantly exceed these capacity levels, we may not be able to satisfy this
increased demand. To increase our production capacity to meet significant
increases in demand for our disks, we would be required to expand our existing
facilities, construct new facilities or acquire entities with additional
production capacities. These alternatives would require significant capital
investments by us and would require us to seek additional equity or debt
financing. There can be no assurance that such financing would be available to
us when needed on acceptable terms, or at all. If we were unable to expand
capacity
on a timely basis to meet increases in demand, we could lose market
opportunities for sales and our market 20




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share could decline. Further, we cannot
assure you that the increased demand for our disk products would continue for a
sufficient period of time to recoup our capital investments associated with
increasing our production capacity. Internal disk operations of disk drive manufacturers may adversely affect our
ability to sell our disk products. Disk drive manufacturers such as HGST, Maxtor, and Seagate have large
internal thin-film media manufacturing operations and are able to produce a
substantial percentage of their disk requirements. We compete directly with
these internal operations when we market our products to these disk drive
companies, and indirectly when we sell our disks to customers who must compete
with vertically-integrated disk drive manufacturers. Vertically-integrated
companies have the opportunity to keep their disk-making operations fully
utilized, thus lowering their costs of production. This cost advantage
contributes to the pressure on us and other independent disk manufacturers to
sell disks at lower prices and can severely affect our profitability.
Vertically-integrated companies are also able to achieve a large manufacturing
scale that supports the development resources necessary to advance technology
rapidly. We may not have sufficient resources or manufacturing scale to be able
to compete effectively with these companies as to production costs or
technology development, which would negatively impact our net sales and market
share. If we are unable to perform successfully in the highly competitive and
increasingly concentrated disk industry, we may not be able to maintain or gain
additional market share, and our operating results would be harmed. The market for our products is highly competitive, and we expect
competition to continue in the future. Competitors in the thin-film media
industry fall mainly into two groups: Asian-based independent disk
manufacturers and captive disk manufacturers. Our major Asian-based independent
competitors include Fuji Electric, Hoya, Showa Denko and Trace Storage. The
captive disk manufacturers who produce thin-film media internally for their own
use include HGST, Maxtor and Seagate. In late 2002, IBM entered into a joint
venture with Hitachi. The joint venture, named Hitachi Global Storage
Technologies (HGST), includes Hitachis and IBMs disk drive operations and a
portion of IBMs thin-film media operations, and evidences the increasing
concentration and economies of scale in our industry. Many of these competitors
have greater financial resources than we have, which could allow them to adjust
to fluctuating market conditions better than us. Further, they may have greater
technical and manufacturing resources, more extensive name recognition, more
marketing power, a broader array of product lines and preferred vendor status.
To the extent our competitors continue to consolidate and achieve greater
economies of scale, we will face additional competitive challenges. If we are
not able to compete successfully in the future, we would not be able to gain
additional market share for our products, or we may lose our existing market
share, and our operating results could be harmed. Because our products require a lengthy sales cycle with no assurance of high
volume sales, we may
expend significant financial and other resources without a return. 21




