FOOL PLATE SPECIAL
An Investment Opinion by Alex Schay

Komag Frags Investors

Trickle down industries are inherently more vulnerable to the vagaries of spending decisions at the top of the chain. Investors in storage technology are keenly aware of the shifting winds that can lead to such a reallocation of dollars. KOMAG INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %>, the world's largest manufacturer of thin-film disks used to store data in computer disk drives, is presently enduring such a shift, down $1 29/32 to $16 13/16 today. After a series of quarters where the company guided expectations downward, the other shoe has finally dropped. In a widely expected announcement after the bell yesterday, Komag stated that it would engage in a restructuring of its manufacturing operations. Adding salt to the wounds, Komag also announced the expectation of a 3Q loss and loss for the 1997 fiscal year, as well as gross margin pressure throughout the first half of 1998.

The company will consolidate all of its U.S. operations and close two factories in Milpitas, California. This reduces its U.S. employee base by approximately 350 people, or 16% of its American workforce. After the reduction, Komag will employ 4,600 people worldwide and will hope to glean 115 million disks a year out of its remaining facilities (once the restructuring is complete). Essential to plan is a shift toward the company's Malaysian operations, which can effect significant tax and labor cost reductions, hence lowering fixed costs for the company. By the end of 1998, the company hopes to produce 75% of its disks offshore, up from 50% currently. Komag expects to take a 3Q charge of $45 to $60 million related to the restructuring. Restructurings are non-recurring items that require that a provision be set up for expected losses. It is important to remember that the numbers Komag provides are a only a rough estimate of the restructuring expense, not the actual realized loss, which may be more or less.

What prompted this mess? Rumblings could be heard in the most recent second quarter 10Q, as Komag received notification from a prominent customer SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> that "orders for the second half of 1997 would be reduced substantially." Seagate had accounted for 31% and 14% of net sales in the first and second quarters of 1997. Komag's high fixed costs needed to be balanced by a replacement of the lost volume. With no increase in volume anticipated in the second half of the year, the company was forced to take the more drastic step of restructuring. Komag's year-over-year decline can be seen in the numbers. In 1996, Komag's factories shipped 49 million of the 340 million disks used in the industry, or roughly 14%. Year-to-date, Komag has produced 28.4 million disks for an industry projected to consume 430 million for the year. Even if the company does ship all its inventory, it would only account for 6% of the industry total. Despite hemorrhaging market share, Komag still operates in an industry anticipated to have a compound annual growth rate of over 20% until the year 2000. As we know hope springs eternal... after restructurings.

UPS

Biopharmaceutical company GUILFORD PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLFD)") else Response.Write("(Nasdaq: GLFD)") end if %> jumped $4 1/4 to $29 1/2 after the company announced a deal with AMGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> under which Amgen will be granted rights to Guilford's FKBP-neuroimmunophilin ligands, an agent representing "a new approach in the treatment of neurodegenerative disorders," such as Alzheimer's disease. As part of the $35 million deal, Amgen will purchase $15 million of Guilford stock.

ORBIT/FR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORFR)") else Response.Write("(Nasdaq: ORFR)") end if %> gained $3 1/4 to $25, pretty much as the result of being discovered by investors lately. The stock has a very small float (shares available to trade), has been generating good earnings momentum, and is growing through acquisitions.

Wound closure device maker and April Daily Double company CLOSURE MEDICAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLSR)") else Response.Write("(Nasdaq: CLSR)") end if %> gained another $3 to $28 1/2 after yesterday announcing that it received approval to market its Dermabond cohesive in European Union countries.

CFM TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFMT)") else Response.Write("(Nasdaq: CFMT)") end if %> picked up $2 1/4 to $29 1/2 after the maker of process equipment for the semiconductor and flat panel display industries reported Q3 EPS of $0.28, up 15% from last year, and $0.03 a share ahead of estimates.

Paperboard manufacturer CARAUSTAR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %> gained $2 3/8 to $34 1/4 on initiation of coverage from Goldman Sachs, which added the company to its "recommended list." Solid fiber partition maker and paperboard products company ROCK-TENN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RKT)") else Response.Write("(NYSE: RKT)") end if %> won the same rating and busted into the secondary for a $2 1/4 gain to $20 1/16.

QEP CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QEPC)") else Response.Write("(Nasdaq: QEPC)") end if %> rose $9/16 to $8 1/2 after the tools maker said it is talking with a possible acquirer.

