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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-K (MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission file number 000-27586
HMT TECHNOLOGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
1055 Page Avenue
(510) 490-3100
Web Page Address: WWW.HMTT.COM
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in a definitive proxy or information statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of June 1, 2000 the aggregate market value of common stock held by non-affiliates was approximately
$75.8 million. For purposes of this computation, shares held by directors and officers of the
registrant have been excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are affiliates of the
registrant. As of June 1, 2000, 47,036,854 shares of the registrant's common stock, par
value $0.001 per share, which is the only class of common stock of the registrant, were
outstanding. The Company's stock is traded on the Nasdaq National Market (HMTT).
Fremont, California 94538
(Address of Principal Executive Offices including Zip Code)
(Registrant's Telephone Number, Including Area Code)
None
ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended March 31, 2000
PART I. | Page |
Item 1. Business |
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Item 2. Properties |
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Item 3. Legal Proceedings |
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Item 4. Submission of Matters to a Vote of Security Holders |
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PART II. | |
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters |
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Item 6. Selected Consolidated Financial Data |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. Consolidated Financial Statements and Supplementary Data |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
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PART III. | |
Item 10. Directors and Executive Officers of the Registrant |
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Item 11. Executive Compensation |
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Item 12. Security Ownership of Certain Beneficial Owners and Management |
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Item 13. Certain Relationships and Related Transactions |
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PART IV. | |
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K |
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PART I
Item 1. Business
This Annual Report on Form 10-K report contains forward-looking statements. In some cases, these statements may be identified by terminology such as "may" , "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause HMT's or its industry's results, level of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed under the captions "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Forward-looking statements not specifically described above also may be found in these and other sections of this report.
HMT Technology Corporation ("HMT" or the "Company") is an independent supplier of high-performance thin-film disks for high-end, high-capacity and removable hard disk drives, which in turn are used in PCs, network servers and workstations. HMT was incorporated in Delaware in December 1988 as a subsidiary of Hitachi Metals, Ltd. ("Hitachi Metals") to acquire certain assets and certain liabilities of the thin-film division of Xidex Corporation, which had been producing thin-film disks since calendar 1983. Since completing the acquisition, the Company has continued to supply thin-film disks to manufacturers of hard disk drives.
The disks currently being shipped by the Company are primarily for disk drives and removable cartridges with storage capacities ranging from 1.0 to 40.8 gigabytes (using one to four disks), and all have coercivity levels of 2100 Oersted or higher. Since March 1994, the Company has focused on addressing the needs of the high-end, high-capacity segment of the disk drive market as well as the removable and emerging low cost hard disk drive segments. HMT believes that its current operating results reflect its success in meeting these needs and that its future growth and success depend on its ability to continue to develop and market products that enable its customers to produce high-performance disk drives for high-end data storage applications. The Company provides a range of magnetic density points (coercivities), glide heights, disk thicknesses and disk sizes to match the design and performance requirements of each particular customer. The Company's principal customers currently include Maxtor Corporation ("Maxtor"), Western Digital Corporation ("Western Digital"), Iomega Corporation ("Iomega"), Samsung Electronic Company Limited ("Samsung") and Conner Corporation ("Conner").
In April 2000, the Company entered into a definitive merger agreement with Komag, Incorporated ("Komag"). Komag designs, develops, manufactures and markets high-performance thin-film disks. Under the terms of the definitive merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of the Komag's common stock. The merger will be accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval of both companies' shareholders and the Company's lenders. The merger is expected to close in the third quarter of calendar 2000.
Investors and security holders are advised to read the joint proxy statement/prospectus regarding the business transaction referenced in the foregoing information, when it becomes available, because it will contain important information. HMT and Komag expect to mail a joint proxy statement/prospectus about the transaction to their respective stockholders. Such joint proxy statement/prospectus will be filed with the Securities and Exchange Commission by both companies. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus (when available) and other documents filed by the companies at the Securities and Exchange Commission's web site at http://www.sec.gov. The joint proxy statement/prospectus and such other documents may also be obtained from HMT or Komag.
Industry Background
The Disk Drive Market
Market demand for disk drives has been growing steadily, stimulated by the demand for new computers, upgrades to existing computers and the growing use of sophisticated network servers. The introduction of increasingly powerful microprocessors and more memory intensive software, combined with the development and growth of multimedia computing applications and Internet usage, have stimulated demand for PCs in both the home and business markets. According to Trend Focus, worldwide shipments of PCs were 90 million units in calendar 1998 and 109 million units in calendar 1999, and are projected to reach approximately 216 million units in calendar 2003. In addition, the PC server market, driven by the trend toward networking applications and the expansion of the Internet, is expected to grow substantially through the calendar year 2003. Although unit shipments of PCs are expected to grow, the introduction of the sub-$1,000 PC has had far-reaching effect throughout the PC supplier base. As PC prices have fallen, the pressure on key component manufacturers, such as disk drive manufacturers, has intensified.
This pricing pressure was evident in calendar 1999; according to Trend Focus, worldwide shipments of hard disk drives grew 20% to 174 million units in calendar 1999 while revenues remained flat from 1998 at $25.9 billion. Analysts predict that drive unit shipments will continue to grow at a 16% annualized level through 2003 to 316 million units while average sales prices are expected to fall off at approximately 5.5% annually resulting in $32 billion in revenue by 2003. Although calendar quarter four showed a reduction in corporate PC sales, the continued growth in the sub $1,000 PC market and Y2K preparation resulted in increased drive and media sales for calendar 1999. However, the disks-per-drive ratio continued its decline from 1998 to 1999 falling from 2.15 to a 1.77 average for desktop PCs. This ratio is expected to continue its drop over the next three years to 1.4 in calendar 2000 and reach below 1.2 by calendar 2003.
According to Trend Focus, media unit shipments
grew 6.1% to 432 million in calendar 1999, with an estimated market value of $3.4 billion, down 20% from 1998. Shipments from non-captive sources grew by approximately 4% while captive manufacturer shipments grew by 7.5% over calendar 1998 levels as captive manufacturers favored increasing their capacity utilization over making purchases from independent media suppliers. However, last years sale of Western Digital Corporations media operations to Komag, the recent announcement of Hyundai Electronics America's intended sale of MMC Technology, Inc. to Trace Corporation and Seagates announcement that it was closing media manufacturing facilities indicate that the vertical integration move may be slowing. The significant declines in the number of disks and revenues seen in 1998 abated in 1999 due to strong PC growth however Trend Focus projects that the total market for thin-film disks will decline in calendar 2000 and slowly begin to expand again in 2001 reaching 530 million units by calendar 2003, with an estimated market value of $3.6 billion.The applications being developed for PCs require greater storage capacity and, as a result, have increased the demand for high-capacity disk drives. Users purchasing newer PCs for business and home are commonly attracted by the availability of greater processing power, larger databases, multimedia and other memory intensive applications and more sophisticated operating systems, such as Windows 98 or Windows NT. Increasing use of the Internet and on-line data, including image storage and retrieval, has been responsible for the stimulated demand for storage capacity. The disk drive industry has responded to this demand with significant technology and product advances. As a result, mean storage capacity per disk drive has increased from 690 megabytes (MB) in calendar 1995, to 4.3 gigabytes (GB) in calendar 1998, and accelerated to 10.2 GB in 1999. This increase in storage capacity per platter has enabled disk drive manufacturers to reduce the average number of disks per drive. According to industry market analysts, this resulting reduction in the average number of disks per drive will likely slow the growth rate of disk shipments below the growth rate of disk drives during calendar 2000 and beyond. The significant amount of captive capacity employed by certain disk drive manufacturers also continues to limit the market opportunities for independent disk suppliers such as HMT.
While storage capacity has grown, the cost per GB has fallen from $1,260 in calendar 1993, to $320 in calendar 1995 and to $6 in calendar 2000. Today's market continues to generate pressure for advances to facilitate these trends in computing, especially at the high-end. Thus, we believe that success in the disk drive market has depended, and for the foreseeable future will depend, on the ability of the disk drive manufacturer, together with its suppliers of critical components, such as thin-film disks, to keep pace with these advances.
Additionally, removable-media storage devices, including removable hard disk drives, have an established portion of the storage market. Removable hard disk drives utilize cartridges incorporating thin-film disks and combine the high-capacity and rapid access of hard disk drives with the benefits of removability. These devices can be used peripherally to increase the storage capacity for PCs.
Disk Drive Technology
Fiscal 2000 was a difficult year for the Company and the disk drive industry in general. During both fiscal 1999 and 2000, the areal density (measured in billions of bits per square inch of disk area: (Gbit/in2 ) of customer products increased at the unprecedented rate of greater than 100% per year. This has necessitated the development of new disk surface finishes, new magnetic alloy systems and new tribology at an extremely accelerated pace. In fiscal 2000, the majority of disk drives were manufactured with advanced giant magnetoresistive (GMR) components. A GMR disk is optimized for use with GMR heads that use separate read and write elements. The write element is made from conventional inductive materials, but the read element is made of a material whose electrical resistance changes when subjected to changes in a magnetic field. GMR heads are more sensitive to magnetic fields enabling them to read more densely packed smaller-sized bits. The transition to GMR and magnetoresistive ("MR") disk drives has led to significant, unprecedented increases in areal density. HMT Technology Corporation completed its transition to GMR products by the second quarter of fiscal 2000, and GMR media currently accounts for 100% of our unit sales for fixed disk drive applications. We believe that GMR disks will continue to be the predominant media for disk drives in fiscal 2001.
Prior to fiscal 1997, market demand for advanced thin-film media typically exceeded supply. In mid-fiscal 1997, the rate of growth in demand for media slowed abruptly due in large measure to the significant increases in storage capacity per disk achieved through the use of GMR/MR technology. As a result, drive designs incorporated fewer disks and recording heads to achieve the disk drive capacities demanded by the market. In addition, based upon historical supply shortages and forecasts for continued strong demand growth rates, HMT and our competitors (both independent and captive suppliers) began adding significant media manufacturing capacity in fiscal 1996, which for the most part became operational in fiscal 1997. The increased supply of media generated by the expanded physical capacity, coupled with the tremendous improvement in disk storage capacity, allowed the overall supply of thin-film media to catch up to, and then exceed, market demand. Captive media suppliers (owned by vertically integrated disk drive customers) utilized their capacity at the expense of independent suppliers, such as HMT, during this period. As a result, in fiscal 1998, fiscal 1999 and fiscal 2000, the market for disks produced by independent suppliers decreased sharply and pricing pressures intensified. During fiscal 2000, we idled certain equipment and facilities to more closely align our production capacity to demand for our products.
The basic elements of the disk drive, sized to fit various industry form factors, have remained essentially the same since hard disk drives were first introduced. The principal components of a hard disk drive are disks, heads, spindle and actuator mechanics and electronics. Each disk drive typically contains from one to ten disks that are attached to a spindle/motor assembly within a sealed enclosure. The electronics control the spinning of the disk, the positioning of the head and the writing and retrieval of data stored on the disk. The recording head is a small magnetic transducer that, when the disk is spinning, "flies" just above the disk surface. Data are written on circumferential tracks on the disk when the electronic channel sends current pulses to the head. The head converts these pulses to magnetic fields that cause the magnetic layer within the disk and under the recording head to become magnetized, oriented in the direction of the head's magnetic field. Reversing the current in the head reverses the direction of the magnetic field on the disk. During the read-back process, as the head scans over the disk, magnetic flux from the disk's magnetic layer is picked up by the head and induces an electrical current which is converted into voltage. The output signal voltage is then transformed into digital data by the read channel electronics.
Major improvements in disk drive performance have been based on technological advances in the principal components. In a typical disk drive today, the spindle/motor assembly rotates the disk at 5,400 to 10,000 revolutions per minute. The head reads and writes data onto the spinning disk while flying at a height of 0.8 to 1.2 microinches (0.020 to 0.030 micron) and at data transfer rates of 250 to 350 megabits per second. The combination of modern head and disk technologies enables this drive to store data on 17,000 to 22,000 circumferential tracks per radial inch on the disk, with 300,000 to 380,000 bits of data per inch along each track.
Thin-Film Disk Technology
A thin-film disk is composed of a substrate, generally aluminum, coated with thin-films capable of storing information in the form of magnetic patterns. The manufacturing of thin-film disks is a multi-step process using processes similar to those used for the production of silicon wafers for semiconductors. The manufacturing process involves the deposition of extremely thin, uniform layers of magnetic film onto a substrate using a sputtering process, by either a static or in-line system, similar to that used to coat silicon wafers. The basic process consists of many interrelated steps and requires an extremely clean environment. Minor deviations in the manufacturing process, minute impurities in materials used, particulate contamination or other problems can cause significant numbers of disks to be rejected, thereby causing significant yield loss.
The most significant technological challenges facing disk manufacturers today are associated with market demand for increased storage capacity and durability. An effective implementation of thin-film technology to meet these challenges must address various performance-related characteristics, including magnetics, glide height, durability and static friction (stiction).
- Magnetic Coercivity, a measure of the magnetic strength of the disk, is expressed in Oersted (Oe). The coercivity of the disk is determined by the types of disk substrate and thin-film materials used, substrate surface conditions before disk sputtering and the conditions that exist during the sputtering process, including temperature, vacuum and possible sources of disk contamination. As areal density increases, higher coercivity is needed to permit sharper transitions between magnetized regions. This allows each bit of data to be stored in a smaller area, and therefore more data can be stored in the same disk area. Advanced drive designs currently require coercivities in the range of 3200 to 3400 Oe, compared to a range of 950 to 1200 Oe nine years ago. We believe that most high-end disk drive manufacturers will require coercivities of 3200 Oe and above by the end of calendar 2000. HMT currently manufactures and sells disks in commercial quantities with coercivities ranging from 2100 to 3300 Oe, with over 80% of our revenues during the three months ended March 31, 2000 deriving from disks with coercivities of 2000 Oe and above. We are also currently producing small quantities of disks for use in customer development programs with coercivities of up to 3600 Oe.
- Glide Height. The glide height of the disk is the measure of the height at which the head can fly over the disk without hitting anything and is a standard used in the specification of the disk. The actual flying height of the head in the disk drive is higher than the glide height to provide a margin for safety. Glide height depends on the smoothness and flatness of the disk surface. The lower the disk head flies above the disk surface, the more accurately the head can read the magnetic signal, allowing a smaller magnetized region to store each bit of data and thereby contributing to increases in areal density. While the current industry standard glide height for advanced applications is 0.7 microinch, we expect that glide heights will decrease to less than 0.6 microinches by the end of calendar 2000. HMT currently manufactures and sells disks in commercial quantities with glide heights of 1.2 microinches to 0.7 microinches.
- Durability Through Start/Stop Cycles. In most hard disk drives, the head and disk come into contact when the disk drive is turned off and the head rests directly on the inner diameter of the disk. To prevent wear on the disk, a protective overcoat is deposited over the magnetic layer of the disk. However, the thickness of this overcoat must be minimized because this layer increases the distance of the head from the magnetic layer, thereby reducing the strength of the magnetic signal reaching the head. Customer specifications typically require 60,000 start/stop cycles for desktop PCs.
- Stiction. Stiction is the static friction that occurs when two smooth surfaces come into contact. In the case of hard disk drives, an extremely smooth disk surface enables lower glide heights and can enhance durability by reducing the friction which occurs when the head contacts the disk. However, if a disk is too smooth, stiction will cause the head to adhere to the disk surface when the drive is turned on and off, causing irreparable damage to the hard disk drive. Disk manufacturers minimize this problem primarily through texturizing the disk surface in a controlled manner. Disk manufacturers cannot simply address each performance characteristic discretely because the interplay among characteristics significantly impacts the overall performance of the disk. For example, a protective overcoat that yields a highly durable disk may well reduce the disk's potential storage capacity.
Challenges Facing the Disk Drive Industry
Despite technological advances in components, including thin-film disks, and the prospects for continued data storage market growth, disk drive manufacturers face a demanding marketplace. A strong competitive position is best achieved through continual innovation. Improvements in product performance characteristics, designed to meet the growing demands for increased storage capacity, play an integral part in allowing the manufacturer to generate acceptable gross margins. However, in the highly competitive disk drive industry, other manufacturers have generally been able to develop comparable products within a relatively short time. The likelihood of rapidly decreasing profitability over the life cycle of any given product provides a strong incentive for manufacturers to innovate. This results in extremely short product cycles, currently estimated to be from nine to twelve months.
Disk drive manufacturers participating in the high-end, high-capacity disk drive market segment can realize higher gross margins by successfully addressing the need for drives capable of supporting today's demand for high-performance, value-added computing products. In this segment, which supplies products incorporated into high-end PCs, network servers and workstations, users are less price sensitive than typical home PC consumers because they have a more compelling need for a value-added product. Because of the short product cycles and the significant technology improvements incorporated into each new generation of high-performance disk drives, the need to be in the forefront of technological advances is particularly great for companies competing in this segment.
Disk drive manufacturers can produce higher capacity products by putting more disks in a drive or coupling a number of drives together in an array. These approaches are limited by form factor constraints and technical complexity. These are also relatively high-cost solutions since the drive manufacturer is adding more componentry. A more cost-effective solution is to develop a product that can store more data using the same number of components. Thus, disk drive manufacturers generally have relied on the development of new head technologies and of thin-film disks with improved areal density characteristics to support generational advances in storage capacity and performance.
HMT focuses on providing value-added technological solutions that meet the demands of the high-end, high-capacity disk drive market. We develop, manufacture and sell technologically advanced products designed to provide improved performance, principally through achieving higher coercivities and lower glide heights. HMT seeks to be a supplier to disk drive manufacturers with a proven record for technological leadership because these customers have the greatest ability to fully exploit the value of technologically superior disks. By working with such high-end customers and their head vendors, HMT can influence leading edge disk drive designs and earn a strong position as a supplier of disks for these products.
The key elements of HMT's strategy are as follows:
Products
We provide a range of magnetic density points (coercivities), glide heights and disk thicknesses. HMT currently manufactures and sells disks in commercial quantities with substantially all having coercivities levels of 2100 Oe or higher and glide heights of 1.2 microinches or less. At March 31, 2000, 80% of revenue was generated from disks with coercivities of 3000 Oe and above. We are also currently producing small quantities of disks for use in customer development programs with coercivities of up to 3600 Oe.