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With short product life cycles and the rapid technological change
experienced in the disk drive industry, we must frequently qualify new products
with our disk drive manufacturing customers, based on criteria such as quality,
storage capacity, performance, and price. Qualifying disks for incorporation
into new disk drive products requires us to work extensively with our customer
and the customers other suppliers to meet product specifications. Therefore,
customers often require a significant number of product presentations and
demonstrations, as well as substantial interaction with our senior management,
before making a purchasing decision. Accordingly, our products typically have a
lengthy sales cycle, which can range from six to twelve months or longer.
During this time, we may expend substantial financial resources and management
time and effort, while having no assurances that a sale will result, or that
disk drive programs ultimately will result in high-volume production. To the
extent we expend significant resources to qualify products without realizing
sales, our operations will suffer. If our customers cancel orders, our sales could suffer and we are generally not
entitled to receive cancellation penalties to offset the loss of sales revenue. Our sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, or rescheduling without significant penalties.
As a result, if a customer cancels, modifies, or reschedules an order, we may
have already made expenditures that are not recoverable, and our profitability
will suffer. Furthermore, if our current customers do not continue to place
orders with us or if we are unable to obtain orders from new customers, our
sales and operating results will suffer. Because we depend on a limited number of suppliers, if our suppliers experience
capacity constraints or production failures, our production, operating results
and growth potential could be harmed. We rely on a limited number of suppliers for some of the materials and
equipment used in our manufacturing processes, including aluminum blanks,
aluminum substrates, nickel plating solutions, polishing and texturing
supplies, and sputtering target materials. For example, Kobe Steel, Ltd. is our
sole supplier of aluminum blanks, a fundamental component in producing our
disks. We also rely on OMG Fidelity, Inc. and Heraeus Incorporated for supplies
of nickel plating solutions and sputtering target materials, respectively. The
supplier base has been weakened by the poor financial condition of the industry
in recent years, and some suppliers have exited the business. Our production
capacity would be limited if one or more of these materials were to become
unavailable or available in reduced quantities, or if we were unable to find
alternative suppliers. For example, due to the significant growth in demand for
our disk products in the fourth quarter of 2002, our sales were smaller during
the quarter than the available market opportunity due to our inability to
acquire additional aluminum substrates. If our sources of materials and
supplies were limited or unavailable for a significant period of time, our
production, operating results and ability to grow our business could be
adversely affected. Disk drive program life cycles are short, and disk drive programs are highly
customized. If we fail to respond to our customers demanding requirements, we
will not be able to compete effectively. The disk industry has experienced rapid technological change, and if we
are unable to anticipate 22




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and develop products and production technologies on a
timely basis, our competitive position could be harmed. In general, the life
cycles of disk drive programs are short. For example, between approximately
1999 and 2002, areal density rose dramatically on an annual basis.
Additionally, disks must be more customized to each disk drive program. Short
program life cycles and customization have increased the risk of product
obsolescence, and as a result, supply chain management, including just-in-time
delivery, has become a standard industry practice. In order to sustain customer
relationships and sustain profitability, we must be able to develop new
products and technologies in a timely fashion that can help customers reduce
their time-to-market performance, and continue to maintain operational
excellence that supports high-volume manufacturing ramps and tight inventory
management throughout the supply chain. Accordingly, we have invested and
intend to continue to invest heavily in our research and development program.
If we cannot respond to this rapidly changing environment or fail to meet our
customers demanding product and qualification requirements, we will not be
able to compete effectively. As a result, we would not be able to maximize the
use of our production facilities and our profitability would be negatively
impacted. If we do not keep pace with the rapid technological change in the disk drive
industry, we will not be able to compete effectively, and our operating results
could suffer. Our products primarily serve the 3 1/2-inch disk drive market where
product performance, consistent quality, price and availability are of great
competitive importance. To succeed in an industry characterized by rapid
technological developments, we must continuously advance our disk technology at
a pace consistent with, or faster than, the pace at which our competitors are
advancing their disk technology. Advances in disk drive technology require continually lower flying heights
and higher areal density. Until recently, areal density was roughly doubling
from year-to-year and even today continues to increase rapidly, requiring
significant improvement in every aspect of disk design. These advances require
substantial on-going process and technology development. New process
technologies, including synthetic anti-ferromagnetic, or SAF and perpendicular
recording media, or PMR, must support cost-effective, high-volume production of
disks that meet these ever-advancing customer requirements for enhanced
magnetic recording performance. We may not be able to develop and implement
these technologies in a timely manner in order to compete effectively against
our competitors products or entirely new data storage technologies. In
addition, we must transfer our technology from our U.S.-based research and
development center to our Malaysian manufacturing operations. If we cannot
advance our process technologies or do not successfully implement those
advanced technologies in our Malaysian operations, or if technologies that we
have chosen not to develop prove to be viable competitive alternatives, we
would not be able to compete effectively. As a result, we would lose market
share and face increased price competition from other manufacturers, and our
operating results would suffer. If we fail to improve the quality of, and control contamination in our
manufacturing processes, we will lose our ability to remain competitive. The manufacture of our products requires a tightly-controlled, multi-stage
process, and the use of high-quality materials. Efficient production of our
products requires utilization of advanced manufacturing
techniques and clean room facilities. Disk fabrication occurs in a highly
controlled, clean environment to 23




