Stockprowler.com | 10/1/00

Another rough week… previous week's pick DTEK released an advisory that earnings for the first, second, and third quarters will have to be restated and that the company is looking at a possible loss for the year. The company is also projecting a loss for the first quarter of 2001. In addition, Display Technologies announced that it had been unable to secure financing in a timely manner for approximately $2.7 million in LED display sales to AmeriVision Outdoor, Inc. (in which the Company holds a preferred stock position). All this is not just bad news, it's unbelievably bad news… and not at all what we expected.

October, during a presidential election year, has been a very good month for the market. I say this looking back at the records for some 50 years. Yes, there are dark clouds hanging over the market...rising oil prices/energy costs, OPEC threatening to cut production if the U.S. continues dipping into strategic reserves, the 6 interest rate hikes... but the economy, in spite of all this, is stronger than ever and remarkably inflation is not on the rise. I suspect that Friday was basically a very ugly day because it was the end of the quarter and with that goes a lot of institutional selling...on top of the fear/panic caused by Apple's cratering stock price. It is our opinion that Al Gore will likely not be elected President if the stock market remains unsteady... or worse yet, takes a nose dive to 3000. We also believe Bill Clinton will do all he can to prevent that from happening. Time will tell... but, Stockprowler is looking for an October rally on the near horizon.

Stockprowler's pick this week is…

Komag, Inc. (NasdaqNM:KMAG)

Corporate Web Site: http://www.komag.com/
Shares Outstanding: 66.8 million
Public Float: 46.1 million
Insider Ownership: 31%
Institutional Ownership: (137) 29%
Market Capitalization: $267.2 million
Closing Price Friday: $4.00

Komag, Inc., headquartered in San Jose, California, designs, manufactures and markets thin-film media (disks), the primary storage medium for digital data used in computer hard disk drives. The Company's products are made for the high-end desktop and high-capacity/high-performance enterprise segments of the disk drive market and are used in products such as personal computers, disk arrays, network attached storage, network file servers and engineering workstations. A hard disk drive is the primary storage device used in computer systems--from portables to mainframes. This data storage device records, stores and retrieves digital information, including a computer's operating system, application programs, and user's data files. These drives are used to record, store and retrieve digital information. Inside a disk drive, the media or disk rotates at speeds of up to 10,000 rpm. The head scans across the disk as it spins, magnetically recording or reading information. The domains where each bit of magnetic code is stored are extremely small and precisely placed. The tolerances of the disks and recording heads are extremely demanding and the interaction between these components is one of the most critical design aspects in an advanced disk drive.

Greater processing power, more sophisticated operating systems and application software, high-resolution graphics and larger data bases are among the developments which have driven demand for ever higher performance computer hard disk drives. Advances in component technology have been critical to improving the performance of hard disk drives and lowering the cost per bit stored. For example, the first 5 1/4-inch hard disk drive, introduced in 1980, offered a capacity of five megabytes (one million bytes is a megabyte or "MB") with a storage density of less than ten megabits (one million bits is a megabit; eight bits is one byte) per square inch. Current high-performance 3 1/2-inch drives have capacities up to 18 gigabytes (one billion bytes is a gigabyte or "GB") with densities up to 2,500 megabits per square inch. On September 7, the company announced that it is shipping a new generation of 20 GB per platter media in volume. The company is shipping these high capacity disks to both 5400 RPM and 7200 RPM applications. With these new products, Komag is a key enabler of the disk drive industry's relentless performance improvement. "Data storage density has more than doubled in the past twelve months,'' stated Ray Martin, Komag's senior vice president of sales and customer service. "We are proud that we continue to provide technology solutions to our customers that support their time-to-market and time-to-volume needs.''

Komag primarily sells its media products to independent OEM disk drive manufacturers for incorporation into hard disk drives that are marketed under the manufacturers' own labels. The Company has also historically sold its disks to computer system manufacturers who make disk drives for their own use or for sale in the open market. Komag works closely with customers as they design new high-performance disk drives and generally customizes the Company's products according to customer specifications. Two customers accounted for approximately 87% of net sales in 1999: Western Digital Corporation, which accounted for 71% and Maxtor Corporation, which accounted for 16% of net sales, respectively.