Our product mix continually shifts as technological advances are implemented in anticipation of demand for disks with improved performance characteristics, and we transition production from less technologically sophisticated disks still in active use. For example, during the three months ended December 31, 1996, 2000 Oe and below products comprised 80% of total units shipped, as compared with the three months ended March 31, 2000, where 2100 Oe and above products comprised 100% of total units shipped.
Our disks are currently used by five disk drive manufacturers in more than 16 different 3 1/2-inch disk drive products. Currently, these disks are used in fixed disk drives that have capacities ranging from 7.16 GB to 40.8 GB with storage capacity per disk ranging from 5.0 GB to 7.25 GB and removable disk drives that have capacities of 1.0 GB with storage capacity per disk of approximately 500 MB to 1.0 GB. HMT has the technological capability to produce disks to fit standard form factors of 5 1/4-inches and below, although we currently produce only 3 1/2-inch disks.
Manufacturing and Quality
HMT believes that our internally developed proprietary and patented manufacturing processes and state-of-the-art equipment, to which we have made proprietary modifications, combined with its extensive expertise, currently provide HMT with a technological advantage over competing independent thin-film disk manufacturers. HMT's expertise, processes and equipment also allow us to develop new proprietary processes in response to customers' requirements for improved product performance and to integrate new technologies into the manufacturing process rapidly. Our production lines are scaleable and have been designed to be installed, modified or expanded in a cost effective manner. The use of a modular strategy facilitates incremental capacity increases, efficient adaptation of manufacturing equipment for new product processes and achievement of high volume manufacturing capacity for new products on a timely basis.
Manufacturing Process
Our manufacturing process is briefly summarized as follows:
Machine, Chamfer, Bake, Grind and Wash. The initial input to the production of a thin-film disk is an aluminum blank that can be procured from a number of sources. To create specialized aluminum alloy substrates, HMT machines the inner edges of the blank to specified diameters, chamfers the inner and outer edges of the blank and bakes the chamfered blank to relieve stress induced by the machine and chamfer processes. HMT then grinds the blank to achieve required gauge thickness and flatness, remove surface defects and improve surface finish. HMT then washes the blank to remove particles. HMT currently produces these substrates through in-house manufacturing, and may from time to time purchase a portion of its requirements from independent vendors.
Plate, Polish, Texture and Wash. Aluminum substrates are plated with electroless Nickel-Phosphorous alloy, a non-magnetic layer critical to corrosion resistance that strengthens the disk and improves durability. HMT currently performs most of its nickel plating in-house. Disks are then polished to produce a mirror smooth surface. Polishing enhances the nickel surface, reducing its roughness, while maintaining the overall flatness of the disk. HMT's texturizing process, a highly automated patented process, produces a controlled roughness on the disk's surface to improve its stiction characteristics. HMT currently utilizes different texture processes, including laser texturing, to address different customer requirements. The wash process is developed to present a clean disk surface to the sputter process. Subsequent processes occur in class ten clean rooms only.
Sputter, Dip Lube and Kiss Buff. The sputter process uses equipment and a process, similar to that used in silicon wafer fabrication, in which layers of materials are deposited on the disk through a vacuum sputtering process. The chrome and magnetic layers determine the magnetic properties of the disk. The carbon layer is a protective overcoat. After sputtering, a microscopic layer of lubrication is applied to the disk's surface to improve durability and reduce surface friction. After lubrication, a surface finishing step is applied, commonly referred to as kiss buff or tape burnish.
Glide/Certify. In the test and certification process, each finished disk is optically and electronically screened and certified as acceptable based on the customer's specifications. A robotically controlled tester electronically tests for glide performance. The tester then writes information onto the disk, reads it back and erases it, simulating performance in the customer's disk drive. Each disk is tested for parametrics, errors in the read/erase process and surface defects.
The conversion of a specialized aluminum alloy blank into a final product requires two days.
Quality Assurance
HMT has a dedicated quality assurance group. We believe that our quality assurance program allows us to realize superior product yields and consistently produce a quality product. Because a high quality product is critical to achieving strong operating results and high customer satisfaction, HMT's emphasis on this area will remain a top priority. The organization consists of four separate groups:
Application Engineering. Our Application Engineering group is responsible for reviewing customer requirements and specifications by conducting specification reviews and soliciting customer and internal manufacturing feedback. Other functions include correlating and evaluating the results of HMT and customer testing, generating standards and performing source audits.
Supplier Quality Engineering. Because quality assurance is a critical aspect of our strategy, the emphasis on quality must extend to the supplier level. Our Supplier Quality Engineering group is responsible for ensuring incoming product quality through auditing suppliers, reviewing process data, establishing internal specifications and creating quality procedures and practices. The group also establishes material specifications, supplier benchmarking and standards for qualification of the supplier base.
Process Quality. Our Process Quality group is responsible for performing ongoing reliability testing, process improvement testing and new product development testing. Specific functions involve statistical process control analysis, gauge repeatability and reproducibility studies, equipment calibration, process qualification improvements and in-process quality audits.
Customer Support. Our Customer Support group acts as liaison between the customer and our manufacturing organization. All customer concerns and issues are handled through the group. Other responsibilities include corrective action requests, non-conforming material reviews, return material authorizations and document control.
Manufacturing Facilities and Capacity
Our manufacturing facilities, distribution center and administrative offices are located in Fremont, California. Our Fremont facility received ISO 9001 certification in May 1996. We currently operate 19 production scale sputtering lines for production and development of products. A typical sputtering line consists of one sputtering machine and associated equipment, such as texturizers, lubricators, glide testers and certifiers. Our facilities currently operate seven days a week, 24 hours per day.
In fiscal 1997, we completed construction of a new 124,000 square foot production facility at our Fremont, California site. We brought four production scale sputtering lines into service during fiscal 1997, six in 1998, and an additional two in fiscal 1999. This building has capacity for four more lines. During fiscal 1997, we also completed the first phase of expansion of our facility in Eugene, Oregon, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. During the third quarter of fiscal 1999, we completed the second phase of expansion of the Eugene facility, adding more polishing capacity. Also, during the third quarter of fiscal 1999, we idled seven sputtering lines and associated equipment and facilities in connection with our restructuring plan.
Technology
We believe that there are a number of factors that are key to establishing and maintaining an advanced technology position. We are optimizing precious metal alloys, based on a cobalt chromium platinum boron alloy, for future products with coercivities that can support foreseeable demand for increased storage capacity. We also have extensive expertise in the deposition of these and other alloys onto disks. We use state-of-the-art static sputtering machines in the development and production of disks. Static machines differ from in-line, pallet machines used by some other disk manufacturers in a number of important respects. Static sputtering machines process one stationary disk at a time, allowing for greater control of alloy deposition and minimizing spatial and temperature variation; use isolated process chambers, permitting the manufacturer to control and optimize each process step separately; and do not require a pallet, reducing the risk of contamination of the disk surface during processing. We have further enhanced the performance of sputtering equipment supplied by vendors through internally developed, proprietary and patented modifications.
We believe our unique tribology approach, which minimizes detrimental interaction between the head and disk, is another area of strength. The method involves balancing the inter-relationship between texturizing, carbon overcoating and lubrication. Our texturing process, a highly automated patented process, produces a controlled roughness on the disk's surface to improve its stiction and defect characteristics. HMT currently utilizes different texture processes, including laser texturing to address different customer requirements. This process provides increased protection where the head most often comes into contact with the disk, while also minimizing the distance between the head and the disk magnetics in other regions of the disk where data is stored and read. A nitrogen-containing carbon overcoat offers superior wear resistance. Application of our in-house blended lubricant results in disks that can withstand an extreme range of temperature and humidity conditions. These additional layers must be thick enough to achieve the desired protection of the disk and thin enough to minimize the distance between the head and the magnetic layer of the disk. We believe that our application of these technologies, with particular attention to the inter-relationship between the technologies and their combined effect on disk performance, have enabled us to develop competitive high-capacity disks.
We also devote considerable resources to developing disks for drives utilizing new head technology. Head technology, traditionally based on flying inductive heads that combine the read and write function within one head, has gone through significant evolution. Important technologies, such as GMR heads, have emerged. GMR head technology separates the read and write function to different elements of the head. By physically disconnecting the writing and readback processes each can be individually tuned for optimized performance. The GMR head, which has even higher sensitivity than MR heads, thereby producing more output, is the head of the future. In order to take advantage of the technological potential of these new head technologies and enable us to play a role in setting design specifications for the disk drive product, HMT works directly with head manufacturers to develop compatible disks. We have demonstrated the ability to produce disks for the new head formats through the use of new alloy systems, modified equipment and optimized processes.
We believe that our materials science expertise and ongoing commitment to developing new technologies is critical to remaining competitive and achieving desired operating results. We expect our research and development efforts to remain focused on alloy and process development, substrate finish and texture, overcoat development, and compatibility with advanced recording concepts. As we have done in the past, we intend to conduct many of our development programs directly on production lines, facilitating transition to high volume commercial production and minimizing development expense. During the fiscal years 1997, 1998, 1999 and 2000, we incurred $5.8 million, $8.8 million, $9.7 million and $9.1 million, respectively, of research and development expenses. We believe that our future success depends on our ability to continue to enhance our existing products and to develop new products.
Customers, Sales and Support
We sell our products directly to independent OEM disk drive manufacturers for incorporation primarily into hard disk drives which are marketed under the manufacturers' own labels. The following table sets forth the percentage of net sales attributable to sales to our principal customers in fiscal 2000, fiscal 1999 and fiscal 1998:
Fiscal Fiscal Fiscal 2000 1999 1998 --------- --------- --------- Maxtor....................... 60.5% 36.0% 23.4% Samsung...................... 7.5% 17.8% 16.0% Iomega....................... 14.6% 15.2% 28.9% Western Digital.............. 13.3% 24.1% 19.0%
Iomega utilizes the disks in its removable media hard disk drives. Our other customers during fiscal 1999 included SyQuest Technologies, Incorporated (Syquest). During the third quarter of fiscal 1999, SyQuest filed for protection under Chapter 11 of the Bankruptcy Code. The Company's other customers during fiscal 1998 included Micropolis Corporation (Micropolis) and Quantum Corporation ("Quantum"). During the third quarter of fiscal 1998, Micropolis filed for protection under Chapter 11 of the Bankruptcy Code. Due to cessation of its high-end manufacturing operations, Quantum's high-end products are now being manufactured by Matsushita Kotobuki Electronics Industries ("MKE"), and we shipped products to MKE during fiscal 1998. Due to the rapid and frequent development of new disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter.
We have generally sold our products to customers pursuant to purchase orders and similar short-term arrangements. In June 1996, we entered into a long-term supply agreement with Maxtor covering the supply of disks to Maxtor through June 2001. This agreement is subject to a number of conditions and qualifications and there can be no assurance that Maxtor will in fact remain a significant customer during the term of the agreement.
We believe that close technical collaboration with our customers and their other suppliers during the design phase of new disk drives facilitates integration of our products into new disk drives, improves our ability to rapidly reach cost effective high volume manufacturing and enhances the likelihood that we will become a primary supplier of thin-film disks for new disk drive products. However, the design-in process is ongoing and recurs frequently, and we must compete for participation in each new product program, even those of existing customers.
Our customer sales and service efforts are an integral part of maintaining strong customer relations. The sales and service organization processes requests from customers concerning product needs and acts to mobilize our resources to fulfill customer requests.
Although HMT has broadened its customer base, there are a relatively small number of disk drive manufacturers, and we expect that our dependence on a few customers will continue in the future. Additionally, there is the possibility that one or more of our customers could develop or expand their ability to produce thin-film disks internally and, as a result, could reduce the level of purchases or cease purchasing from us or could sell thin-film disks in competition with us. For example, MMC Technology, Incorporated (MMC Technology), a division of Hyundai Electronics America, and an affiliate of Maxtor, began internal media production of thin-film disks during fiscal 1998. There has also been a trend toward consolidation in the disk drive industry that we expect to continue. For example, during fiscal 1998, StorMedia, one of our competitors, acquired another of our competitors; Akashic Memories Corporation ("Akashic"), a subsidiary of Kubota, Inc.. Then, during fiscal 1999, Stormedia filed for protection under Chapter 11 of The Bankruptcy Code. Also during fiscal 1999 one of our customers, Western Digital, announced it had sold all of its media manufacturing operations to Komag Incorporated. Western Digital also signed a long term volume purchase agreement with Komag in connection with the sale of its media manufacturing operations. Recently Hyundai Electronics America's announced the intended sale of MMC Technology to Trace Corporation. In April 2000, we entered into a definitive merger agreement with Komag, Incorporated. Under the terms of the definitive merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of Komag's common stock. This agreement is publicly available and we urge you to read it for further information. The merger will be accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval of both companies' shareholders and both companies' lenders. The merger is expected to close in the third quarter of calendar 2000. If any of our customers or competitors were to further combine and rationalize suppliers and competitive product lines, our business, results of operations and financial condition could be materially adversely affected.
Backlog
Our sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reductions or rescheduling without significant penalties. Customers typically provide us with forecasts of expected requirements for the next three to six months and submit purchase orders 60 to 90 days in advance of shipment dates. Because these purchase orders may be modified or rescheduled by customers on short notice and without penalty, we do not believe that our backlog as of any particular date should be considered indicative of sales for any future period.
Competition
Competitors in the thin-film disk industry fall into three groups: U.S. non-captive manufacturers, Asian-based manufacturers and U.S. captive manufacturers. Historically each of these groups has supplied approximately one-third of the worldwide thin-film disk unit output. Our primary U.S. non-captive competitor is Komag, Incorporated. Asian-based competitors include Fuji Electric Company Limited, Mitsubishi Kasei Corporation, Trace Corporation, Showa Denko K.K. and Hoya Corporation. As previously noted, on April 26 we signed an agreement to merge with Komag. The merger is expected to close in the third quarter of calendar 2000. Certain of these companies have significantly greater financial, technical and marketing resources than us. In addition, U.S. captive manufacturers, which include certain computer manufacturers, as well as disk drive manufacturers such as Seagate Technology, Inc. ("Seagate") and MMC Technology, an affiliate of Maxtor, manufacture disks for their internal use as part of their vertical integration programs. These companies could increase their internal production and reduce or cease purchasing from independent disk suppliers such as the Company. In the event of an oversupply of disks, these customers are likely to utilize their internal capacity prior to purchasing disks from independent manufacturers such as us. Moreover, while captive manufacturers have, to date, sold only nominal quantities of thin-film disks in the open market, there can be no assurance that such companies will not in the future do so in direct competition with us. Furthermore, there can be no assurance that other current and potential customers will not acquire or develop capacity to produce thin-film disks for internal use, or that disk manufacturing capacity will not exceed demand. Any such changes could have a material adverse effect on our business, operating results and financial condition. Announcement or implementation of any of the following by our competitors could have a material adverse effect on our business, operating results and financial condition: changes in pricing, product introductions, increases in production capacity, changes in product mix and technological innovation.
The market for thin-film disk products is highly competitive, and we expect competition to increase in the future. We believe that the principal competitive factors affecting this market include performance, quality, delivery capability and price. We believe that our products compete favorably in the high-end segment of the market that we serve, especially with respect to performance and quality. The thin-film disk industry is characterized by short product life cycles, ranging from nine to 12 months. As a result, we must continually anticipate, and adapt our products to meet demand for increased storage capacity. There can be no assurance that in the future we will be able to manufacture products on a timely basis with the quality and features necessary in order to remain competitive. In addition, the development of technologically innovative products requires substantial investments in research and development. Specifically, the thin-film disk industry is characterized by intense price competition. We have experienced significant pricing pressures since fiscal 1998, and there can be no assurance that we will not face similar pressure in fiscal 2001. Price competition has had and may continue to have a material adverse effect on our business, operating results and financial condition.
Intellectual Property and Proprietary Rights
Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. There can be no assurance that we will be able to protect our technology adequately or that competitors will not be able to develop similar technology independently. We have 51 patents and six pending patent applications in the United States. In addition, we have nine foreign patents. Patents may not be issued with respect to our pending patent applications, and our issued patents may not be sufficiently broad to protect our technology. No assurance can be given that any patent issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to our products. In addition, we have only limited patent rights outside the United States, and the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
We may from time to time be notified by third parties that we may be infringing patents owned by such third parties. If necessary, we may have to seek a license under such patents or modify our products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that we could so avoid infringement of such patents, in which case our business, operating results and financial condition could be materially adversely affected.
Litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or claims for indemnification resulting from infringement claims by third parties. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. See "Risk Factors - Intellectual Property and Proprietary Rights."
Sources of Supply
We rely on a limited number of suppliers for many materials used in our manufacturing processes, including substrates, plating chemicals, abrasive tapes and slurries, certifier heads, sputter targets and certain other materials. In general, we seek to have two or three suppliers for our requirements; however, there can be no assurance that we can secure more than one source for all of our materials requirements in the future or that our suppliers will be able to meet our requirements on a timely basis or on acceptable terms. Shortages have occurred in the past, and there can be no assurance that shortages will not occur in the future, or that materials will not be available only with longer lead times. Moreover, changing suppliers for certain materials, such as lube or buffing tape, may require that the product be requalified with each customer. Requalification could prevent an early design, or could prevent or delay continued participation in disk drive programs for which our products have been qualified. In addition, long lead times are required to obtain many materials. Regardless of whether these materials are available from established or new sources of supply, these lead times could impede our ability to quickly respond to changes in demand and product requirements. Furthermore, a significant increase in the price of one or more of these materials could adversely affect our business, operating results and financial condition. While we have implemented procedures to monitor the quality of the materials received from our suppliers, there can be no assurance that the materials will meet the Company's specifications and will not adversely impact manufacturing yields or cause other production problems. In addition, there are only a limited number of providers for thin-film disk manufacturing equipment, such as sputtering machines, glide testers and certifiers, and ordering additional equipment for replacement or expansion requires long lead times, limiting the rate and flexibility of capacity expansion. Any limitations on, or delays in, the supply of materials or equipment could disrupt our production volume and could have a material adverse effect on our business, operating results and financial condition.