Geriatric products maker SUNRISE MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMD)") else Response.Write("(NYSE: SMD)") end if %> picked up $15/16 to $15 11/16 after reporting Q4 EPS of $0.20, beating estimates of $0.11.

Mortgage and home equity lender AAMES FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAM)") else Response.Write("(NYSE: AAM)") end if %> climbed $1 1/8 to $22 3/4 on takeover rumors.

AMERICAN REAL ESTATE INVESTMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: REA)") else Response.Write("(AMEX: REA)") end if %>, a real estate investment trust, gained $2 5/16 to $12 on announcing that it will transform itself into an office and industrial REIT and combine its assets with privately held Penn Square Properties and McBride Enterprises. An affiliate of CRESCENT REAL ESTATE EQUITIES CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEI)") else Response.Write("(NYSE: CEI)") end if %> will also buy 1.36 million American shares at $11 apiece.

DOWNS

MCI COMMUNICATIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> slumped $4 3/4 to $31 15/16 on huge volume after the company announced that it and merger partner BRITISH TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> are reworking the terms of the stock and cash price British Telecom will pay for MCI. Even after MCI said last month that it will lose $800 million this year because of costs of entering the local loop, investors thought the deal was a lock. British Telecom gained $2 7/8 to $64 7/8 on the news.

Specialty retailer SUNGLASS HUT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %> lost $1 1/4 to $8 3/16 after reporting second quarter same-store sales growth of 1.4% and Q2 operating EPS of $0.28, slightly ahead of estimates.

ZYGO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZIGO)") else Response.Write("(Nasdaq: ZIGO)") end if %> fell $1 7/8 to $36 1/4 after the maker of optical measurement devices reported Q2 EPS of $0.33, up 43% year over year, and a penny above estimates.

Dutch bank and financial services company ABN AMRO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAN)") else Response.Write("(NYSE: AAN)") end if %> slid $1 1/4 to $22 even though the company reported an 18% rise in first half earnings per share.

PAMECO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PCN)") else Response.Write("(NYSE: PCN)") end if %> was sent packing this morning, losing $3 to $18. There appears to be no fresh news after yesterday's announcement of two acquisitions of heating, ventilation, and air conditioning distributors.

Telecom hardware and software company BOSTON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSN)") else Response.Write("(NYSE: BSN)") end if %> fell $1 5/16 to $30 5/16 after agreeing to merge with COMVERSE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMVT)") else Response.Write("(Nasdaq: CMVT)") end if %> in a stock swap that offered Boston Technology shareholders no premium. Boston Technology had run up, however, in advance of the deal.

CONFERENCE CALLS

HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
(800) 633-8284 (code: 2857062) -- replay through 8/22

HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
(402) 220-3005 -- replay through 8/22

WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %>
(800) 953-6481 -- replay

ROSS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROST)") else Response.Write("(Nasdaq: ROST)") end if %>
(402) 222-9936 -- replay through 8/26

ACE CASH EXPRESS INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:AACE)") else Response.Write("(Nasdaq:AACE)") end if %>
(800) 642-1687 (give last name and confirmation #566078) -- replay through 8/27

THIS WEEK'S CONFERENCE CALL SYNOPSES

HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> Call
DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> Call

FOOL PORTFOLIO                 BORING PORTFOLIO

ATCT down $1/16 at $4 3/4      ATLS up $1/4 at $29 1/4
AOL up $5/16 at $68 1/4        BGP up $1/4 at $24 1/4
CHV down $7/16 at $78 13/16    CSL up $3/16 at $42 11/16
COMS up $3/16 at $54 5/8       CSCO up $5/8 at $79
DJT up $1/4 at $11 1/16        GNT up $3/8 at $45 7/8
GM up $11/16 at $64 1/8        ORCL dn $5/16 at $40 11/16
INVX down $1 at $34 7/8        OXHP down $7/8 at $78 1/2
IOM down $1/4 at $22 11/16     PMSI up $1/8 at $11 11/16
KLAC down $2 at $73 5/8        TDW up $1 5/16 at $52 1/4
LU down $1 1/16 at $84 1/2
MMM down $15/16 at $92 5/16
T up $1/16 at $40 5/16

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Alex Schay (TMF Templr), a Fool
Fool Plate Special

Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), and yet another Fool
Editing