Komag reported net sales for the second quarter of fiscal 2000 totaled $83.5 million, up 5% from $79.6 million in the first quarter of 2000. Net sales for the second quarter of fiscal 1999 totaled $93.2 million. The company's net loss for the second quarter of 2000 was $6.5 million, or $0.10 per share based on 66.0 million shares. The net loss included an extraordinary gain of $3.8 million resulting from the exchange of senior debt to a new convertible, subordinated note. The loss per share without extraordinary gain is $0.16. The company reported a loss for the first quarter of 2000 of $5.3 million, or $0.08 per share based on 65.9 million shares. A year ago, Komag reported a net loss for the second quarter of 1999 of $38.2 million, or $0.60 per share based on 64.2 million shares.

On September 20, 2000, Komag, Inc. announced that an earlier proposed merger of Komag, Inc. and HMT Technology Corp. (NasdaqNM:HMTT) was approved by the shareholders of both companies in a $125 million stock deal. HMT Technology Corp. like Komag, designs, develops, manufactures and markets high-performance thin-film disks. The company's products are used in high-capacity hard disk drives for a variety of high-end applications including personal computers, network servers and workstations, and in certain removable hard disk drive applications. The merger is expected to be completed on October 2. Under the terms of the merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of Komag stock. With combined annual revenues of over $500 million, the merged company's customers would include leading disk drive manufacturers such as Western Digital, Maxtor, Seagate, Iomega, Samsung and Conner Technology. Together, Komag and HMT shipped 16.7 million units in the quarter ended March 31, 2000. The management team will consist of top executives from both companies. Upon completion of the merger, T.H. Tan, president and chief executive officer of Komag, will become chief executive officer of the combined company. Ronald Buschur, president and chief operating officer of HMT, will become chief operating officer of the combined company. Ronald Schauer, chairman and chief executive officer of HMT, will be a member of the board of directors of the combined company. The board of directors of the combined company will be comprised of 9 members, 3 from HMT and 6 from Komag. Komag CEO T.H. Tan stated, "The new company will bring together the best of the technology from each company and will have the broadest customer base and scale to achieve the lowest cost structure in the industry."

Komag recently completed the move of its manufacturing operations to Malaysia, which should improve the company's gross margins. That combined with the soon to be completed merger with HMT Technology, Inc., and other cost saving moves such as employee reductions should help decrease operating expenses. The likely improvements in the company's cost structure and increased competitiveness as a result of the synergy of the merger of the two companies bode well for the future. An independent analysis by International Data Corp. forecasts that worldwide disk drive unit shipments will grow at a 13% compound annual rate through 2003 as a result of the need for higher performance disk drives. It is the opinion of Stockprowler.com that the need and amount of data storage capacity will likely increase exponentially over the next several years as new and more sophisticated software becomes available for widespread use.

On Thursday, September 28, according to BusinessWeek's Inside Wall Street, a major computer data-storage company is planning to bid $2.3 billion, or $20 a share, for data storage provider Maxtor Corp. (NasdaqNM:MXTR). Maxtor is a key customer of Komag, Inc… Maxtor closed up 1 5/8 on Friday at 10 1/2. Business Week would not identify the bidder, though speculation is centered around 4 companies: Quantum, Seagate, Hewlett/Packard, and Compaq.

Stockprowler views Komag, Inc. as a strong speculation with very little downside risk, especially with the shares trading near an all-time low. We believe the synergy of the merged companies and the reduced cost structure/savings, widespread institutional ownership (137 institutions), the need for increased data storage capacity in the near future, and the wild card of its second largest customer being the target of a buyout deal at twice its current share price as being compelling reasons for buying KMAG at nearly all time low prices… not to mention the strong possibility of short covering/squeeze and the marginability of the stock when the price hits $5/share. All of which points to this stock running to much higher ground.

Good trading… Stockprowler