Environmental Regulation
Our operations and manufacturing processes are subject to certain environmental laws and regulations, which govern our use, handling, storage, transportation, disposal, emission and discharge of hazardous materials and wastes, the pre- treatment and discharge of process waste waters and the emission of air pollutants. We have from time to time been notified of minor violations of environmental laws and regulations. These violations have been corrected in all material respects without undue expense.. Environmental laws and regulations, however, may become more stringent over time, and there can be no assurance that our failure to comply with either present or future laws or regulations, which may become more stringent, would not subject us to significant compliance expenses, production suspension or delay, restrictions on expansion or the acquisition of costly equipment.
Employees
As of March 31, 2000, we had 1,445 full-time employees, with 1,249 in manufacturing, 71 in research and development, 84 in quality assurance and 41 in administration and marketing. We believe we generally have good relations with our employees. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that attracting and motivating skilled technical personnel is vital to our success. Although competition for such personnel is intense, we believe that we have not historically experienced difficulties in attracting personnel that are significantly different from those experienced by our competitors.
Recapitalization Transaction
On November 30, 1995, we effected a leveraged recapitalization. The leveraged recapitalization and related transactions consisted of: (i) our repurchase by from Hitachi Metals of shares of Common Stock representing all the outstanding capital stock of HMT for an aggregate purchase price of $52.1 million in cash; (ii) the recapitalization of HMT through the issuance of 21,968,057 shares of common stock for an aggregate purchase price of approximately $0.7 million, 5,900,000 shares of Series A preferred stock for an aggregate purchase price of approximately $59.0 million, $47.0 million of subordinated promissory notes and $60.0 million in senior debt with associated warrants to purchase 701,344 shares of common stock at an exercise price of $0.0003 per share and (iii) the grant of options to purchase 11,451,865 shares of common stock under the 1995 Management Stock Option Plan and 1995 Stock Option Plan. The purchasers of HMT securities in the leveraged recapitalization included certain investment funds affiliated with Summit Partners, L.P. and certain other investment funds, our management and employees and Hitachi Metals. The terms of the leveraged recapitalization were determined through negotiations between Hitachi Metals and Summit Partners, who, prior to the leveraged recapitalization, did not have any affiliation with HMT. Pursuant to these negotiations, the shares of common stock were valued at $0.03 per share, the shares of Series A preferred stock were valued at $10.00 per share, and the subordinated notes were valued at face value. The values of these securities were confirmed by a third party appraisal.
The leveraged recapitalization has been accounted for as a recapitalization, and accordingly, no change in the accounting basis of our assets has been made.
As of November 30, 1995 (immediately prior to the leveraged recapitalization), we had $98.5 million in assets and $122.7 million in liabilities. Immediately following the leveraged recapitalization, we had $110.9 million in assets, $132.1 million in liabilities (including a $60.0 million senior bank term loan and $47.0 million of subordinated notes) and $59.0 million of Series A preferred stock.
In April 2000, HMT entered into a definitive merger agreement with Komag, Incorporated. Under the terms of the definitive merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of Komag's common stock. The merger will be accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval of both companies' shareholders and lenders. The merger is expected to close in the third quarter of calendar 2000.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating HMT and our business. This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below.
Fluctuations in Operating Results
Our operating results historically have been, and may continue to be, subject to significant quarterly and annual fluctuations. As a result, our operating results in any quarter may not be indicative of our future performance. Factors affecting operating results include: market acceptance of new products; timing of significant orders; changes in pricing by us or our competitors; timing of product announcements and product transitions by us, our customers or our competitors; order cancellations, modifications and quantity adjustments and shipment reschedulings; changes in product mix; manufacturing yields; the level of utilization of our production capacity; increases in production and engineering costs associated with initial manufacture of new products; and changes in the cost of, or limitations on, the availability of materials. The impact of these and other factors on our revenues and operating results in any future period cannot be forecasted with certainty. Our expense levels are based, in part, on our expectations as to future revenues. Because our sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reduction or rescheduling on short notice and without significant penalties, our backlog as of any particular date may not be indicative of sales for any future period, and such changes could cause our net sales to fall below expected levels. If revenue levels are below expectations, operating results are likely to be materially adversely affected. Net income, if any, and gross margins may be disproportionately affected by a reduction in net sales because a proportionately smaller amount of our expenses varies with our revenues.
We derive substantially all of our net sales from the sale of thin-film disks to a small number of customers. We typically supply disks in volume for a limited number of disk drive products at any one time (14 as of March 31, 2000), and these products have an extremely short life cycle. Due to the rapid technological change and frequent development of new disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. Generally, new products have higher average selling prices than more mature products. Therefore, our ability to introduce new products in a timely fashion is an important factor in its continued success. Moreover, manufacturing yields and production capacity utilization impact our operating results. New products often have lower manufacturing yields and are produced in lower quantities than more mature products. If production for a disproportionate number of new products is commenced in a given quarter or if manufacturing yields for such products do not improve in a timely manner, our operating results for such quarter could be adversely affected. For example, during the quarter ended March 31, 1997, our operating results were adversely affected due partly to lower yields associated with initial production of a significant number of new products. Manufacturing yields generally improve as the product matures and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of product specifications. The ability to adjust manufacturing procedures to reduce costs and improve manufacturing yields and productivity during a product's life is limited, and many adjustments can only be implemented in connection with new product introductions or upgrades. Small variations in manufacturing yields and productivity can have a significant impact on operating results. Furthermore, because the thin-film disk industry is capital intensive and requires a high level of fixed costs, operating results are also extremely sensitive to changes in volume. Substantial advance planning and commitment of financial and other resources is necessary for expansion of manufacturing capacity, while our sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reduction or rescheduling without significant penalties. The impact of any of the foregoing factors could have a material adverse effect on our business, operating results and financial condition.
Dependence on a Limited Number of Customers; Lengthy Sales Cycle
During fiscal 2000, we shipped most of our thin-film disks to four customers: Iomega, Maxtor, Western Digital, and Samsung. Aggregate shipments to Iomega, Maxtor, Western Digital and Samsung represented 14.6%, 59.8%, 12.6% and 8.3%, respectively, of net sales in fiscal 2000. There are a relatively small number of disk drive manufacturers, and we expect that our dependence on a few customers will continue in the future. Loss of, or a reduction in, orders from one or more of our customers could result in a substantial reduction in net sales and operating results. During fiscal 1997, one of our customers, Micropolis, filed for protection under Chapter 11 of The Bankruptcy Code. During fiscal 1998, SyQuest, another of our customers, filed for protection under Chapter 11 of The Bankruptcy Code. Because many of our expense levels are based, in part, on our expectations as to future revenues, decreases in net sales may result in a disproportionately greater negative impact on operating results. Our success will therefore depend on the success of our key customers. One or more of our customers could develop or expand their ability to produce thin-film disks internally and, as a result, could reduce the level of purchases or cease purchasing from us or could sell thin-film disks in competition with us. For example, MMC Technology, an affiliate of Maxtor, manufactures thin-film disks for Maxtor's use. Also during 1999 one of our customers, Western Digital, announced it had sold all of its media manufacturing operations to our largest U.S. competitor, Komag. Western Digital also signed a long-term volume purchase agreement with Komag in connection with the sale of its media manufacturing operations. During calendar 2000, Trace Corporation announced a pending purchase of MMC Technology and Komag and HMT announced a pending merger. There has also been a trend toward consolidation in the disk drive industry, which we expect to continue. For example, in February 1996, two leading disk drive manufacturers, Seagate and Conner Peripherals, Inc., combined to form the world's largest disk drive manufacturing company. In addition, during fiscal 1996, Hewlett-Packard Co. exited the disk drive business. If any of the Company's customers or competitors were to further combine and reduce suppliers and competitive product lines, our business, operating results and financial condition could be materially adversely affected.
We have generally sold our products to customers pursuant to purchase orders and similar short-term arrangements. In June 1996, we entered into a long-term supply agreement with Maxtor covering the supply of disks to Maxtor through June 2001. This agreement is subject to a number of conditions and qualifications, and there can be no assurance that Maxtor will in fact remain a significant customer during the term of the agreement.
Qualifying thin-film disks for incorporation into a new disk drive product requires us to work extensively with the 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 12 months, during which we may expend substantial financial resources and management time and effort with no assurance that a sale will result.
Dependence on Intensely Competitive and Cyclical Hard Disk Drive Industry
Our operating results are dependent on current and anticipated demand for high-end, high-capacity hard disk drives, which in turn depend on the demand for high-end PCs, network servers and workstations. The disk drive industry is cyclical and historically has experienced periods of oversupply and reduced production levels, resulting in significantly reduced demand for thin-film disks, as well as pricing pressures. The effect of these cycles on suppliers, including thin-film disk manufacturers, has been magnified by hard disk drive manufacturers' practice of ordering components, including thin-film disks, in excess of their needs during periods of rapid growth, which increases the severity of the drop in the demand for components during periods of reduced growth or contraction. During fiscal 1999, the disk drive industry experienced a significant decline in demand. There can be no assurance that current levels of demand will not decline, or that future demand will be sufficient to support existing and future capacity. A decline in demand for hard disk drives would have a material adverse effect on our business, operating results and financial condition. Additionally, the hard disk drive industry is intensely competitive, and, in the past, some disk drive manufacturers have experienced substantial financial difficulties. For example, during 1997, one of the Company's customers, Micropolis, filed for protection under Chapter 11 of the Bankruptcy Code. Then, during fiscal 1998, SyQuest, another of the Company's customers, filed for protection under Chapter 11 of the Bankruptcy Code. There can be no assurance that we will not face greater difficulty in collecting receivables or be required to offer more liberal payment terms in the future, particularly in a period of reduced demand. Any failure to collect or delay in collecting receivables could have a material adverse effect on our business, operating results and financial condition.
Expansion of Capacity
While the industry is currently suffering from excess capacity, a rebound in demand could require us to resume our capacity expansion. During fiscal 1998 and 1997 we were operating at close to full capacity. In fiscal 1997, we completed construction of a new 124,000 square foot production facility at our Fremont, California site. We brought four production scale sputtering lines into service during fiscal 1997, six in 1998, and an additional two in fiscal 1999. This building has capacity for four more lines. During fiscal 1997, we completed the first phase of expansion of our facility in Eugene, Oregon, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. During the third quarter of fiscal 1999, we completed the second phase of expansion of the Eugene facility, adding more polishing capacity. During the third quarter of fiscal 1999, we idled seven sputtering lines and associated equipment and facilities in connection with our restructuring plan.
We currently expect to spend approximately $10 million over the next 12 months for maintenance and upgrades to production equipment, a substantial majority of which will be spent on our Fremont, California facility.
Intense Competition
The market for our products is highly competitive, and we expect competition to continue in the future. There can be no assurance that in the future we will be able to develop and manufacture products on a timely basis with the quality and features necessary in order to remain competitive. Competitors in the thin-film disk industry fall into three groups: U.S. non- captive manufacturers, Asian-based manufacturers and U.S. captive manufacturers. Historically, each of these groups has supplied approximately one-third of the worldwide thin-film disk unit output. Our primary U.S. non-captive competitor is Komag. Asian-based competitors include Fuji, Mitsubishi, Trace Corporation, Showa Denko and Hoya. In addition, U.S. captive manufacturers, which include certain computer manufacturers, as well as disk drive manufacturers such as Seagate and MMC Technology, an affiliate of Maxtor, manufacture disks for their internal use as part of their vertical integration programs. During periods of industry excess capacity, such as was experienced during fiscal 1999 and 2000, these customers favor their internal capacity over purchasing disks from independent suppliers such as us. Moreover, while captive manufacturers have, to date, sold only nominal quantities of thin-film disks in the open market, there can be no assurance that such companies will not in the future do so in direct competition with us. These companies could increase their internal production and reduce or cease purchasing from independent disk suppliers such as us. Also, consolidation of customers and competitors could reduce demand for our products. For example, during fiscal 1999, Komag purchased Western Digital's U.S. media manufacturing operations and Western Digital signed a long-term volume purchase agreement in connection with the sale. During calendar 2000, Trace Corporation announced a pending purchase of MMC Technology and Komag and HMT Technology Corporation announced a pending merger.
Furthermore, there can be no assurance that other current and potential customers will not acquire or develop capacity to produce thin-film disks for internal use. Any such changes could have a material adverse effect on our business, operating results and financial condition. Announcement or implementation of any of the following by our competitors could have a material adverse effect on our business, operating results and financial condition: changes in pricing, product introductions, increases in production capacity, changes in product mix and technological innovation. Specifically, the thin-film disk industry is characterized by intense price competition. We experienced significant pricing pressure during fiscal 1998, 1999 and 2000, and there can be no assurance that we will not experience increased price competition in the future. Pricing pressure has included, and may in the future include, demands for discounts, long-term supply commitments, just-in-time inventory warehouses and extended payment terms. Any increase in price competition could have a material adverse effect on our business, operating results and financial condition.
During fiscal 1999 and 2000, many of our competitors and customers had excess disk manufacturing capacity, resulting in industry capacity in excess of levels of demand. As a result, we and many of our customers and competitors have experienced poor operating results. During fiscal 1999 and 2000, we recorded a net loss of $21.0 million and $51.6 million respectively, primarily a result of declining demand and increased competition.
These increased levels of competition, could have further material adverse effects on our business, operating results and financial condition.
Rapid Technological Change
Rapid technological development and short product life cycles have characterized the thin-film disk industry. Product life cycles typically range from nine to 12 months. As a result, we must continually anticipate, and adapt our products to meet, demand for increased storage capacity. Although we are continually developing new products and production techniques, there can be no assurance that we will be able to anticipate technological advances in disk drives and develop products incorporating such advances in a timely manner or to compete effectively against our competitors' new products. In addition, there can be no assurance that customers will certify our products for inclusion in new disk drive products. We anticipate continued changes in the requirements of the disk drive industry and thin-film disk manufacturing technologies, and there can be no assurance that the future technological innovations will not reduce demand for thin-film disks. Our business, operating results and financial condition will be materially adversely affected if our efforts are not successful, if the technologies that we have chosen not to develop prove to be competitive alternatives or if any trend develops toward technology that would replace thin-film disks as a storage medium.
Dependence on Suppliers
We rely on a limited number of suppliers for many materials used in its manufacturing processes, including aluminum blanks, substrates, sputter targets, plating chemicals, abrasive tapes and slurries, certifier heads and certain other materials. In general, we seek to have two or three suppliers for its requirements; however, there can be no assurance that we can secure more than one source for all of our materials requirements in the future or that our suppliers will be able to meet our requirements on a timely basis or on acceptable terms. Shortages have occurred in the past and there can be no assurance that shortages will not occur in the future, or that materials will be available without longer lead times. Moreover, changing suppliers for certain materials, such as lube or buffing tape, may require that the product be requalified with each customer. Requalification could prevent an early design-in, or could prevent or delay continued participation in disk drive programs for which our products have been qualified. In addition, long lead times are required to obtain many materials. Regardless of whether these materials are available from established or new sources of supply, these lead times could impede our ability to quickly respond to changes in demand and product requirements. Furthermore, a significant increase in the price of one or more of these materials could adversely affect our business, operating results and financial condition. In addition, there are only a limited number of providers for thin- film disk manufacturing equipment, such as sputtering machines, glide testers and certifiers, and ordering additional equipment for replacement or expansion requires long lead times, limiting the rate and flexibility of capacity expansion. Any limitations on, or delays in, the supply of materials or equipment could disrupt our production volume and could have a material adverse effect on our business, operating results and financial condition.
Process Quality Control Risks
The manufacture of our high-performance thin-film disks 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 minimize dust and other yield- and quality-limiting contaminants. Despite 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 operation depends in part on our ability to maintain process control and minimize such impurities in order to maximize our yield of acceptable high-quality disks. Minor variations from our specifications could have a disproportionately adverse impact on manufacturing yields. For example, in the quarter ended March 31, 1995, our operating results were materially adversely affected by chlorine contamination of our thin-film disk products that we believe resulted from chlorine contamination of disk carriers provided by one of our suppliers. While we have implemented procedures to monitor our manufacturing process and the quality of production materials, there can be no assurance that such procedures will be adequate.
Need for Additional Financing
The disk media business is capital intensive, and we believe that in order to remain competitive, we may require additional financing resources over the next several years for capital expenditures, working capital, and research and development. Among other things, our customers prefer suppliers that can meet a substantial portion of their volume requirements, so we will need to expand our manufacturing capacity to remain competitive. We currently expect to spend approximately $10 million on capital expenditures principally directed towards the maintenance and upgrade of production equipment over the next 12 months. We believe that existing cash balances, cash generated from operations, and funds available under our credit facility will provide adequate cash to fund our operations for at least the next 12 months. Additional sources of long-term liquidity could include cash generated from operations and debt and equity financings. If we were to resume a facilities expansion, we could require additional capital. As of March 31, 2000, the Company had approximately $85.9 million in working capital, including approximately $55.3 million in cash and cash equivalents. In addition, the Company's operations generated cash flow of $4.6 million during the year ended March 31, 2000.
Intellectual Property and Proprietary Rights
Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that we will be able to protect our technology adequately or that competitors will not be able to develop similar technology independently. We have 51 patents and nine pending patent applications in the United States. In addition, we have nine foreign patents. Patents may not be issued with respect to our pending patent applications, and our issued patents may not be sufficiently broad to protect our technology. No assurance can be given that any patent issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to our products. In addition, we have only limited patent rights outside the United States, and the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
We are from time to time notified by third parties that we may be infringing patents owned by such third parties. If necessary, we may have to seek a license under such patents or modify our products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that we could so avoid infringement of such patents, in which case our business, operating results and financial condition could be materially adversely affected.
Litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or claims for indemnification resulting from infringement claims by third parties. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition.
Dependence on Key Personnel
Our future operating results depend in significant part upon the continued contributions of our officers and personnel, many of whom would be difficult to replace. We do not have employment agreements with any employee. The loss of our officers or other key personnel, who are critical to our success, could have a material adverse effect on the business, operating results and financial condition. In addition, our future operating results depend in part upon our ability to attract, train, retain and motivate other qualified management, technical, manufacturing, sales and support personnel for our operations. Competition for such personnel is intense, especially since many of our competitors are located near our facilities in Fremont, California. Among the competitive factors in attracting personnel are compensation and benefits, equity incentives and geographic location. There can be no assurance that we will be successful in attracting or retaining such personnel. The loss of the services of existing personnel as well as the failure to recruit additional personnel could materially adversely effect our business, operating results and financial condition.