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minimize particles and other yield- and
quality-limiting contaminants. In spite of stringent manufacturing controls,
weaknesses in process control or minute impurities in materials may cause a
substantial percentage of the disks in a lot to be defective. The success of
our manufacturing operations depends, in part, on our ability to maintain
process control and minimize such impurities in order to maximize yield of
acceptable high-quality disks. Minor variations from specifications could have
a disproportionately adverse impact on our manufacturing yields. If we are not
able to continue to improve on our manufacturing processes or maintain
stringent quality controls, or if contamination problems arise, we will not
remain competitive, and our operating results would be harmed. An industry trend towards glass-based applications could negatively impact our
ability to remain competitive. Our finished disks are primarily manufactured from aluminum substrates,
which are the primary substrate used in desktop PC and enterprise applications.
Some disk manufacturers emphasize the use of glass as a basis for the
manufacture of their disks to primarily serve the mobile personal computer
market and certain other consumer applications. These applications are expected
to achieve significant growth in the near future. To the extent glass-based
applications were to achieve significant growth in the market place, we may
lose market share if we were unable to move rapidly to produce glass-based
disks to address the demand. All of our manufacturing operations have been consolidated in Malaysia and our
foreign operations and international sales subject us to additional risks
inherent in doing business on an international level that make it more costly
or difficult to conduct our business. As a result of our consolidation of manufacturing operations in Malaysia,
technology developed at our U.S.-based research and development center must now
be first implemented for high-volume production at our Malaysian facilities
without the benefit of being implemented at a U.S. factory. Therefore, we rely
heavily on electronic communications between our U.S. headquarters and our
Malaysian facilities to transfer specifications and procedures, diagnose
operational issues and meet customer requirements. If our operations in
Malaysia or overseas communications are disrupted for a prolonged period for
any reason, including a failure in electronic communications with our U.S.
operations, the manufacture and shipment of our products would be delayed, and
our results of operations would suffer. Furthermore, our ability to transfer funds from our Malaysian operations
to the United States is subject to Malaysian rules and regulations. In 1999,
the Malaysian government repealed a regulation that restricted the amount of
dividends that a Malaysian company may pay to its stockholders. If not
repealed, this regulation would have potentially limited our ability to
transfer funds to the United States from our Malaysian operations. If similar
regulations are enacted in the future, we may not be able to finance our
U.S.-based research and development and/or repay our U.S. debt obligations as a
significant percentage of our revenues are generated from our Malaysian
operations. We are subject to a number of risks of conducting business outside of the
United States. Our sales to customers in Asia, including the foreign subsidiaries of domestic disk
drive companies, account for 24




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substantially all of our net sales. Further, while
customers assemble a substantial portion of their disk drives in Asia, they
subsequently sell these products throughout the world. Therefore, our high
concentration of Asian sales does not accurately reflect the eventual point of
consumption of the assembled disk drives. We anticipate that international
sales will continue to represent the majority of our net sales, and as a result
the success of our business is subject to factors affecting global markets
generally. We are subject to these risks to a greater extent than most companies
because, in addition to selling our products outside the United States, our
Malaysian operations account for substantially all of our net sales.
Accordingly, our operating results are subject to the risks inherent with
international operations, including, but not limited to:  
    
    compliance with changing legal and regulatory requirements of foreign jurisdictions;  
    
    fluctuations in tariffs or other trade barriers;  
    
    foreign currency exchange rate fluctuations, since certain
costs of our foreign manufacturing and marketing operations are
incurred in foreign currency, including purchase of certain
operating supplies and production equipment from Japanese suppliers
in Yen-denominated transactions;  
    
    difficulties in staffing and managing foreign operations;  
    
    political, social and economic instability;  
    
    increased exposure to threats and acts of terrorism;  
    
    exposure to taxes in multiple jurisdictions;  
    
    local infrastructure problems or failures including but not
limited to loss of power and water supply; and  
    