Dependence on Fremont Manufacturing Facilities; Environmental Issues
Our Fremont facilities, which currently account for all of our finished products, are located near major earthquake faults. Disruption of operations at any of our facilities for any reason, including power failures, work stoppages or natural disasters such as fire, floods or earthquakes, would cause delays in, or an interruption of, production and shipment of products, which could materially adversely affect our business, operating results and financial condition.
Our operations and manufacturing processes are subject to certain environmental laws and regulations, which govern the Company's use, handling, storage, transportation, disposal, emission and discharge of hazardous materials and wastes, the pre- treatment and discharge of process waste waters and its emission of air pollutants. We have from time to time been notified of minor violations of environmental laws and regulations. These violations have been corrected in all material respects without undue expense. Environmental laws and regulations, however, may become more stringent over time, and there can be no assurance that our failure to comply with either present or future laws or regulations, which may become more stringent, would not subject us to significant compliance expenses, production suspension or delay, restrictions on expansion or the acquisition of costly equipment.
Risks of International Sales
In fiscal 2000, 1999 and 1998, substantially all of our net sales consisted of products delivered to customers in Asia, primarily foreign subsidiaries of U.S. companies, and we anticipate that the substantial majority of our products will be delivered to customers outside of the United States for the foreseeable future. Accordingly, our operating results are subject to the risks of doing business in foreign jurisdictions, including compliance with, or changes in, the law and regulatory requirements of foreign jurisdictions, local content rules, taxes, tariffs or other barriers, and transportation delays and other interruptions. Although presently all of our sales are made in U.S. dollars, there can be no assurance that future international sales will not be denominated in foreign currency.
Anti-Takeover Effects
Certain provisions of our Amended and Restated Certificate of Incorporation, and Bylaws and Delaware law, including the provisions of Section 203 of the Delaware General Corporation Law, which restrict the ability of a substantial stockholder to acquire us, may discourage certain transactions involving a change in control of HMT. In addition to the foregoing, the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of HMT.
Risks of Intended Merger with Komag
In April 2000, the Company entered into a definitive merger agreement with Komag, Incorporated ("Komag"). Komag designs, develops, manufactures and markets high-performance thin-film disks. Under the terms of the definitive merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of the Komag's common stock. The merger will be accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval of both companies' shareholders and the Company's lenders. The merger is expected to close in the third quarter of calendar 2000.
Investors and security holders are advised to read the joint proxy statement/prospectus regarding the business transaction referenced in the foregoing information, when it becomes available, because it will contain important information. HMT and Komag expect to mail a joint proxy statement/prospectus about the transaction to their respective stockholders. Such joint proxy statement/prospectus will be filed with the Securities and Exchange Commission by both companies. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus (when available) and other documents filed by the companies at the Securities and Exchange Commission's web site at http://www.sec.gov. The joint proxy statement/prospectus and such other documents may also be obtained from HMT or Komag.
There are certain risks and uncertainties relating to the proposed merger with Komag which will be described in the joint proxy statement/prospectus to be mailed to Komag and HMT's respective stockholders and will be filed with the Securities and Exchange Commission.
Volatility of Convertible Note and Common Stock Prices
The trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, including quarterly variations in operating results, announcements of technological innovations or new products by us, our customers or our competitors, developments in patents or other intellectual property rights, general conditions in the computer or disk drive industry, comments made by analysts, including charges in analysts estimates and general economic and market conditions. Additionally, the stock markets in general, and the market for technology stocks in particular, has experienced extreme price volatility in recent years. This volatility has often had a substantial effect on the market prices of many technology companies for reasons unrelated or disproportionate to the operating performance of such companies. Broad market fluctuations could have a significant impact on the market price of the common stock.
Various factors such as changes in prevailing interest rates or changes in perceptions of our creditworthiness could cause the market price of our 5 3/4% convertible subordinated notes due calendar 2004 to fluctuate significantly. The trading price of the convertible notes could also be significantly affected by the market price of the common stock, which could be subject to wide fluctuations in response to a variety of factors as discussed above.
Item 2. Properties
We own one 57,776 square foot building, used for manufacturing and administration, on approximately 4.3 acres of land in Fremont, California and another 124,000 square foot manufacturing and administrative facility on an adjacent five acre parcel. We lease an adjacent 50,400 square foot building used primarily for manufacturing under a lease that expires in December 2003 with three five-year extension options. We also lease a nearby 60,312 square foot building used for administration, engineering and distribution, under a lease that expires in May 2004.
We also own a 106,458 square foot building, used for manufacturing and administration, on approximately 4.6 acres in Eugene, Oregon. We lease a nearby 23,970 square foot building used for engineering and distribution, under a lease that expires in December, 2002, with two five-year extension options.
Our Fremont facilities, which currently account for all of our finished disk production, are located near major earthquake faults. Disruption of operations for any reason, including power failures, work stoppages or natural disasters such as fire, floods or earthquakes, could materially adversely affect our business, operating results and financial condition.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The following table sets forth, for each quarter of fiscal year 1999 and 2000, the range of high and low closing sales prices, as reported on the Nasdaq National Market.
PRICE RANGE OF COMMON STOCK ---------------------- High Low ---------- ---------- Fiscal 1999 First Quarter........................ 14 5/8 8 13/16 Second Quarter....................... 10 13/16 5 3/4 Third Quarter........................ 13 15/16 10 1/32 Fourth Quarter....................... 15 9/16 3 1/2 Fiscal 2000 First Quarter........................ 4 13/16 2 1/2 Second Quarter....................... 4 5/32 2 1/4 Third Quarter........................ 4 1/8 3 1/16 Fourth Quarter....................... 4 11/16 2 5/8
As of June 1, 2000, there were approximately 245 holders of
record of our common stock. On June 1, 2000, the last sale price
reported on the Nasdaq National Market for our common stock
was $1.75 per share.
We have never declared or paid cash dividends on our common stock. We currently intend to retain all
future earnings for use in our business, and do not anticipate paying cash dividends on the common stock in the foreseeable future.
In addition, the terms of our revolving credit facility prohibit the payment of dividends without the banks' prior approval. See
Notes 5 and 8 of Notes to Consolidated Financial Statements. Item 6. Selected Consolidated Financial Data
(In thousands, except per share data)
_________________________
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
amounts.
Subsequent Event
Fiscal Year Ended March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $192,762 $239,531 $356,194 $263,209 $194,401
Cost of sales............................... 236,788 221,495 225,599 156,277 119,803
--------- --------- --------- --------- ---------
Gross profit (loss)......................... (44,026) 18,036 130,595 106,932 74,598
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................. 9,094 9,728 8,825 5,812 3,803
Selling, general and administrative....... 9,771 11,655 13,679 11,803 7,774
Recapitalization expenses................. -- -- -- -- 4,347
Restructuring expenses.................... -- 15,662 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 18,865 37,045 22,504 17,615 15,924
--------- --------- --------- --------- ---------
Operating income (loss)..................... (62,891) (19,009) 108,091 89,317 58,674
Interest expense, net....................... 10,893 10,994 8,194 3,329 8,578
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... (73,784) (30,003) 99,897 85,988 50,096
Income tax provision (benefit).............. (22,135) (9,001) 29,969 25,400 2,590
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary
debt extinguishment costs................. (51,649) (21,002) 69,928 60,588 47,506
Extraordinary debt extinguishment costs,
net of income taxes....................... -- -- -- -- 1,127
--------- --------- --------- --------- ---------
Net income (loss)........................... (51,649) (21,002) 69,928 60,588 46,379
Accretion reversal (accretion) for
dividends on Mandatorily Redeemable
Series A Preferred Stock.................. -- -- -- 1,157 (1,157)
--------- --------- --------- --------- ---------
Net income (loss) available for common
stockholders.............................. ($51,649) ($21,002) $69,928 $61,745 $45,222
========= ========= ========= ========= =========
Net income (loss) available for common
stockholders per share(1)
Basic..................................... ($1.14) ($0.48) $1.66 $1.52 $1.28
========= ========= ========= ========= =========
Diluted................................... ($1.14) ($0.48) $1.40 $1.35 $1.28
========= ========= ========= ========= =========
Shares used in computing per share
amounts(1)
Basic..................................... 45,411 43,720 42,196 40,493 35,224
Diluted................................... 45,411 43,720 54,542 46,019 35,224
March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................... $75,872 $85,170 $88,699 $71,827 $45,899
Total assets................................ 377,062 442,540 478,223 373,389 165,786
Subordinated promissory notes payable to
stockholders.............................. -- -- -- -- 47,000
Mandatorily Redeemable Series A Preferred
Stock..................................... -- -- -- -- 60,157
5 3/4% Convertible Subordinated Notes....... 230,000 230,000 230,000 230,000 --
Total stockholders' equity.................. 117,571 165,948 182,452 95,442 19,524
In April 2000, we entered into a definitive merger agreement with Komag, Incorporated. Komag designs, develops, manufactures and markets high-performance thin-film disks. Under the terms of the definitive merger agreement, each issued and outstanding share of HMT stock will be converted into 0.9094 shares of Komag's common stock. The merger will be accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval of both companies' shareholders and lenders. The merger is expected to close in the third quarter of calendar 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1 under the heading entitled "Risk Factors."
Overview
HMT Technology Corporation is an independent supplier of high-performance thin-film disks for high-end, high- capacity hard disk drives, which in turn are used in high-end PCs, network servers and workstations. HMT was incorporated in December 1988 as a subsidiary of Hitachi Metals for the purpose of acquiring certain assets and certain liabilities of the thin-film division of Xidex Corporation, which had been producing thin-film disks since calendar 1983. Since completing the Xidex acquisition, we have continued to supply thin-film disks to manufacturers of hard disk drives. On November 30, 1995, we effected the leveraged recapitalization pursuant to which we repurchased from Hitachi Metals, then the sole stockholder of HMT, all of the outstanding shares of common stock of HMT, and certain investment funds, members of management and Hitachi Metals, purchased common stock, mandatorily redeemable Series A preferred stock and subordinated promissory notes.
Beginning in fiscal 1995, HMT's management team, many of whom had joined us since February 1994, refocused the strategy and operations. The new management concentrated on the 3 1/2-inch disk form factor, focused on the high-end, high-capacity segment of the disk drive market and expanded the customer base. In addition, HMT implemented an extensive quality assurance program, developed proprietary manufacturing processes and optimized production capacity utilization. These changes resulted in higher production volumes, lower unit costs, and higher average selling prices primarily associated with new high-end products. As a result, we increased sales and improved gross margins, achieving net income of $60.6 million for fiscal 1997 and $69.9 million for fiscal 1998, compared with a net loss of $8.9 million for fiscal 1995.
During March and April 1996, we sold 9,660,000 shares of common stock at $10.00 per share (including exercise of the underwriters' over-allotment option) through our initial public offering. The net proceeds (after underwriter's discounts and commissions and other costs associated with the initial public offering) totaled $88.7 million. In January 1997, we completed a $230 million private placement of the convertible notes to qualified institutional investors, resulting in net proceeds of approximately $222.5 million (after offering costs). Proceeds from the issuance of the convertible notes were used to fully redeem the $59 million of mandatorily redeemable Series A preferred stock and to prepay the $47 million principal balance of the subordinated promissory notes issued pursuant to the leveraged recapitalization plus accrued interest and to fully repay $41 million in long-term borrowings outstanding.
In fiscal 1997, we completed construction of a new 124,000 square foot production facility at our Fremont, California site. We brought four production scale sputtering lines into service during fiscal 1997, six in fiscal 1998, and an additional two in fiscal 1999. This building has capacity for four more lines. During fiscal 1997, we completed the first phase of expansion of our facility in Eugene, Oregon, commencing volume production of aluminum substrates and nickel-plated and polished substrates at that site. During the third quarter of fiscal 1999, we completed the second phase of expansion of the Eugene facility, adding more polishing capacity. During the third quarter of fiscal 1999, we idled seven sputtering lines and associated equipment and facilities in connection with our restructuring plan.
Pricing pressure was evident in calendar 1999; according to Trend Focus, worldwide shipments of hard disk drives grew 20% to 174 million units in calendar 1999
while revenues remained flat from 1998 at $25.9 billion. Analysts predict that drive unit shipments will continue to grow at a 16% annualized level through 2003 to 316 million units while average sales prices are expected to fall off at approximately 5.5% annually resulting in $32 billion in revenue by 2003. Although calendar quarter four showed a reduction in corporate PC sales, the continued growth in the sub $1,000 PC market and Y2K preparation resulted in increased drive and media sales for calendar 1999. However, the disks-per-drive ratio continued its decline from 1998 to 1999 falling from 2.15 to a 1.77 average for desktop PCs. This ratio is expected to continue its drop over the next three years to 1.4 in calendar 2000 and reach below 1.2 by calendar 2003.According to Trend Focus, media unit shipments grew 6.1% to 432 million in calendar 1999, with an estimated market value of $3.4 billion, down 20% from 1998. Shipments from non-captive sources grew by approximately 4% while captive manufacturer shipments grew by 7.5% over calendar 1998 levels as captive manufacturers favored increasing their capacity utilization over making purchases from independent media suppliers.
However, last years sale of Western Digital Corporations media operations to Komag, the recent announcement of Hyundai Electronics America's intended sale of MMC Technology, Inc. to Trace Corporation and Seagates announcement that it was closing media manufacturing facilities indicate that the vertical integration move may be slowing. The significant declines in the number of disks and revenues seen in 1998 abated in 1999 due to strong PC growth however Trend Focus projects that the total market for thin-film disks will decline in calendar 2000 and slowly begin to expand again in 2001 reaching 530 million units by calendar 2003, with an estimated market value of $3.6 billion.Due to the changes in ownership resulting from our leveraged recapitalization, utilization of net operating losses is limited to approximately $0.8 million per year over the loss carryforward period (expiring between 2008 and 2010). The benefit from the net operating losses was recorded in the quarter ended December 31, 1995. Had we been obligated to pay taxes at the statutory rates for fiscal 1996, net income would have been $30.7 million.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
Fiscal Year Ended March 31, ----------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................... 122.8% 92.5% 63.3% 59.4% 61.6% --------- --------- --------- --------- --------- Gross profit (loss)......................... -22.8% 7.5% 36.7% 40.6% 38.4% Operating expenses: Research and development.................. 4.7% 4.1% 2.5% 2.2% 2.0% Selling, general and administrative....... 5.1% 4.8% 3.9% 4.5% 4.0% Recapitalization expenses................. -- -- -- -- 2.2% Restructuring expenses.................... -- 6.5% -- -- -- --------- --------- --------- --------- --------- Total operating expenses.......... 9.8% 15.4% 6.4% 6.7% 8.2% --------- --------- --------- --------- --------- Operating income (loss)..................... -32.6% -7.9% 30.3% 33.9% 30.2% Interest expense, net....................... 5.7% 4.6% 2.3% 1.2% 4.4% --------- --------- --------- --------- --------- Income (loss) before income tax provision (benefit) and extraordinary debt extinguishment costs...................... -38.3% -12.5% 28.0% 32.7% 25.8% Income tax provision (benefit).............. -11.5% -3.7% 8.4% 9.7% 1.4% --------- --------- --------- --------- --------- Net income (loss) before extraordinary debt extinguishment costs................. -26.8% -8.8% 19.6% 23.0% 24.4% Extraordinary debt extinguishment costs, net of income taxes....................... -- -- -- -- 0.5% --------- --------- --------- --------- --------- Net income (loss)........................... -26.8% -8.8% 19.6% 23.0% 23.9% ========= ========= ========= ========= =========
Fiscal Years Ended March 31, 2000, 1999 and 1998
Net Sales. Net sales were $192.8 million in fiscal 2000, $239.5 million in fiscal 1999 and $356.2 million in fiscal 1998. The decrease in net sales during fiscal 2000 was a result of a 1.1% decline in unit sales volume from fiscal 1999 to fiscal 2000 and a 18.6% decline in average selling prices over the same period. The decline in both unit sales volume and average selling prices was generated by the continuing imbalance in supply and demand for thin-film media during fiscal 2000.
The 32.8% decrease in net sales in fiscal 1999
was primarily attributable to a 23.4% decrease in unit sales volume from fiscal 1998 to fiscal 1999 compounded by a 12.2% decline in average selling prices over the same period. Price reductions are common on individual product offerings in the thin-film media industry. We anticipate that the decline in average selling prices will continue as a result of the excess industry supply. Substantially all of our net sales consist of products delivered to customers in Asia, primarily foreign subsidiaries of U.S. companies.Gross Profit.
Gross margin (loss) was (22.8%) in fiscal 2000, 7.5% in fiscal 1999 and 36.7% in fiscal 1998. We operated below capacity during fiscal 2000 in order to match unit production volume to lower demand. The decrease in gross margin in fiscal 1999 and continuing in fiscal 2000 was a result of lower average selling prices and higher unit production costs related to underutilized capacity. The increase in unit production cost caused by lower production volumes was partially offset by reduced salaries in fiscal 1999 as the company responded to lower demand by reducing the work force, implementing two shutdown periods, curtailing the use of temporary personnel and suspending the accruals for profit sharing and bonuses for all of our personnel.Research and Development. Research and development expenses were $9.1 million, or 4.7% of net sales, in fiscal 2000, $9.7 million, or 4.1% of net sales, in fiscal 1999 and $8.8 million, or 2.5% of net sales, in fiscal 1998. Research and development expenses declined in absolute dollars in fiscal 2000 due primarily to decreased headcount after having
increased in absolute dollars in fiscal 1999 and 1998 due to an increase in headcount related to our new product introductions, as well as increased efforts to expand research and to provide enabling technology elements for advanced products. We develop manufacturing processes for new products directly on production lines during the research and development phase, avoiding the need for substantial capital investment in dedicated research equipment. Costs associated with developing products on the production lines are included as research and development expenses. We anticipate that research and development expenses will increase in absolute dollars in future periods, although as a percentage of net sales, research and development expenses may fluctuate.Selling, General and Administrative. Selling, general and administrative expenses were $9.8 million, or 5.1% of net sales, in fiscal 2000, $11.7 million or 4.8% of net sales, in fiscal 1999 and $13.7 million, or 3.9% of net sales, in fiscal 1998.
After allowance for the one time $1.7 million charge for uncollectible receivables in fiscal 1999, fiscal year 2000 selling, general & administrative expenses were basically unchanged. The decrease in selling, general and administrative expenses from 1998 to 1999 was primarily a result of reduced salaries as the Company responded to lower demand by reducing the work force, implementing two shutdown periods, curtailing the use of temporary personnel and suspending accruals for profit sharing and bonuses.Restructuring Charge. During the third quarter of fiscal 1999, we announced and implemented a restructuring plan, which included a work force reduction of approximately 300 employees and the consolidation of our manufacturing operations. The plan was primarily aimed at improving costs efficiencies by retiring older equipment and eliminating excess capacity. We recorded a total charge of $15.7 million, which included a non-cash charge of $13.7 million for equipment and related spare parts taken out of service during the quarter. The restructuring charge also included a charge of $1.8 million for severance costs, which were paid in full during the third fiscal quarter, and a provision of $200,000 for contract services in connection with the restructuring plan.
Interest Expense, Net. Interest expense, net was $10.9 million, or 5.7% of net sales, in fiscal 2000, $11.0 million, or 4.6% of net sales, in fiscal 1999 and $8.2 million, or 2.3% of net sales, in fiscal 1998.
The fiscal 2000 interest expense, net remained essentially unchanged as interest income increased $1.1 million from increased average invested cash balances while capitalized interest decreased $1.2 million, from decreased average construction-in-progress balances. The fiscal 1999 increase in interest expense, net was primarily a result of a $2.1 million decrease in capitalized interest and an $0.8 million decrease in interest income as construction-in-progress and average invested cash balances declined versus fiscal 1998. We anticipate interest expense, net will fluctuate in absolute dollars as interest income (driven by average invested cash balances) and capitalized interest (driven by construction-in-progress balances) change as a result of our operating and investing activities.Provision for Income Taxes. We recorded an income tax benefit of $22.1 million in fiscal 2000, $9.0 million in fiscal 1999 and an income tax provision of $30.0 million in fiscal 1998.
The tax rate of approximately 30% reflected statutory federal and state rates, reduced primarily by benefits realized from the establishment of a foreign sales corporation, utilization of state credits and implementation of other state tax planning strategies.We have assessed the recoverability of deferred tax assets and, based on expectations about operating results for the fiscal year ending March 31, 2000 and future years, determined it was more likely than not that the entire balance of deferred tax assets would be recovered. Accordingly, we have not recorded a valuation allowance for deferred tax assets.
Liquidity and Capital Resources
During fiscal 2000 and fiscal 1999, we financed our cash requirements through cash from operating and financing activities. Our operations provided net cash of $4.6 million, $68.3 million and $84.9 million for fiscal 2000, 1999 and 1998, respectively. Cash generated from operations during fiscal 2000 reflected a net loss of $51.6 million, offset by $56.1 million in depreciation and amortization and $9.3 million provided by changes in operating assets and liabilities which were then reduced by a $9.1 million change in deferred income taxes. Greater sales and operating margins contributed to the positive cash flow provided by operations in fiscal 1998 and 1999.
Based on the $60.5 million cash position at December 31, 1999 and expected future cash flow, the Board of Directors has authorized the Company to buy from time to time in open market purchases and negotiated private transactions, up to $30 million principal amount of the Company's 5 3/4% Convertible Subordinated Notes due 2004.
For fiscal 2000 and fiscal 1999, net cash used in investing activities was $5.0 million and $42.1 million, respectively. We invested $6.0 million and $43.4 million in property, plant and equipment during fiscal 2000 and fiscal 1999, respectively.
During fiscal 2000 and 1999, net cash from financing activities was $2.7 million and $1.8 million, respectively. Cash provided by financing activities for fiscal 2000 reflects cash received for common stock issued in connection with our employee stock purchase plan and the incentive stock option plans, as well as a $1.3 million tax benefit for disqualifying dispositions related to our incentive stock option plans.
Cash provided by financing activities for fiscal 1998 reflects the $13.4 million received for the common stock issued in connection with our follow-on public offering, employee stock purchase plan, and the incentive stock option plans, as well as a $2.0 million tax benefit for disqualifying dispositions related to our incentive stock option plans.
As of March 31, 2000, our principal sources of liquidity consisted of $55.3 million in cash and cash equivalents and a $50.0 million revolving credit facility under which there were no borrowings. We must comply with certain restrictive financial covenants and conditions as defined in the revolving credit facility. At March 31, 2000, we were not in compliance with certain covenants of the agreement , but, because the Company had no borrowings under this facility, no waiver was necessary. At March 31, 2000, we had indebtedness of $230.0 million in convertible notes, that require semi-annual interest payments, which began July 15, 1997. We expect to spend approximately $10.0 million on capital expenditures for the upgrade and maintenance of production equipment over the next twelve months.
We believe existing cash balances, cash generated from operations, and funds available under its credit facilities will provide adequate cash to fund our operations for at least the next 12 months. Additional sources of long-term liquidity could include cash generated from operations and debt and equity financings. We continue to have significant future obligations and expect that we would require additional capital if we were to undertake a substantial expansion of manufacturing capacity. There can be no assurance that we will be able to obtain alternative sources of financing on favorable terms, if at all, at such time or times as we may require such capital.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement becomes effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 "Accounting for Derivative Instruments - Deferral of the Effect Date of SFAS Statement No. 133" (SFAS 137). SFAS 137 defers the effective date of SFAS 133 until June 15, 2000. We will adopt SFAS 133 in 2001. We expects the adoption of SFAS 133 will not affect results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 provides guidance for revenue recognition under certain circumstances. We do not believe SAB 101 will have a material impact on the financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25". This interpretation has provisions that are effective on staggered dates, some of which began after December 15, 1998 and others that become effective after June 30, 2000
. The adoption of this interpretation did not and will not have a material impact on the financial statements.Year 2000 Compliance
Our internal Year 2000 identification, assessment, remediation and testing efforts, which began in October 1997 were completed in 1999. The cost of these programs to date is not material to the financial position and results of operations of HMT. However, there can be no guarantee that new costs will not be incurred in the future. To date, we have experienced no significant problems with our systems as a result of the Year 2000 issue but can give no assurance that such problems will not arise in the future.
We have also worked with our customers and suppliers to address their Year 2000 compliance issues in a timely manner. To date we have experienced no disruptions in our operations due to customer or supplier Year 2000 issues but can give no assurance that such problems may not arise in the future.
We have developed a contingency plan for operation without our computer based manufacturing control systems. However, there are scenarios for failure of suppliers or infrastructure for which no contingency exists.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2000 and 1999, our investment portfolio consisted of fixed income securities of $54.7 million and $52.6 million, respectively. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 2000 and 1999, the decline in the fair value of the portfolio would not be material. Additionally, we have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize such an adverse impact in income or cash flows.
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements required by this item are set forth on pages 38 through 56 and the related consolidated financial statement schedule is set forth on page 57.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's directors and executive officers, and their ages as of March 31, 2000, are as follows:
Name Age Position with the Company - ------------------------------ ------ ---------------------------------------- Ronald L. Schauer............. 56 Chief Executive Officer and Chariman of the Board Ronald J. Buschur.............. 36 President & Chief Operating Officer George J. Hall................. 55 Executive Vice-President, Operations Peter S. Norris................ 49 Executive Vice-President, Finance, Chief Financial Officer and Assistant Secretary Michael A. Russak.............. 53 Executive Vice-President, Research & Development and Chief Technical Officer Donald P. Beadle (1)(2)....... 64 Director Bruce C. Edwards (1).......... 46 Director Richard S. Love (2)........... 62 Director Harry G. Van Wickle (2)....... 53 Director
_________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Ronald J. Buschur joined the Company as Director of Quality Systems in June 1994, was appointed Vice President, Quality Assurance in February 1995, promoted to Vice President, Worldwide Quality and Marketing in June 1998 and promoted to President and Chief Operating Officer in November 1999. From December 1993 to June 1994, he was a Customer Account Manager at StorMedia, a thin-film disk manufacturer. From July 1993 to December 1993, he was a Supplier Accounts Manager at Maxtor, a disk drive company. From May 1987 to July 1993, he held various managerial positions at Digital Equipment Corporation, a computer manufacturer. Mr. Buschur holds a B.A. in Business Administration and Management from the University of Phoenix and an Associate Degree in Electrical Engineering Technology from ITT Technical Institute.
George J. Hall joined the Company as Vice President, Operations in February 1995 and was promoted to Executive Vice President, Operations in November 1999. From December 1990 to February 1995, he was General Manager of the Rigid Media Division of Sequel, Inc., a media drive company. From 1988 to 1989, he was Director of Operations at Seagate Magnetics, a media manufacturer. From 1985 to 1988, he was employed in development of rigid disk media for vertical recording at Censtor Corporation, a thin film media/head company. From 1983 to 1985, he was Vice President of Operations of Domain Technology, a thin film manufacturer, which he co-founded. Prior to 1983, he held various positions relating to the manufacture of rigid disk media at IBM Corporation, a computer company ("IBM"). Mr. Hall holds a B.S. in Industrial Technology from San Jose State University.
Peter S. Norris joined the Company as Vice President, Finance, Chief Financial Officer and Treasurer in December 1995 and was promoted to Executive Vice President, Finance, Chief Financial Officer and Treasurer in November 1999. From 1975 to December 1995, he held various positions at General Instrument Corporation, an electronics company, most recently as Assistant Treasurer since 1981. Mr. Norris holds a B.A. in Economics from Upsala College.
Michael A. Russak joined the Company as Vice President, Research and Development in August 1993 and promoted to Chief Technical Officer in 1998 and promoted to Executive Vice President Research & Development and Chief Technical Officer in November 1999. From October 1988 to August 1992, he was a manager at the Research Division of IBM. He then transferred to IBM's Storage Products Division in San Jose, California in 1992. Dr. Russak holds a B.S. in Ceramic Engineering and a Ph.D. in Materials Science from Rutgers University.
Donald P. Beadle joined the Company's Board of Directors in May 1998. Mr. Beadle spent 34 years at National Semiconductor Corp., a semiconductor manufacturing company ("NSC"), to his retirement in 1994. Since that time, he has been a consultant to various companies, including having spent three months as the acting Vice President, Sales, Marketing and Sales Support for Interwave Communications, a wireless communications device manufacturer. From 1991 to 1994, Mr. Beadle was the Senior Vice President/ Managing Director, Far East, of NSC, reporting to the Chief Executive Officer of NSC. Mr. Beadle's previous positions with NSC included Senior Vice President, Worldwide Sales and Marketing of NSC and Managing Director, Europe.
Bruce C. Edwards joined the Company's Board of Directors in January 1996. Since February 1996, he has been President, Chief Executive Officer and a director of Powerwave Technologies, Inc., a manufacturer of power amplifiers for wireless telecommunications applications. Mr. Edwards was employed by AST Research, Inc., a computer company, as Senior Vice President and Chief Financial Officer from 1988 until July 1994 and as Executive Vice President, Chief Financial Officer and a director from July 1994 to December 1995. Mr. Edwards is also a director of Diamond Multimedia Systems, Inc.
Richard S. Love joined the Company's Board of Directors in May 1998. Mr. Love retired from Hewlett-Packard Company, a computer engineering company, in March 1997 after 35 years. Mr. Love was most recently Vice President and General Manager of the Computer Order Fulfillment and Manufacturing Group responsible for worldwide manufacturing and distribution of networked computer systems and workstations.
Harry G. Van Wickle joined the Company's Board of Directors in May 1998. Since December 1997, Mr. Van Wickle has been President and Chief Executive Officer of Intarsia Corporation, an integrated electronic component design and manufacturing company ("Intarsia"). Mr. Van Wickle is a twenty-six year veteran in semiconductor and disk drive manufacturing. From 1974 to 1992, Mr. Van Wickle held top management positions at Texas Instruments, Fairchild Semiconductor, AT&T and Micropolis Corporation. From 1992 and prior to joining Intarsia, he has been a Vice President in Operations at Dastek, a subsidiary of Komag, Vice President of Manufacturing at Cypress Semiconductor and President of Alphatec Electronics Corporation.
Compliance With the Reporting Requirements of Section 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent (10%) stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, during the fiscal year ended March 31, 2000, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent (10%) beneficial owners were complied with
.Item 11. Executive Compensation
Compensation of Directors
Non-employee directors are paid an $10,000 annual retainer fee, $1,500 per meeting for attendance at meetings of the Board of Directors and $500 per meeting for attendance at meetings of any committee thereof. In the fiscal year ended March 31, 2000, the total cash compensation paid to non-employee directors was $62,500. Directors are reimbursed for reasonable out- of-pocket expenses incurred in connection with attendance at such meetings in accordance with Company policy.
Each non-employee director of the Company (other than employees or affiliates of Summit Partners) receives stock options under the 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") as compensation for services of the Board of Directors. Option grants under the Directors' Plan are automatic and non-discretionary. The Directors' Plan provides for the grant of an option to purchase 10,000 shares of Common Stock to each person who is first elected as a non-employee director after the plan's adoption date. Each director who continues to serve as a non-employee director is granted an additional option to purchase 2,000 shares of Common Stock on the anniversary of the date of his or her initial grant or annually commencing with the fourth anniversary of the plan's adoption date. During the last fiscal year, 10,000 options to purchase shares of the Company's Common Stock were granted under the Directors' Plan. As of March 31, 2000, no options had been exercised under the Directors' Plan.
The 1996 Equity Incentive Plan (the "Incentive Plan") provides for grants of incentive stock options to employees (including officers and employee directors) and nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights to employees (including officers and employee directors). The Incentive Plan is administered by the Compensation Committee, which determines recipients and types of awards to be granted, including the exercise price, number of shares subject to the award and the exercisability thereof. Restricted stock purchase awards granted under the Incentive Plan may be granted pursuant to a repurchase option in favor of the Company in accordance with a service vesting schedule determined by the Board. During the last completed fiscal year, 1,313 employees and consultants received options to purchase 1,442,240 shares of the Company's Common Stock. As of March 31, 2000, 30,615 options had been exercised under the Incentive Plan.
Compensation of Executive Officers
The following table shows for the fiscal years ended March 31, 2000, 1999 and 1998, certain compensation awarded or paid to, or earned by, the Company's Chief Executive Officer and its other four most highly compensated executive officers (the "Named Executive Officers") at March 31, 2000:
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM ------------------------------------------- COMPENSATION OTHER AWARDS/ ANNUAL SECURITIES ALL OTHER FISCAL COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#) ($)(2) - --------------------------- -------- ---------- ---------- ------------ ------------ ------------ Mr. Ronald L. Schauer...... 2000 376,825 -- -- -- 4,775 Chief Executive 1999 352,603 34,092 -- -- 5,242 Officer 1998 291,060 132,714 -- -- 3,701 Mr. George J. Hall......... 2000 247,499 -- -- -- 2,883 Vice President, 1999 229,825 22,279 -- -- 3,242 Operations 1998 191,285 86,710 -- -- 2,440 Dr. Michael A. Russak...... 2000 248,999 -- -- -- 3,216 Vice President, Research 1999 238,213 23,562 -- -- 3,535 and Development 1998 205,037 91,809 1,685 -- 2,732 Mr. Peter S. Norris........ 2000 225,014 -- -- -- 2,935 Vice President and Chief 1999 207,996 18,936 -- -- 3,318 Financial Officer 1998 161,835 73,589 2,631 -- 2,331 Mr. Ronald J. Buschur...... 2000 257,595 -- -- -- 2,883 President and Chief 1999 218,066 18,702 -- -- 3,385 Operating Officer 1998 159,103 70,917 -- -- 2,360
(1) Consists of relocation payments.
(2) Includes with respect to fiscal year 2000: (i) $358 paid by the Company in life insurance premiums for each of Mr. Schauer, Mr. Hall, Dr. Russak, Mr. Norris and Mr. Buschur; (ii) $2,596, $2,525, $2,858, $2,577 and $2,525 in 401(k) employer matching contributions for Mr. Schauer, Mr. Hall, Dr. Russak, Mr. Norris and Mr. Buschur, respectively; and (iii) $1,821 for car allowance for Mr. Schauer. Includes with respect to 1999: (i) $410 paid by the Company in life insurance premiums for each of Mr. Schauer, Mr. Hall, Dr. Russak, Mr. Norris and Mr. Buschur; (ii) $2,914, $2,808, $2,975, $3,125 and $2,975 in 401(k) employer matching contributions for Mr. Schauer, Mr. Hall, Mr. Buschur, Dr. Russak and Mr. Norris, respectively; and (iii) $1,917 for car allowance for Mr. Schauer. Includes with respect to 1998: (i) $102 paid by the Company in life insurance premiums for each of Mr. Schauer, Mr. Hall, Dr. Russak and Mr. Norris; (ii) $2,279, $2,338, $2,630 and $2,229 in 401(k) employer matching contributions for Mr. Schauer, Mr. Hall, Dr. Russak and Mr. Norris, respectively; and (iii) $1,320 for car allowance for Mr. Schauer.
Except as disclosed above, no compensation characterized as long-term compensation, including restricted stock awards issued at a price below fair market value or long-term incentive plan payouts, was paid by the Company during the year ended March 31, 2000, to any of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the fiscal year ended March 31, 2000 to each of the Named Executive Officers:
INDIVIDUAL GRANTS -------------------------------------------- % OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF SECURITIES GRANTED TO STOCK PRICE UNDERLYING EMPLOYEES APPRECIATION FOR OPTIONS IN FISCAL EXERCISE OPTION TERM(4) GRANTED YEAR PRICE EXPIRATION ---------- ---------- NAME AND PRINCIPAL POSITION (#)(1) (%)(2) ($/SH)(3) DATE 5%($) 10%($) - --------------------------- ---------- ---------- ----------- ---------- ---------- ---------- Ronald L. Schauer.......... -- -- -- -- -- -- George J. Hall............. 60,000 4.16 3.3125 10/14/09 $124,993 $316,756 Michael A. Russak.......... 60,000 4.16 3.3125 10/14/09 $124,993 $316,756 Peter S. Norris............ 60,000 4.16 3.3125 10/14/09 $124,993 $316,756 Ronald J. Buschur.......... 60,000 4.16 3.3125 10/14/09 $124,993 $316,756
(1) Generally 20% of the options became exercisable immediately upon grant and the remaining 80% will vest semi-annually for the next 24 months. The term of each option granted is generally the earlier of (i) ten years or (ii) 30 days after termination of the employment of the holder.