    transportation delays and interruptions. If we are not able to attract and retain key personnel, our operations could be
harmed. Our future success depends on the continued service of our executive
officers, our highly-skilled research, development and engineering team, our
manufacturing team and our key administrative, sales and marketing and support
personnel. Acquiring talented personnel who possess the advanced skills we
require has been difficult. Our bankruptcy filing and our financial performance
in prior years increased the difficulty of attracting and retaining skilled
engineers and other knowledgeable workers. Even though we have emerged from
bankruptcy, we may have difficulty attracting and retaining key personnel. We
may not be able to attract, assimilate or retain highly-qualified personnel to
maintain the capabilities that are necessary to compete effectively. Further,
we do not have key person life insurance on any of our key personnel. If we are
unable to retain existing or hire key personnel, our business, financial
condition and operating results could be harmed. If we do not protect our patents and other intellectual property rights, our
revenues could suffer. It is commonplace to protect technology through patents and other forms of
intellectual property rights in technically sophisticated fields. In the disk
and disk drive industries, companies and individuals
have initiated actions against others in the industry to enforce
intellectual property rights. Although we 25




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attempt to protect our intellectual
property rights through patents, copyrights, trade secrets and other measures,
we may not be able to adequately protect our technology. In addition, we may
not be able to discover significant infringements of our technology or
successfully enforce our rights to our technology if we discover infringing
uses by others, and such infringements could have a negative impact on our
ability to compete effectively. Competitors may be able to develop similar
technology and also may have or may develop intellectual property rights and
enforce those rights to prevent us from using such technologies, or demand
royalty payments from us in return for using such technologies. Either of these
events may affect our production, which could materially reduce our revenues
and harm our operating results. We may face intellectual property infringement claims that are costly to
resolve, may divert our managements attention, and may negatively impact our
operations. We have occasionally received, and may receive in the future,
communications from third parties that assert violation of intellectual
property rights alleged to cover certain of our products or manufacturing
processes or equipment. We evaluate on a case-by-case basis whether it would be
necessary to defend against such claims or to seek licenses to the rights
referred to in such communications. In certain cases, we may not be able to
negotiate necessary licenses on commercially reasonable terms, or at all. Also,
if we have to defend such claims, we could incur significant expenses and our
managements attention could be diverted from our core business. Further, we
may not be able to anticipate claims by others that we infringe on their
technology or successfully defend ourselves against such claims. Any litigation
resulting from such claims could have a material adverse effect on our business
and financial results. Historical quarterly results may not accurately predict our performance due to
a number of uncertainties and market factors, and as a result it is difficult
to predict our future results. Our operating results historically have fluctuated significantly on both a
quarterly and annual basis. Additionally, as a result of our emergence from
bankruptcy on June 30, 2002, we are operating our business with a new capital
structure and have been subject to the fresh-start reporting prescribed by
generally accepted accounting principles. Our balance sheet beginning as of
June 30, 2002 reflects the application of these rules. As a result, our
operating results in any quarter may not reflect our future performance,
particularly because our financial condition and results of operations are not
comparable to those in our historical financial statements ended prior to June
30, 2002. We believe that our future operating results will continue to be
subject to quarterly variations based on a wide variety of factors, including:  
    
    timing of significant orders, or order cancellations;  
    
    changes in our product mix and average selling prices;  
    
    modified, adjusted or rescheduled shipments;  
    
    availability of disks versus demand for disks;  
    
    the cyclical nature of the disk drive industry;  
    
    our ability to develop and implement new manufacturing process technologies;
    
    increases in our production and engineering costs associated
with initial design and production of new product programs; 26




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
    
    the ability of our process equipment to meet more stringent
future product requirements;  
    
    our ability to introduce new products that achieve
cost-effective high-volume production in a timely manner, timing of
product announcements, and market acceptance of new products;  
    
    the availability of our production capacity, and the extent
to which we can use that capacity;  
    
    changes in our manufacturing efficiencies, in particular
product yields and input costs for direct materials, operating
supplies and other running costs;  
    
    prolonged disruptions of operations at any of our facilities for any reason;  
    