(2) Based on an aggregate of 1,442,240 options granted to employees, consultants and directors, including the Named Executive Officers, of the Company during the fiscal year ended March 31, 2000.
(3) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant.
(4) The potential realizable value is calculated based on the term of the option at its time of grant. It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. All calculations are based on rounding the number of years remaining on the term of the option to the nearest whole number. No gain to the option holder is possible unless the stock price increases over the option term. The 5% and 10% assumed rates of appreciation are derived from the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
This table discloses the aggregate dollar value realized upon exercise of stock options in the last fiscal year by the Named Executive Officers. For each Named Executive Officer, the table also includes the total number of unexercised options and the aggregate dollar value of in-the-money unexercised options held at the end of the last completed fiscal year, separately identifying the exercisable and unexercisable options.
NUMBER OF SECURITIES UNDERLYING VALUE OF IN-THE-MONEY SHARES UNEXERCISED OPTIONS OPTIONS AS OF ACQUIRED AS OF MARCH 31, 2000 MARCH 31, 2000(1) ON VALUE --------------------------- --------------------------- EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE NAME (#) ($) (#) (#) ($) ($) - ------------------------- -------- -------- ------------- ------------- ------------- ------------- Ronald L. Schauer........ 0 0 92,501 32,499 -- -- George J. Hall........... 0 0 80,001 59,999 -- -- Michael A. Russak........ 0 0 80,001 59,999 -- -- Peter S. Norris.......... 0 0 59,501 70,499 -- -- Ronald J. Buschur........ 0 0 80,001 59,999 -- --
(1) Based on the fair market value of $3.3125 per share at March 31, 2000; the named Executive Officers had no unexercised in-the-money options.
Bonus Plan. The Company has a discretionary bonus program for certain designated key employees of the Company, including all executive officers, pursuant to which such employees are paid cash bonuses based upon the attainment of certain specified corporate goals for the year established by the Board of Directors. The amount of the cash bonus to which each such employee is entitled is determined by the Board.
Profit Sharing Plan. In May 1996, the Board of Directors approved an incentive-based profit sharing plan for employees of the Company, including all executive officers. Under this Plan, employees are paid cash bonuses on a quarterly basis based upon the attainment of certain specified corporate goals determined by the Board of Directors.
Stock. In addition to cash compensation, the Company's executive officers are eligible to receive stock options under the Company's Employee Stock Purchase Plan (the "Purchase Plan") and the Incentive Plan. Approximately 1,284 of the Company's approximately 1,468 employees are eligible to participate in the Purchase Plan. The Purchase Plan is implemented by offerings of rights to all eligible employees from time to time by the Board. Eligible employees enroll in the Purchase Plan by delivering to the Company, prior to the date selected by the Board as the offering date for the offering, an agreement authorizing payroll deductions of up to 15% of such employees' base total compensation during the purchase period. The purchase price per share at which shares of Common Stock are sold in an offering under the Purchase Plan is the lower of (i) 85% of the fair market value of a share of Common Stock on first day of the offering or (ii) 85% of the fair market value of a share of Common Stock on the specified purchase date. An aggregate of 3,000,000 shares of Common Stock is reserved for issuance under the Purchase Plan. If rights granted under the Purchase Plan expire, lapse or otherwise terminate without being exercised, the shares of Common Stock not purchased under such rights again becomes available for issuance under the Purchase Plan. For a description of the Incentive Plan, see "Director Compensation" above.
Employment and Severance Agreements
In January 1996, the Company adopted an Executive Severance Plan (the "Severance Plan") providing for certain benefits to executive officers of the Company in the event an executive's employment is involuntary terminated without cause (generally meaning without any misconduct on the executive's part) or that the executive voluntarily terminates employment with good reason (generally meaning that the executive's responsibilities, title or compensation was materially reduced). Upon the occurrence of such an event, the Severance Plan provides for salary continuation for a period no greater than one year. In addition, the Severance Plan provides for continued health benefits coverage to the extent permitted by the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Company's group health policies.
Ronald L. Schauer, Chief Executive Officer and Chairman of the Board of HMT, is party to a severance agreement with HMT pursuant to which, upon consummation of the merger with Komag (see Item 6, Subsequent Events), Mr. Schauer is entitled to receive a bonus in the total amount of $1,187,500 to be paid in 60 equal monthly amounts beginning on the first day of the month following consummation of the merger. In addition, upon the occurrence of certain events after consummation of the merger, Mr. Schauer may be entitled to acceleration of his bonus amount and acceleration of his executive stock options to provide for up to an additional 24 months of service credit toward the vesting of his stock options.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee is currently composed of three non-employee directors: Messrs. Beadle, Love and Van Wickle. There were no officers or employees of the Company who participated in deliberations of the Company's Compensation Committee concerning executive officer compensation during the year ended March 31, 2000.
Audit Committee
The Company's Audit committee is currently composed of two non-employee directors: Messrs. Edwards and Beadle. The Audit committee is responsible for approving the services of the Company's independent auditors and reviewing the auditors reports concerning the Company's accounting practices and systems of internal control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Company's Common Stock as of May 15, 2000 by: (i) each director; (ii) each of the executive officers named in the Summary Compensation Table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its Common Stock.
BENEFICIAL OWNERSHIP(1) -------------------- PERCENT NUMBER OF OF BENEFICIAL OWNER SHARES TOTAL - ------------------------------------------------------- ----------- -------- State of Wisconsin Investment Board.................... 6,545,000 13.92 121 East Wilson Street Madison, WI 53702 Crabbe Huson Group, Inc................................ 3,804,028 8.09 121 S.W. Morrison, Suite 1400 Portland, OR 97204 Dimensional Fund Advisors.............................. 2,429,529 5.17 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Donald P. Beadle(2).................................... 6,354 * Bruce C. Edwards(3).................................... 35,646 * Richard S. Love(4)..................................... 6,354 * Harry G. Van Wickle(5)................................. 6,354 * Ronald L. Schauer(6)................................... 2,084,751 4.43 Ronald J. Buschur(7)................................... 592,827 1.26 George J. Hall(8)...................................... 419,626 * Michael A. Russak(9)................................... 526,900 1.12 Peter S. Norris(10).................................... 533,270 1.13 All directors and executive officers as a group (9 persons)(11)......................................... 4,212,082 8.96
* Less than one percent (1%).
(1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the Securities and Exchange Commission (the "SEC"). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Beneficial ownership also includes shares of stock subject to options and warrants currently exercisable or convertible within 60 days of the date of this table. Applicable percentages are based on 47,022,145 shares outstanding on May 15, 2000, adjusted as required by rules promulgated by the SEC.
(2) Consists of 6,354 shares Mr. Beadle has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(3) Represents 34,500 shares held by Bruce C. Edwards and Susan E. Edwards, as co-trustees of the Bruce C. Edwards and Susan E. Edwards Living Trust under agreement dated June 26, 1991. Includes 1,146 shares Mr. Edwards has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(4) Includes 6,354 shares Mr. Love has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(5) Includes 6,354 shares Mr. Van Wickle has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(6) Represents 1,769,478 shares held by The Schauer Living Trust under agreement dated March 15, 1996 ("Schauer Living Trust"). Mr. Schauer is a co-trustee of the Schauer Living Trust. Also represents 108,261 shares held by the Ronald L. Schauer 1997 Grantor Retained Annuity Trust and 108,261 shares held by the Marlys A. Schauer 1997 Grantor Retained Annuity Trust ("Marlys Schauer Trust"). Marlys A. Schauer, the beneficiary of the Marlys Schauer Trust, is the spouse of Mr. Schauer. Mr. Schauer disclaims beneficial ownership of the shares held in the Marlys Schauer Trust. Includes 98,751 shares Mr. Schauer has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(7) Represents 371,496 shares held by The Buschur Living Trust under agreement dated March 11, 1996 ("Buschur Living Trust"), 44,945 shares held by the Ronald J. Buschur 1997 Grantor Retained Annuity Trust, 44,945 shares held by The Lisa A. Buschur 1997 Grantor Retained Annuity Trust ("Lisa Buschur Trust"), 19,220 shares held by The Ryan Buschur 1996 Irrevocable Trust under agreement dated February 9, 1996 ("Ryan Buschur Trust") and 19,220 shares held by The Lynsey Buschur 1996 Irrevocable Trust under agreement dated February 6, 1996 ("Lynsey Buschur Trust"). Mr. Buschur is a co-trustee of the Buschur Living Trust. Lisa A. Buschur, the beneficiary of the Lisa Buschur Trust, is the spouse of Mr. Buschur. Ryan Buschur, the beneficiary of the Ryan Buschur Trust, and Lynsey Buschur, the beneficiary of the Lynsey Buschur Trust, are the children of Mr. Buschur. Mr. Buschur disclaims beneficial ownership of the shares held in the Lisa Buschur Trust, the Ryan Buschur Trust and the Lynsey Buschur Trust. Includes 93,001 shares Mr. Buschur has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(8) Represents 304,625 shares held by The George J. Hall Family Trust ("Hall Family Trust") and 22,000 shares held by The Anne T. Hall Foundation ("Hall Foundation"). Mr. Hall is a co-trustee of the Hall Family Trust and trustee of the Hall Foundation. Mr. Hall disclaims beneficial ownership of the shares held in the Hall Foundation. Includes 93,001 shares Mr. Hall has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(9) Represents 433,899 shares held by The Russak Living Trust under agreement dated May 31, 1996 ("Russak Living Trust"). Mr. Russak is co-trustee of the Russak Living Trust. Includes 93,001 shares Mr. Russak has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(10) Includes 72,501 shares Mr. Norris has the right to acquire pursuant to an option exercisable within 60 days of May 15, 2000.
(11) Includes 470,463 shares issuable upon the exercise of options within 60 days of May 15, 2000.
Item 13. Certain Relationships and Related Transactions
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnity agreements with certain officers and directors which provide, among other things, that the Company will indemnify such officer or director, under the circumstances and to the extent provided therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his position as a director, officer or other agent of the Company, and otherwise to the full extent permitted under Delaware law and the Company's Bylaws.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements.
See Index to Consolidated Financial Statements and Financial Statement Schedules included on page 37.
2. Financial Statement Schedules.
See "Schedule II - Valuation and Qualifying Accounts" included on page 57. All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto.
3. List of Exhibits.
See Index of Exhibits included on pages 59 and 60.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
(c) Exhibits:
The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index beginning on page 59.
HMT TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page |
|
Report of Independent Accountants |
38 |
Consolidated Financial Statements: |
|
Consolidated Balance Sheets |
39 |
Consolidated Statements of Operations |
40 |
Consolidated Statements of Stockholders' Equity |
41 |
Consolidated Statements of Cash Flows |
42 |
Notes to Consolidated Financial Statements |
43 |
Schedules: II - Valuation and qualifying accounts |
57 |
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders HMT Technology Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows presented fairly, in all material respects, the financial position of HMT Technology Corporation and its subsidiaries at March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 14, 2000, except for Note 13 which is as of April 26, 2000
HMT TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these consolidated
financial statements.
HMT TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these consolidated
financial statements.
HMT TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these consolidated
financial statements.
HMT TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these consolidated
financial statements.
HMT TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation HMT Technology Corporation ("HMT" or the "Company") is an independent supplier of high-performance thin-film
disks for high-end, high-capacity and removable hard disk drives, which in turn are used in PCs, network servers and workstations.
HMT was incorporated in Delaware in 1988 as a subsidiary of Hitachi Metals, Ltd. ("Hitachi Metals") to acquire certain assets and
certain liabilities of the thin-film division of Xidex Corporation, which had been producing thin-film disks since 1983. Since
completing the acquisition, the Company has continued to supply thin-film disks to manufacturers of hard disk drives. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, HMT
FSC Ltd. (incorporated on February 14, 1996). All significant intercompany accounts and transactions have been eliminated in
consolidation. Fiscal Year The Company uses a 52-week fiscal year ending on March 31 and thirteen- to fourteen-week quarters that end on
the Sunday closest to the calendar quarter end. Recapitalization On November 30, 1995, the Company effected a leveraged recapitalization (the "Leveraged Recapitalization")
pursuant to which the Company repurchased from Hitachi Metals, then the sole stockholder of the Company, all of the outstanding shares
of Common Stock of the Company, and certain investment funds, members of management and Hitachi Metals purchased newly issued Common
Stock, Mandatorily Redeemable Series A Preferred Stock ("Series A Preferred Stock") and subordinated promissory notes ("Subordinated
Notes") of the Company. As of November 30, 1995 (immediately prior to the Leveraged Recapitalization), the Company had approximately
$98.5 million in assets (unaudited) and approximately $122.7 million in liabilities (unaudited). Immediately following the Leveraged
Recapitalization, the Company had $110.9 million in assets (unaudited), and $132.1 million in liabilities (unaudited) (including
$60.0 million of senior bank term loan and $47.0 million of Subordinated Notes to stockholders) and $59.0 million of Series A
Preferred Stock. The Leveraged Recapitalization has been accounted for as a recapitalization, and accordingly, no change in the
accounting basis of the Company's assets has been made in the accompanying financial statements. The amount of cash paid and
securities issued to the stockholders of the Company exceeded the Company's net assets on the date of the transaction and has been
recorded in the equity section as distributions in excess of net book value Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less from the
date of purchase and money market funds to be cash equivalents. The Company maintains deposits with several financial institutions in
the United States. Deposits in banks may exceed the amount of insurance provided on such deposits. The Company has not experienced
any losses on its deposits of cash and cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis.
The Company's inventories include high-technology materials that may be specialized in nature or subject to rapid technological
obsolescence. While the Company has programs to minimize the required inventories on hand and considers technological obsolescence in
estimating reserves to reduce recorded amounts to market value, such estimates could change in the future. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation and amortization is provided using the
straight-line method over estimated useful lives of ten to thirty-five years for the building and improvements; five to ten years or
the lease term, whichever is shorter, for leasehold improvements; and three to five years for the machinery, equipment and furniture
and fixtures. The Company's policy is to regularly review the carrying amount of specialized assets and to evaluate the remaining
life and recoverability of such equipment in light of current market conditions. Upon disposal, the assets and related accumulated
depreciation are removed from the Company's accounts, and resulting gains or losses are reflected in operations. Other Assets Other assets are comprised principally of debt issue costs, which are capitalized and amortized to interest
expense using the effective interest method over the term of the related debt. Warranties The Company's products are generally warrantied for a period of 60 days from customer receipt. Estimated
future costs of repair, replacement or customer accommodations are reflected in the accompanying financial statements. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the liability method is used for accounting for income taxes. The
realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Revenue Recognition Revenue is generally recognized upon shipment of product to the customer. Research and Development Research and development expenditures are charged to operations as incurred. Foreign Currency Accounting Substantially all of the Company's sales are denominated in U.S. dollars. Foreign currency transactions during
the period are immaterial and are included in operations. Concentration of Risks
Three customers accounted for 89.5% and 74.2% of accounts
receivable at March 31, 2000 and 1999, respectively. Significant
customers accounted for the following percentages of net sales in
fiscal 2000, 1999 and 1998:
The Company sells substantially all of its production to Asian subsidiaries of U.S. companies. The
Company performs ongoing credit evaluations of its customers. The Company does not require collateral for its receivables and
maintains an allowance for potential credit losses, which have been insignificant to date. The Company's Fremont facilities currently account for all of its finished goods production. Disruption of
operations at either the Eugene or Fremont site could cause delays in, or an interruption of, production and shipment of products,
which could materially adversely affect the Company's business, operating results and financial condition. The Company maintains its short-term investments at one financial institution. The Company has not experienced
material losses on any of its investments. Income Per Common Share Basic income per common share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted income per common share is computed giving effect to all
potentially dilutive common shares that were outstanding during the period Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, other receivables and accrued liabilities are a reasonable
estimate of their fair value due to their short-term nature. The carrying value of the Company's long-term debt is a reasonable
estimate of their fair value based on interest rates as of March 31, 2000 for issues with similar remaining maturities The estimated fair value amounts of the Company's financial instruments have been determined
by the Company, using appropriate market information and valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, thus, the estimates provided herein are not necessarily indicative of the amounts that could be realized in
a current market exchange. The Company calculates the fair value of financial instruments and includes this additional information in the
notes to financial statements when the fair value is different than the book value of those financial instruments. When the fair
value is equal to the book value no additional disclosure is made. The Company uses quoted market prices whenever available to
calculate these fair values. When quoted market prices are not available, the Company uses standard pricing models for various types
of financial instruments which take into account the present value of estimated future cash flows. The effect of using different
market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Restructuring charge During the third quarter of year ended March 31, 1999, The Company implemented a restructuring plan, which
included a work force reduction of approximately 300 employees and the consolidation of the Company's manufacturing operations. The
Company recorded a total charge of $15.7 million, which included a non-cash charge of $13.7 million for equipment and related spare
parts taken out of service during the quarter. The restructuring charge also included a charge of $1.8million for severance costs,
which were paid in full during the third quarter, and a provision of $200,000 for contract services in connection with the
restructuring Recent Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 "Accounting for
Derivative Instruments - Deferral of the Effect Date of SFAS Statement No. 133" ("SFAS 137"). SFAS 137 defers the effective date of
SFAS 133 until June 15, 2000. The Company will adopt SFAS 133 in 2001. The Company expects the adoption of SFAS 133 will not affect
results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements". SAB 101 provides guidance for revenue recognition under certain circumstances.
The
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31,
-------------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents..................... $55,314 $53,077
Receivables -- trade, net of allowance for
doubtful accounts of $944 and $3,054 at
March 31, 2000 and 1999, respectively...... 24,888 29,559
Other receivables............................. 13 13
Inventories, net.............................. 16,594 26,585
Deposits, prepaid expenses and other.......... 153 588
Deferred income taxes......................... 3,848 5,133
---------- ----------
Total current assets.................. 100,810 114,955
Property, plant and equipment, net.............. 271,225 321,508
Other assets.................................... 5,027 6,077
---------- ----------
Total assets.......................... $377,062 $442,540
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $15,266 $20,732
Accrued liabilities........................... 9,672 8,498
Obligations under capital leases -- current
portion.................................... -- 555
---------- ----------
Total current liabilities............. 24,938 29,785
Other long-term liabilities..................... 865 2,680
Deferred income taxes........................... 3,688 14,127
5 3/4% Convertible Subordinated Notes, due 2004. 230,000 230,000
---------- ----------
Total liabilities..................... 259,491 276,592
---------- ----------
Commitments and contingencies (Note 6)
Common Stock, $0.001 par value; authorized:
100,000,000 shares; issued and outstanding:
46,174,465 and 44,299,557 shares at March 31,
2000 and 1999, respectively................... 46 44
Additional paid-in capital...................... 116,931 113,661
Retained earnings............................... 77,243 128,892
Distribution in excess of basis (Note 1)........ (76,649) (76,649)
---------- ----------
Total stockholders' equity............ 117,571 165,948
---------- ----------
Total liabilities and stockholders'
equity.............................. $377,062 $442,540
========== ==========
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended March 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales................................. $192,762 $239,531 $356,194
Cost of sales............................. 236,788 221,495 225,599
---------- ---------- ----------
Gross profit (loss)..................... (44,026) 18,036 130,595
---------- ---------- ----------
Operating expenses:
Research and development................ 9,094 9,728 8,825
Selling, general and administrative..... 9,771 11,655 13,679
Restructuring expenses.................. -- 15,662 --
---------- ---------- ----------
Total operating expenses............. 18,865 37,045 22,504
---------- ---------- ----------
Operating income (loss).............. (62,891) (19,009) 108,091
Interest expense, net..................... 10,893 10,994 8,194
---------- ---------- ----------
Income (loss) before income tax...... (73,784) (30,003) 99,897
Income tax provision (benefit)............ (22,135) (9,001) 29,969
---------- ---------- ----------
Net income (loss)......................... ($51,649) ($21,002) $69,928
========== ========== ==========
Net income (loss) per share
Basic................................... ($1.14) ($0.48) $1.66
========== ========== ==========
Diluted................................. ($1.14) ($0.48) $1.40
========== ========== ==========
Shares used in computing net income
(loss) per share
Basic................................... 45,411 43,720 42,196
========== ========== ==========
Diluted................................. 45,411 43,720 54,542
========== ========== ==========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Distributions
Common Stock Additional In Excess of Total
--------------------- Paid-in Net Book Retained Stockholders'
Shares Amount Capital Value Earnings Equity
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1997.......... 41,046,360 $41 $92,084 ($76,649) $79,966 $95,442
Follow-On Offering of $0.001
par value Common Stock, net
of offering expenses.......... 1,000,000 1 13,350 -- -- 13,351
Common Stock issued under
Employee Stock Purchase
Plan.......................... 278,255 -- 2,575 -- -- 2,575
Common Stock issued under Stock
Option Plans.................. 832,528 1 1,155 -- -- 1,156
Net income...................... -- -- -- -- 69,928 69,928
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1998.......... 43,157,143 43 109,164 (76,649) 149,894 182,452
Common Stock issued under
Employee Stock Purchase
Plan.......................... 371,777 -- 3,334 -- -- 3,334
Common Stock issued under Stock
Option Plans.................. 770,637 1 1,163 -- -- 1,164
Net loss........................ -- -- -- -- (21,002) (21,002)
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1999.......... 44,299,557 44 113,661 (76,649) 128,892 165,948
Common Stock issued under
Employee Stock Purchase
Plan.......................... 1,208,389 1 2,969 -- -- 2,970
Common Stock issued under Stock
Option Plans.................. 666,519 1 301 -- -- 302
Net loss........................ -- -- -- -- (51,649) (51,649)
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 2000.......... 46,174,465 $46 $116,931 ($76,649) $77,243 $117,571
=========== ======== =========== ============ ============ ===========
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEAR ENDED MARCH 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).................................($51,649) ($21,002) $69,928
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization..................... 56,104 53,425 41,771
Equipment writedowns - restructuring.............. -- 12,839 --
Provision (reversal) for loss on inventories...... -- (2,509) 1,844
Provision (reversal) for doubtful accounts
receivable...................................... (2,110) 1,727 272
Loss (gain) on sale or disposal of assets......... 272 (480) --
Changes in operating assets and liabilities:
Deferred income taxes............................. (9,154) 2,235 9,946
Receivables -- trade.............................. 6,781 38,730 (34,517)
Other receivables................................. -- 631 (621)
Inventories....................................... 9,991 (5,676) (8,407)
Deposits, prepaid expenses and other assets....... 435 41 (155)
Accounts payable.................................. (5,466) (6,569) 877
Accrued liabilities............................... 1,174 228 (495)
Long term liabilities............................. (1,815) (5,304) 4,422
--------- --------- ---------
Net cash provided by operating activities......... 4,563 68,316 84,865
--------- --------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment.... (6,025) (43,436) (130,320)
Sale of short-term investments.................... -- -- 10,833
Decrease in other assets.......................... 982 1,367 942
--------- --------- ---------
Net cash used in investing activities............. (5,043) (42,069) (118,545)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on obligations under capital
leases.......................................... (555) (2,653) (2,642)
Proceeds from issuance of Common Stock............ 3,272 4,498 17,082
--------- --------- ---------
Net cash provided by financing activities......... 2,717 1,845 14,440
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 2,237 28,092 (19,240)
Cash and cash equivalents at beginning of period.. 53,077 24,985 44,225
--------- --------- ---------
Cash and cash equivalents at end of period........ $55,314 $53,077 $24,985
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period.......... $10,893 $13,495 $13,582
Net cash paid (received) for income taxes
during the period...............................($12,871) $11,588 $20,860
Supplemental disclosure of noncash investing and
financing activities:
Machinery and equipment acquired pursuant to a
capital lease................................... $ -- $2,792 $1,633
Years Ended March 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Maxtor Corporation................... 60.50% 36.0% 23.4%
Samsung Electronics Company Limited.. 7.50% 17.8% 16.0%
Iomega Corporation................... 14.60% 15.2% 28.9%
Western Digital Corporation.......... 13.30% 24.1% 19.0%
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25". This interpretation has provisions that are effective on staggered dates, some of which began after December 15, 1998 and others that become effective after June 30, 2000
. The adoption of this interpretation did not and will not have a material impact on the financial statements.Reclassifications
Certain amounts in the consolidated financial statements have been reclassified to conform with the current year's presentation. The reclassification has no impact on previously reported net income or stockholders' equity (deficit).
2. Balance Sheet Detail
March 31, -------------------- 2000 1999 --------- --------- (dollars in thousands) Inventories: Raw materials..................... $7,739 $5,575 Work-in-process................... 3,890 3,569 Finished goods.................... 4,965 17,441 --------- --------- $16,594 $26,585 ========= =========
Inventories reflect reserves of approximately $3.1 million and $4.7 million as of March 31, 2000 and 1999, respectively.
March 31, -------------------- 2000 1999 --------- --------- (dollars in thousands) Property, Plant and Equipment, Net: Land................................ $4,869 $4,869 Building and improvements........... 110,393 110,393 Leasehold improvements.............. 37,068 36,790 Machinery, equipment, furniture and fixtures...................... 286,968 280,471 Construction in progress............ 15,667 18,770 --------- --------- 454,965 451,293 Less accumulated depreciation and amortization.................. 183,740 129,785 --------- --------- $271,225 $321,508 ========= =========
Additions to construction in progress include capitalized interest of approximately $1.2 million, $2.4 million and $4.5 million during fiscal 2000, 1999 and 1998, respectively.
March 31, -------------------- 2000 1999 --------- --------- (dollars in thousands) Accrued Liabilities: Interest payable.................... $2,557 $2,878 Payroll related items............... 4,335 4,397 Other............................... 2,780 1,223 --------- --------- $9,672 $8,498 ========= =========
3. Related Party Transactions
The Company had the following transactions with a certain stockholder and its affiliates:
Years Ended March 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (dollars in thousands) Hitachi Metals Trading Purchases of raw materials......... 403 -- $1,237 Hitachi Metals America Purchases of raw materials......... 541 259 1,241
As of March 31, 2000, the parties listed above owned none of HMT Technology's outstanding securities.
4. Obligations Under Capital Leases
As of March 31, 2000 there were no assets under capitalized lease obligations. Assets under capitalized lease obligations as of March 31, 1999 consisted of machinery and equipment with a cost of $1.6 million and accumulated amortization of $0.6 million. No payment was outstanding as of March 31, 2000.
5. Debt
On November 17, 1997, the Company amended and restated the revolving credit agreement originally entered into in 1995 pursuant to the leveraged recapitalization. This unsecured $100 million revolving credit agreement was with a consortium of banks and had an expiration date of November 17, 2000. On November 2, 1998, the Company terminated this credit agreement and entered into a new $50 million credit agreement with two banks expiring November 2, 2000. Interest rates for loans under the agreement vary with the loan type and the level of various published interest rates. The credit agreement contains certain covenants relating to profitability, minimum levels of tangible net worth, limitations on additional debt, minimum levels of liquidity and prohibits the cash payment of dividends on common stock.
At March 31, 2000, the Company was not in compliance with certain covenants of the agreement, but, because the Company had no borrowings under this facility, no waiver was necessary.Issuance of 5 3/4% Convertible Subordinated Notes
In January 1997, the Company completed a $230 million private placement of the convertible notes to qualified institutional investors, resulting in net proceeds of approximately $222.5 million (after offering costs). Proceeds from the issuance of the convertible notes were used to repay the $47 million principal balance of the subordinated notes plus accrued interest to redeem the $59 million of Series A preferred stock issued pursuant to the leveraged recapitalization, and to fully repay the $41 million in long-term borrowings outstanding.
The convertible notes have an interest rate of 5 3/4% payable semiannually at January 15 and July 15, are convertible into shares of common stock of the Company at a conversion price of $23.75 per share, subject to adjustment in certain events, and mature January, 2004. The convertible notes are not redeemable prior to January 19, 2000. Thereafter the Company may redeem the convertible notes initially at 103.286% and at decreasing prices thereafter to 100% at maturity, in each case together with accrued interest. As of March 31, 2000, the fair value of the convertible notes, which is determined based on quoted market price, was $92.9 million.
6. Commitments and Contingencies
The Company leases equipment and office and manufacturing facilities under operating lease agreements. Future minimum payments under these noncancelable operating leases are as follows:
(in Fiscal Year Ending March 31, thousands) - ---------------------------------------- --------- 2001............................ 4,204 2002............................ 4,232 2003............................ 4,237 2004............................ 2,209 2005............................ 61 Thereafter...................... -- --------- $14,943 =========
Rent expense was approximately $4.7 million $4.1 million, and $1.0 million for the years ended March 31, 2000, 1999 and 1998 respectively.
Equipment and Facilities Purchase Commitments
As of March 31, 2000, the Company had commitments to purchase $5.1 million and $3.1 million of equipment and facilities, respectively.
Contingencies
Because of the nature of its activities, the company is at times
subject to pending and threatened legal actions which arise out of
the normal course of business. In the opinion of management, based
in part upon the advice of legal counsel, the disposition of all such
matters will not have a material effect on the consolidated financial
statements.
Severance Agreement Ronald L. Schauer, Chief Executive Officer and Chairman of the Board of HMT, is party to a severance agreement
with HMT pursuant to which, upon consummation of the merger (see Note 13), Mr. Schauer is entitled to receive a bonus in the total
amount of $1,187,500 to be paid in 60 equal monthly amounts beginning on the first day of the month following consummation of the
merger. In addition, upon the occurrence of certain events after consummation of the merger, Mr. Schauer may be entitled to
acceleration of his bonus amount and acceleration of his executive stock options to provide for up to an additional 24 months of
service credit toward the vesting of his stock options. 7. Mandatorily Redeemable Preferred Stock The Board of Directors is authorized without further action by the Company's stockholders, to issue 9,100,000
shares of Preferred Stock, in one or more series and to fix the rights, preferences and privileges thereof. 8. Stockholders' Equity Common Stock The holders of common stock are entitled to one vote per share on all matters to be voted on by stockholders.
In the event of the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities. The common stock has no preemptive rights or other subscription rights. All
outstanding shares of common stock are fully paid and nonassessable. The Company has reserved 9,684,210 shares of common stock in the
event of conversion of the convertible notes. The Company has not declared or paid cash dividends as of March 31, 2000. Warrants In connection with the leveraged recapitalization, the Company issued to the banks that provided the senior
bank term loan warrants to purchase 701,344 shares of common stock. During the fourth quarter of fiscal 1996, pursuant to the terms
of the warrant agreement, the Company exercised its right to repurchase 40% of the outstanding warrants for an immaterial amount. The
remaining warrants to purchase 420,794 shares of common stock were exercised during the first and third quarters of fiscal 1998. Stock Option Plans In November 1995, the Board of Directors authorized and reserved an aggregate of 12,400,000 shares of common
stock for issuance under the 1995 Management Stock Option Plan and the 1995 Stock Option Plan (the "1995 Plan"). In January 1996, the Board of Directors adopted the 1996 Non-Employees Directors' Stock Option Plan (the
"Directors' Plan") to provide for the automatic grant of options to purchase shares of common stock to non-employee directors of the
Company (other than employees or affiliates of Summit Partners, L.P. or Hitachi Metals). In the event of a merger, consolidation, reverse merger or reorganization, options outstanding under the
Directors' Plan will automatically become fully vested and will terminate if not exercised prior to such event. No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date it
was granted. The exercise price of options under the Directors' Plan will equal the fair market value of the common stock on the date
of grant. The Directors' Plan will terminate in January 2006, unless earlier terminated by the Board of Directors. In January 1996, the Board of Directors adopted the 1996 Equity Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for grants of incentive stock options to employees (including officers and employee directors) and of non-
statutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights to employees (including
officers and directors) and consultants of the Company. During 1999, the stockholders approved an amendment to the Incentive Plan
increasing the total number of shares authorized by 2,500,000 shares. The combined maximum number of shares of common stock
authorized to be issued pursuant to options granted under the Directors' Plan and the Incentive Plan is 5,500,000 shares.
A summary of activity under the Stock Plans is as follows:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
1995 Plan. Had compensation cost for the 1996 Plan been determined based on
the fair value at the grant date for the options granted in fiscal 2000, 1999
and 1998 consistent with the provisions of SFAS 123, the Company's net income
for fiscal 2000, 1999 and 1998 would have been reduced to the pro forma
amounts indicated below (amounts in thousands, except per share):
The effects of applying SFAS 123 on pro forma disclosures of net income and net income per share for
fiscal 2000, 1999 and 1998 are not likely to be representative of the pro forma effects on net income and earnings per share in
future years. The fair value of each option grant for the Incentive Plan is estimated on
the date of the grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: The weighted average expected life was calculated based on the vesting period and the anticipated
exercise behavior of the employees.
The following table summarizes the stock options outstanding at March 31, 2000
Employee Stock Purchase Plan In January 1996, the Board adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 500,000 shares of common stock. Under the terms of the Purchase Plan, employees may elect to contribute up to 15% of
their compensation toward the purchase of shares of the Company's common stock. The purchase price per share is the lesser of 85% of
the fair market value of the stock on the first day of enrollment during the six month offering period or the last day within the six
month offering period (generally April 30 and October 31 of each year). The total number of shares of stock issuable under the
Purchase Plan aggregated 3,000,000 shares as of March 31, 2000. In April 1999, the Company's Board of Directors approved an amendment
to the Purchase Plan, creating a two-year window which allows participants to purchase stock at the lesser of 85% of the fair market
value of the stock on the first day of enrollment or the last day of each of four six-month offering periods. Shares issued under the
Purchase Plan were 1,208,389, 371,103 and 278,255 in fiscal 2000, 1999 and 1998, respectively. For purposes of pro forma disclosure, the fair value of employee's purchase rights has been estimated using the
Black-Scholes model assuming risk-free interest rates ranging from 4.18% to 6.74% in fiscal 2000, 1999 and 1998. Volatility factors
of the expected market price were 98%, 81% and 69% for fiscal 2000, 1999 and 1998, respectively. The weighted-average expected life
of the purchase rights was six months for 2000 and eight months for fiscal 1999 and 1998.
The weighted-average fair value of the purchase rights granted in fiscal 2000, 1999 and 1998 was $2.93, $7.80 and
$11.48, respectively. 9. Income Taxes
The provision for income taxes consists of the following:
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
The components of the deferred tax assets and liabilities are as follows:
Although realization of the deferred tax assets is not assured, the Company believes that it is more
likely than not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance has been recorded. At March 31, 2000, the Company had federal net operating loss carryforwards of approximately $71 million, as well
as R&D and AMT credit carryforwards of $10 million, available to offset future taxable income. These net operating loss
carryforwards expire in the years 2009 to 2020. The R&D credit and AMT credit can be carried forward for twenty years and
indefinitely, respectively. Because the Leveraged Recapitalization caused an ownership change, as defined by tax law, the Company's
ability to use its net operating loss carryforwards from November 30, 1995 is limited to $810,000 each year. At March 31, 2000, the Company also had California net operating loss carryforwards of approximately $31.5 million
which expire in the years 2004 to 2005. In addition, the Company had California R&D credit of $3.6 million which can be carried
forward indefinitely, and $5.8 million Manufacturer's Investment Credit which can be carried forward for eight years. 10. Earnings Per Share
Reconciliation of the numerator and denominator of both basic and
diluted EPS is provided as follows:
11. Segment and Geographic Information The company operates in one business segment, which is the development, production and marketing of high-
performance thin-film media for use in hard disk drives. The Company primarily sells to original equipment manufacturers in the rigid
disk drive market. The company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", (SFAS131) at March 31, 1999. SFAS 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Under
SFAS 131, the Company's operations are treated as one operating segment as it only reports profit and loss information on an
aggregate basis to chief operating decision makers of the Company. The following table presents information about reportable segments by geography. Revenue is allocated to segments
based on the location to which the products were shipped. 12. 401(K) Plan The Company has a deferred tax savings 401(k) plan and generally matches 50% of employee contributions up to
4% of gross salaries. The employer contributions do not vest until the employee's second year of service, at which time the
contributions vest 100%. All regular, full-time employees are eligible to participate under the plan. The Company contributed to the
plan approximately $0.6 million, $0.6 million and $0.5 million in fiscal 2000, 1999 and 1998, respectively. 13. Subsequent Event In April 2000, the Company entered into a definitive merger agreement with Komag, Incorporated (Komag). Komag
designs, develops, manufactures and markets high-performance thin-film disks. Under the terms of the definitive merger agreement,
each issued and outstanding share of HMT stock will be converted into 0.9094 shares of the Komag's common stock. The merger will be
accounted for under purchase accounting and is subject to customary closing conditions, including regulatory approvals, the approval
of both companies' shareholders and lenders. The merger is expected to close in the third quarter of calendar 2000. If the merger
agreement is terminated by Komag or HMT upon the occurrence of a triggering event as defined in the definitive merger agreement, the
non-terminating party will pay the terminating party a termination fee of $5 million. 14. Unaudited Quarterly Financial Information
The following quarterly financial information should be read in conjunction
with Note 1.