    changes in the cost of or limitations on availability of labor; and  
    
    structural changes within the disk industry, including
combinations, failures, and joint venture arrangements. We cannot forecast with certainty the impact of these and other factors on
our revenues and operating results in any future period. Our expense levels are
based, in part, on expectations as to future revenues. If our revenue levels
are below expectations, our operating results are likely to suffer. Given our reliance on manufacturing facilities and suppliers in Asia, another
outbreak of SARS or another infectious disease may negatively impact our
operating results. If there is another outbreak of severe acute respiratory syndrome (SARS)
as occurred at the end of 2002 in China, Hong Kong, Singapore, and Vietnam,
such an outbreak, or an outbreak of another such infectious disease, or the
fear of such an outbreak, could have a negative impact on our operations. The
outbreak that occurred in 2002 had an impact on the ability of our management,
sales and customer service employees to travel between the executive and
research facilities in California, manufacturing operations in Malaysia, and
customer sites throughout Asia. Our normal operating processes could be
hindered by a number of disease-related factors upon a future extended
occurrence, including, but not limited to:  
    
    disruptions in our manufacturing facilities in Malaysia;  
    
    disruptions at our third-party suppliers located in China or other affected countries;  
    
    disruptions in our customers operations in Singapore, Malaysia or other affected countries;  
    
    reduced travel between our U.S.-based research and
development facility and our Malaysian manufacturing locations; and  
    
    reduced travel between ourselves, customers, and suppliers. Because of our reliance on our Malaysian manufacturing facilities and
significant distribution to customers in Asia, if another outbreak occurs or
spreads to other areas, our sales and operating results could be harmed. If we make unprofitable acquisitions or are unable to successfully integrate
future acquisitions, our business could suffer. We have in the past and from time to time in the future may acquire
businesses, products or
technologies that we believe complement or expand our existing business.
Acquisitions involve numerous risks, including the following: 27




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
    
    difficulties in integrating the operations, technologies,
products and personnel of the acquired companies, especially given
the specialized nature of our technology;  
    
    diversion of managements attention from normal daily
operations of the business;  
    
    potential difficulties in completing projects associated with
in-process research and development;  
    
    initial dependence on unfamiliar supply chains or relatively small supply partners; and  
    
    the potential loss of key employees of the acquired companies. Acquisitions may also cause us to:  
    
    issue stock that would dilute our current stockholders percentage ownership;  
    
    assume liabilities;  
    
    record goodwill and non-amortizable intangible assets that
will be subject to impairment testing and potential periodic
impairment charges;  
    
    incur amortization expenses related to certain intangible assets;  
    
    incur large and immediate write-offs; or  
    
    become subject to litigation. For example, in 2000, we acquired HMT Technology Corporation (HMT),
another disk manufacturer. As a result of the acquisition of HMT, we acquired
debt liabilities, real property and manufacturing facilities and incurred
significant transaction costs related to the acquisition that raised our
ongoing operational expenses and fixed costs. We were unable to utilize our
increased capacity and generate sufficient revenues to cover the increased
costs and have since sold a majority of all unused facilities. Mergers and acquisitions of high-technology companies are inherently
risky, and no assurance can be given that any future acquisitions by us will be
successful and will not materially adversely affect our business, operating
results or financial condition. The failure to manage and successfully
integrate acquisitions we make could harm our business and operating results in
a material way. Even if an acquired company has already developed and marketed
products, there can be no assurance that product enhancements will be made in a
timely fashion or that pre-acquisition due diligence will have identified all
possible issues that might arise with respect to products or the integration of
the company into our company. The nature of our operations makes us susceptible to material environmental
liabilities, which could result in significant compliance and clean-up expenses
and adversely affect our financial condition. We are subject to a variety of federal, state, local, and foreign
regulations relating to:  
    
    the use, storage, discharge, and disposal of hazardous
materials used during our manufacturing process;  
    
    the treatment of water used in our manufacturing process; and 28




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
    
    air quality management. We are required to obtain necessary permits for expanding our facilities.
We must also comply with new regulations on our existing operations, which may
result in significant costs. Public attention has increasingly been focused on
the environmental impact of manufacturing operations that use hazardous
materials. If we fail to comply with environmental regulations or fail to
obtain the necessary permits:  
    
    we could be subject to significant penalties;  
    
    our ability to expand or operate in California or Malaysia could be restricted;  
    
    our ability to establish additional operations in other locations could be restricted; or  
    
    we could be required to obtain costly equipment or incur
significant expenses to comply with environmental regulations. Furthermore, our manufacturing processes rely on the use of hazardous
materials and any accidental hazardous discharge could result in significant
liability and clean-up expenses, which could harm our business, financial
condition, and results of operations. Earthquakes or other natural or man-made disasters could disrupt our
operations. Our U.S. facilities are located in San Jose, California. In addition, Kobe
and other Japanese suppliers of our key manufacturing supplies and sputtering
machines are located in areas with seismic activity. Our Malaysian operations
have been subject to temporary production interruptions due to localized
flooding, disruptions in the delivery of electrical power, and, on one occasion
in 1997, by smoke generated by large, widespread fires in Indonesia. If any
natural or man-made disasters do occur, operations could be disrupted for
prolonged periods, and our business would suffer. Anti-takeover provisions in our certificate of incorporation could discourage
potential acquisition proposals or delay or prevent a change of control. We have protective provisions in place designed to provide our board of
directors with time to consider whether a hostile takeover is in our best
interests and that of our stockholders. Our certificate of incorporation
provides that we have three classes of directors. As a result, a person could
not take control of the board until the third annual meeting after the closing
of the merger, since a majority of our directors will not stand for election
until that third annual meeting. This provision could discourage potential
acquisition proposals and could delay or prevent a change in control of the
company and also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including offers at a price above the
then-current market price for our common stock. These provisions also may
inhibit fluctuations in our stock price that could result from takeover
attempts. Risks Related to our Indebtedness We are leveraged, and our debt service requirements will continue to make us
vulnerable to economic downturns and impose restrictions on our operations. 29




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We recently completed a public common stock offering of 4.0 million shares
(of which 0.5 million were sold by selling stockholders) and a public $80.5
million Convertible Subordinated Notes offering. We used a significant portion
of the proceeds of the offerings to redeem all of our outstanding Senior Notes.
Even though we redeemed all of the outstanding Senior Notes using the proceeds
of the common stock offering and the debt offering, we now have debt service
obligations under the Convertible Subordinated Notes. As a result, we may be
required to use a substantial portion of our cash flow from operations to meet
our obligations on our Convertible Subordinated Notes, thereby reducing the
availability of cash flow to fund our business. Debt service obligations
arising from the offering of our Convertible Subordinated Notes could limit our
flexibility in planning for or reacting to changes in our industry, and could
limit our ability to borrow more money for operations and implement our
business strategy in the future. In addition, our leverage may restrict our
ability to obtain additional financing in the future. We will continue to be
more leveraged than some of our competitors, which may place us at a
competitive disadvantage because our interest and debt repayment requirements
makes us more susceptible to downturns in our business. Our holding company structure makes us dependent on cash flow from our
subsidiaries to meet our obligations. Most of our operations are conducted through, and most of our assets are
held by, our subsidiaries. Therefore, we are dependent on the cash flow of our
subsidiaries to meet our debt obligations. Our subsidiaries are separate legal
entities that have no obligation to pay any amounts due under the Convertible
Subordinated Notes, or to make any funds available therefore, whether by
dividends, loans or other payments. Our subsidiaries have not guaranteed the
payment of the Convertible Subordinated Notes. Except to the extent we may
ourselves be a creditor with recognized claims against our subsidiaries,
subject to any limitations contained in our debt agreements, all claims of
creditors and holders of preferred stock, if any, of our subsidiaries will have
priority with respect to the assets of such subsidiaries over the claims of our
creditors, including holders of the Convertible Subordinated Notes. The assets of our subsidiaries may not be available to make payments on our
debt obligations. Our Convertible Subordinated Notes have not been guaranteed by our
subsidiaries, and payments on the Convertible Subordinated Notes are required
to be made only by us. We may not have direct access to the assets of our
subsidiaries unless these assets are transferred by dividend or otherwise to
us. The ability of our subsidiaries to pay dividends or otherwise transfer
assets to us is subject to various restrictions, including restrictions under
other agreements to which we are a party under applicable law. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to foreign currency exchange rate risk. We currently do not
use derivative financial instruments to hedge such risk. The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We invest primarily in high-quality, short-term 30




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debt instruments. A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, a large portion of our
payroll, certain operating expenses, and capital purchases are transacted in
other currencies, primarily Malaysian ringgit. Since late 1998, the ringgit has
been pegged at a conversion rate of 3.8 Malaysian ringgit to the U.S. dollar.
If the pegging is lifted in the future, we will evaluate whether or not we will
enter any hedging contracts for the Malaysian ringgit. Expenses recorded in
Malaysian ringgit in the first three months of 2004 totaled approximately $12.7
million. We have $80.5 million in convertible subordinated notes outstanding that
bear interest at 2% and mature in February 2024. A hypothetical 100 basis
point increase in interest rates would result in approximately $0.8 million of
additional interest expense each year. 
 ITEM 4. CONTROLS AND PROCEDURES We maintain a rigorous set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in our filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Our Chief Executive
Officer and our Chief Financial Officer have designed and evaluated our
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under their supervision, pursuant to Rules 13a  15
(e) and 15d  15(e) of the Securities Exchange Act of 1934 for the period
covered on this Quarterly Report on Form 10-Q, and have determined that such
disclosure controls and procedures are effective to ensure that the information
required to be disclosed in our filings under periodic Securities and Exchange
Commission filings is gathered, analyzed, and disclosed with adequate
timeliness, accuracy, and completeness, based on an evaluation of such controls
and procedures conducted as part of the end of the period covered by this
report. There has been no change in our last fiscal quarter ended April 4,
2004 that has or is likely to materially affect our internal controls over
financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings Not applicable. 
 ITEM 2. Changes in Securities Not applicable. 
 ITEM 3. Defaults Upon Senior Securities Not applicable. 31




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ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 ITEM 5. Other Information  Most of the Companys officers have entered into Rule 10b5-1 plans
regarding future sales of Common Stock currently held by them in their
deferred compensation plan accounts (deferred accounts). Such plans were entered into
primarily to permit the officers to sell enough stock to cover income
taxes that will be due from them at the time the stock is released to them from
their deferred accounts. 
 ITEM 6. Exhibits and Reports on Form 8-K  a)
    
    Exhibits 31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200232
    
    Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  b)
    
    Reports on Form 8-K On February 11, 2004, the Company filed a Form 8-K stating that it issued
a February 10, 2004 press release announcing that its wholly-owned subsidiary,
KMS, signed an agreement with Trace, an independent media supplier in Taiwan.
The agreement provides KMS with additional substrate capacity as well as a
substrate supply relationship with Trace. On January 29, 2004, the Company filed a Form 8-K/A stating that it
amended its January 28, 2004 press release. On January 29, 2004, the Company filed a Form 8-K stating that it issued a
January 28, 2004 press release announcing its call for the partial redemption
on February 12, 2004 of $72,000,000 principal amount of its Senior Secured
Notes due in 2007 and for the full redemption on February 27, 2004 of the
remaining Senior Secured Notes not redeemed on February 12, 2004. On January 28, 2004, the Company filed a Form 8-K stating that it issued a
January 28, 2004 press release announcing the closing of 3.5 million shares of
its common stock at $20.00 per share, of which
selling security holders are selling 500,000 shares, and $70 million of
2.0% Convertible Subordinated Notes due in 2024, and the exercise of the
over-allotment by the underwriters of 525,000 shares of common stock and
$10,500,000 of the notes. 32




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On January 23, 2004, the Company filed a Form 8-K stating that it issued a
January 23, 2004 press release announcing the pricing of 3.5 million shares of
its common stock at $20.00 per share, of which selling security holders are
selling 500,000 shares, and $70 million of 2.0% Convertible Subordinated Notes
due in 2024. On January 20, 2004, the Company furnished a Form 8-K stating that it
issued a January 20, 2004 press release announcing its financial results for
the year ended December 28, 2003, and presenting forward-looking statements
related to the first quarter of 2004. On January 6, 2004, the Company furnished a Form 8-K stating that it
issued a January 6, 2004 press release presenting estimated financial
information for the quarter ended December 28, 2003. 33




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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: May 11, 2004
    BY:
    /s/ Thian Hoo TanThian Hoo TanChief Executive OfficerDATE: May 11, 2004
    BY:
    /s/ Kathleen A. BaylessKathleen A. BaylessVice President, Chief Financial Officer 34




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EXHIBIT INDEX 31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 200232
    
    Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002