Net sales and net income are subject to fluctuations as a result of
customer actions including the timing of mandated delivery schedules.
Report of Independent Accountants on Financial Statement Schedules To the Board of Directors and Stockholders of HMT Technology Corporation Our audits of the consolidated financial statements referred to in our report dated April 14, 2000, except for
note 13, which is as of April 26, 2000, appearing in the 2000 Annual Report to Stockholders of HMT Technology Corporation (which
report and consolidated financial statements are incorporated by reference in this annual report on Form 10K) also included an audit
of the financial statement schedules listed in Item 14(a)(2) of this form 10K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. PricewaterhouseCoopers LLP
HMT TECHNOLOGY CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. HMT TECHNOLOGY CORPORATION By: Ronald L. Schauer Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Ronald L. Schauer and Peter S. Norris, and each of them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitutes, may
lawfully do or cause to be done by virtue, hereof. Pursuant to the Securities Act of 1934, this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE By: /s/ RONALD L. SCHAUER Chief Executive Officer and June 9, 2000 Ronald L. Schauer Chairman of the Board (Principal Executive Officer) By: /s/ PETER S. NORRIS Executive Vice President, Finance, Chief June 9, 2000 Peter S. Norris Financial Officer and Treasurer (Principal Financial Officer) By: /s/ BRUCE C. EDWARDS Director June 9, 2000 Bruce C. Edwards By: /s/ DONALD P. BEADLE Director June 9, 2000 Donald P. Beadle By: /s/ RICHARD S. LOVE Director June 9, 2000 Richard S. Love By: /s/ HARRY G. VAN WICKLE Director June 9, 2000 Harry G. Van Wickle __________
The following are incorporated by reference from Registrants filings:
(1) Incorporated by reference in the Registrant's registration Statement
on Form S-1 No. 333-450 and amendments thereto.
(2) Incorporated by reference in the Registrant's Form 8-K, dated as of
January 21, 1997.
(3) Incorporated by reference in the Registrant's Form 10-K, for the
fiscal year ended March 31, 1997.
(4) Incorporated by reference in the Registrant's Form 10-Q, for the
fiscal quarter ended December 31, 1998.
(5) Incorporated by reference in the Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1999
(6) Incorporated by reference in the Registrant's Form 10-K, for the
fiscal year ended March 31, 1999.
Exhibit 2.1 MERGER AGREEMENT CONCERNING TRANSACTION INVOLVING KOMAG, INCORPORATED AND HMT TECHNOLOGY CORP. [FINAL EXECUTION COPY] AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG KOMAG, INCORPORATED, KHM, INC. AND HMT TECHNOLOGY CORP. DATED AS OF APRIL 26, 2000 TABLE OF CONTENTS PAGE ARTICLE I THE MERGER.............................................................................2 1.1 The merger........................................................................2 1.2 Effective Time;
Closing...........................................................2 1.3 Effect of the Merger..............................................................2 1.4 Certificate of Incorporation and Bylaws of Surviving Corporation..................2 1.5 Board of Directors; Officers......................................................2 1.6 Effect on Capital Stock...........................................................3 1.7 Surrender of Certificates.........................................................4 1.8 No Further Ownership Rights in Company Common Stock...............................5 1.9 Lost, Stolen or Destroyed Certificates............................................5 1.10 Tax and Accounting Consequences...................................................6 1.11 Taking of Necessary Action; Further Action........................................6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................6 2.1 Organization of the Company.......................................................6 2.2 The Company Capital Structure.....................................................7 2.3 Obligations With Respect to Capital Stock.........................................7 2.4 Authority.........................................................................7 2.5 SEC Filings; The Company Financial Statements.....................................8 2.6 Absence of Certain Changes or Events..............................................9 2.7 Taxes............................................................................10 2.8 Company Intellectual Property....................................................11 2.9 Compliance; Permits; Restrictions................................................13 2.10 Litigation.......................................................................13 2.11 Brokers' and Finders' Fees.......................................................13 2.12 Employee Benefit Plans...........................................................14 2.13 Absence of Liens and Encumbrances................................................15 2.14 Environmental Matters............................................................15 2.15 Labor Matters....................................................................16 2.16 Agreements, Contracts and Commitments............................................16 2.17 Statements; Proxy Statement/Prospectus...........................................17 2.18 Board Approval...................................................................18 2.19 State Takeover Statutes..........................................................18 2.20 Fairness Opinion.................................................................18 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...................18 3.1 Organization of Parent...........................................................18 3.2 Parent Capital Structure.........................................................19 3.3 Obligations With Respect to Capital Stock........................................19 3.4 Authority........................................................................20 3.5 SEC Filings; Parent Financial Statements.........................................21 -i- TABLE OF CONTENTS (CONTINUED) PAGE 3.6 Absence of Certain Changes or Events.............................................22 3.7 Taxes............................................................................22 3.8 Parent Intellectual Property.....................................................23 3.9 Compliance; Permits; Restrictions................................................24 3.10 Litigation.......................................................................24 3.11 Brokers' and Finders' Fees.......................................................25 3.12 Employee Benefit Plans...........................................................25 3.13 Absence of Liens and Encumbrances................................................26 3.14 Environmental Matters............................................................26 3.15 Labor Matters....................................................................27 3.16 Agreements, Contracts and Commitments............................................27 3.17 Statements; Proxy Statement/Prospectus...........................................28 3.18 Board Approval...................................................................28 3.19 State Takeover Statutes..........................................................29 3.20 Fairness Opinion.................................................................29 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE
TIME........................................29 4.1 Conduct of Business..............................................................29 ARTICLE V ADDITIONAL
AGREEMENTS.......................................................32 5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings................32 5.2 Meetings of Stockholders.........................................................32 5.3 Access to Information; Confidentiality...........................................34 5.4 No Solicitation..................................................................34 5.5 Public Disclosure................................................................38 5.6 Legal Requirements...............................................................38 5.7 Third Party Consents.............................................................39 5.8 FIRPTA...........................................................................39 5.9 Notification of Certain Matters..................................................39 5.10 Reasonable Efforts and Further Assurances........................................39 5.11 Stock Options; Employee Stock Purchase Plans.....................................40 5.12 Form S-8.........................................................................41 5.13 Indemnification..................................................................41 5.14 Tax-Free Reorganization..........................................................41 5.15 Nasdaq Qualification.............................................................41 5.16 Action by Boards of Directors....................................................41 5.17 The Company Affiliate Agreement..................................................41 5.18 Regulatory Filings; Reasonable Efforts...........................................42 5.19 Board of Directors; Officers.....................................................42 ARTICLE VI CONDITIONS TO THE MERGER...................................................43 6.1 Conditions to Obligations of Each Party to Effect the Merger.....................43 6.2 Additional Conditions to Obligations of the Company..............................44 6.3 Additional Conditions to the Obligations of Parent and Merger Sub................44 -ii- ARTICLE VII TERMINATION, AMENDMENT AND
WAIVER..........................................45 7.1 Termination......................................................................45 7.2 Notice of Termination; Effect of Termination.....................................48 7.3 Fees and Expenses................................................................48 7.4 Amendment........................................................................50 7.5 Extension; Waiver................................................................50 ARTICLE VIII GENERAL
PROVISIONS........................................................51 8.1 Non-Survival of Representations and
Warranties...................................51 8.2 Notices..........................................................................51 8.3 Interpretation; Knowledge........................................................52 8.4 Counterparts.....................................................................52 8.5 Entire Agreement.................................................................53 8.6 Severability.....................................................................53 8.7 Other Remedies; Specific Performance.............................................53 8.8 Governing Law....................................................................53 8.9 Rules of Construction............................................................53 8.10 Assignment.......................................................................53 8.11 WAIVER OF JURY TRIAL.............................................................54 -iii- INDEX OF EXHIBITS Exhibit A Parent Stock Option Agreement Exhibit B Company Stock Option Agreement Exhibit C Parent Voting Agreement Exhibit D Company Voting Agreement Exhibit E Company Affiliate Agreement AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and entered into as of April 26, 2000
among KOMAG, INCORPORATED, a Delaware corporation ("PARENT"), KHM, INC., a Delaware corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and HMT TECHNOLOGY CORP., a Delaware corporation (the "COMPANY"). RECITALS A. Upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware
General Corporation Law ("DELAWARE LAW"), Parent and the Company will enter into a business combination transaction pursuant to which
Merger Sub will merge with and into the Company (the "MERGER"). B. The Board of Directors of Parent (i) has determined that the Merger is consistent with and in furtherance
of the long-term business strategy of Parent and fair to, advisable and in the best interests of, Parent and its stockholders, (ii)
has approved this Agreement, the Merger and the other transactions contemplated by this Agreement and (iii) has determined to
recommend that the stockholders of Parent vote to approve the issuance of shares of Parent Common Stock (as defined below) to the
stockholders of the Company pursuant to the terms of the Merger. C. The Board of Directors of the Company (i) has determined that the Merger is consistent with and in
furtherance of the long-term business strategy of the Company and fair to, advisable and in the best interests of, the Company and
its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement and (iii)
has determined to recommend the adoption of this Agreement by the stockholders of the Company. D. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent's and the
Company's willingness to enter into this Agreement, Parent shall execute and deliver a Stock Option Agreement in favor of the Company
in substantially the form attached hereto as Exhibit A (the "PARENT STOCK OPTION AGREEMENT") and the Company shall execute and
deliver a Stock Option Agreement in favor of Parent in substantially the form attached hereto as Exhibit B (the "COMPANY STOCK OPTION
AGREEMENT" and, together with the Parent Stock Option Agreement, the "STOCK OPTION AGREEMENTS"). The Board of Directors of Parent and
the Company have each approved the Stock Option Agreements. E. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent's and the
Company's willingness to enter into this Agreement, certain affiliates of Parent shall enter into a Voting Agreement in substantially
the form attached hereto as Exhibit C (the "PARENT VOTING AGREEMENTS"), and certain affiliates of the Company shall enter into a
Voting Agreement in substantially the form attached hereto as Exhibit D (the "COMPANY VOTING AGREEMENTS" and, collectively with the
Parent Voting Agreements, the "VOTING AGREEMENTS"). F. Parent, the Company and Merger Sub desire to make certain representations and warranties and other
agreements in connection with the Merger. G. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"). NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and
conditions of this Agreement and the applicable provisions of Delaware Law, Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to as the "SURVIVING CORPORATION." 1.2 Effective Time; Closing. Subject to the provisions of this Agreement, the parties hereto shall cause the
Merger to be consummated by filing a Certificate of Merger (the "CERTIFICATE OF MERGER") with the Secretary of State of Delaware in
accordance with the relevant provisions of Delaware Law (the time of such filing (or such later time as may be agreed in writing by
the parties and specified in the Certificate of Merger) being the "EFFECTIVE TIME") as soon as practicable on or after the Closing
Date (as herein defined). The closing of the Merger (the "CLOSING") shall take place at the offices of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, at a time and date to be specified by the parties, which shall be no later than the second business
day after the satisfaction or waiver of the conditions set forth in Article VI, or at such other time, date and location as the
parties hereto agree in writing (the "CLOSING DATE"). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this
Agreement and the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation. 1.4 Certificate of Incorporation and Bylaws of Surviving Corporation. (a) The Certificate of Incorporation of Merger Sub as in effect immediately prior to the Effective Time shall
be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Certificate of
Incorporation; provided, however, that the name of the Surviving Corporation shall be the Company's current name. (b) The Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until thereafter amended. 1.5 Board of Directors; Officers. The initial directors of the Surviving Corporation shall be the directors of
Merger Sub immediately prior to the Effective Time, until their respective successors are duly elected or appointed and qualified.
The initial officers of the Surviving -2- Corporation shall be the officers of Merger Sub immediately prior to the Effective Time, until their respective
successors are duly appointed. 1.6 Effect on Capital Stock. Subject to the terms and conditions of this Agreement, at the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, the Company or the holders of any of the following securities,
the following shall occur: (a) Conversion of Company Common Stock. Each share of Common Stock, $0.001 par value per share, of the Company
(the "COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than any shares of Company Common
Stock to be canceled pursuant to Section 1.6(b)) will be canceled and extinguished and automatically converted (subject to Sections
1.6(e) and (f)) into 0.9094 (the "EXCHANGE RATIO") shares of Common Stock, par value $0.01 per share, of Parent (the "PARENT COMMON
STOCK") at the Effective Time. (b) Cancellation of Parent-Owned Stock. Each share of Company Common Stock held in the treasury of the Company
or owned by Merger Sub, Parent or any direct or indirect wholly-owned subsidiary of the Company or of Parent immediately prior to the
Effective Time shall be canceled and extinguished without any conversion thereof. (c) Stock Options; Employee Stock Purchase Plan. At the Effective Time, all options to purchase Company Common
Stock then outstanding under the Company's 1995 Management Stock Option Plan, 1995 Stock Option Plan, 1996 Non-Employees Directors'
Stock Option Plan and 1996 Equity Incentive Plan (collectively, the "COMPANY STOCK OPTION PLANS") shall be assumed by Parent in
accordance with Section 5.11 hereof. At the Effective Time, in accordance with the terms of the Company's Employee Stock Purchase
Plan (the "COMPANY ESPP"), all rights to purchase shares of Company Common Stock under the Company ESPP shall be converted (in
accordance with the Exchange Ratio) into rights to purchase shares of Parent Common Stock (with the number of shares rounded down to
the nearest whole share and the purchase price rounded up to the nearest whole cent) and all such converted rights shall be assumed
by Parent and the offering periods in effect under the Company ESPP immediately prior to the Effective Time shall be continued
substantially in accordance with the terms of the Company ESPP until the end of the offering periods in effect as of the Effective
Time. (d) Capital Stock of Merger Sub. Each share of Common Stock, $0.001 par value per share, of Merger Sub issued
and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, $0.001 par value, of the Surviving Corporation. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (e) Adjustments to Exchange Ratio. The Exchange Ratio and any other applicable numbers or amounts shall be
adjusted to reflect appropriately the effect of any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company Common Stock), extraordinary cash dividends,
reorganization, recapitalization, reclassification, combination, exchange of shares or other like -3- change with respect to Parent Common Stock or Company Common Stock occurring or having a record date on or after
the date hereof and prior to the Effective Time. (f) Fractional Shares. No fraction of a share of Parent Common Stock will be issued by virtue of the Merger,
but in lieu thereof each holder of shares of Company Common Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall receive from Parent
an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of (i) such fraction, multiplied by
(ii) the closing price of one share of Parent Common Stock on the trading day immediately prior to the Effective Time, as reported on
the Nasdaq National Market System ("NASDAQ"). (g) 5 3/4% Convertible Subordinated Notes. At the Effective Time, Parent shall execute and deliver to State
Street Bank and Trust Company of California, N.A., as trustee ("Trustee") pursuant to the indenture, dated as of January 15, 1997, to
which the Company is a party ("Indenture"), a supplemental indenture in form satisfactory to the Trustee providing that the holder of
each of the Company's outstanding 5 3/4% Convertible Subordinated Notes due 2004 ("Company Note") shall have the right to convert
such Company Note into Parent Common Stock, and that as of the Effective Time, the Conversion Price (as defined in the Indenture)
will be divided by the Exchange Ratio, as required by the Indenture. 1.7 Surrender of Certificates. (a) Exchange Agent. At or prior to the Effective Time, Parent shall select an institution reasonably
satisfactory to the Company to act as the exchange agent (the "EXCHANGE AGENT") in the Merger. (b) Parent to Provide Common Stock. Promptly after the Effective Time, Parent shall make available to the
Exchange Agent for exchange in accordance with this Article I, the shares of Parent Common Stock issuable pursuant to Section 1.6 in
exchange for outstanding shares of Company Common Stock, and cash in an amount sufficient for payment in lieu of fractional shares
pursuant to Section 1.6(f) and any dividends or distributions to which holders of shares of Company Common Stock may be entitled
pursuant to Section 1.7(d). (c) Exchange Procedures. Promptly after the Effective Time, Parent shall cause the Exchange Agent to mail to
each holder of record (as of the Effective Time) of a certificate or certificates (the "CERTIFICATES") which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose shares were converted into shares of Parent Common Stock
pursuant to Section 1.6, cash in lieu of any fractional shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.7(d), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have
such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates
in exchange for certificates representing shares of Parent Common Stock, cash in lieu of any fractional shares pursuant to Section
1.6(f) and any dividends or other distributions pursuant to Section 1.7(d). Upon surrender of Certificates for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, the holders of such Certificates shall be entitled to
receive in exchange therefor certificates -4- representing the number of whole shares of Parent Common Stock, payment in lieu of fractional shares which such
holders have the right to receive pursuant to Section 1.6(f) and any dividends or distributions payable pursuant to Section 1.7(d),
and the Certificates so surrendered shall forthwith be canceled. Until so surrendered, outstanding Certificates will be deemed from
and after the Effective Time, for all corporate purposes, subject to Section 1.7(d) as to the payment of dividends, to evidence the
ownership of the number of full shares of Parent Common Stock into which such shares of Company Common Stock shall have been so
converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section
1.6(f) and any dividends or distributions payable pursuant to Section 1.7(d). (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made
after the date of this Agreement with respect to Parent Common Stock with a record date after the Effective Time will be paid to the
holders of any unsurrendered Certificates with respect to the shares of Parent Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to applicable law, following surrender of any such
Certificates, the Exchange Agent shall deliver to the record holders thereof, without interest, certificates representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in lieu of fractional shares pursuant to Section 1.6(f)
hereof and the amount of any such dividends or other distributions with a record date after the Effective Time payable with respect
to such whole shares of Parent Common Stock. (e) Transfers of Ownership. If certificates for shares of Parent Common Stock are to be issued in a name other
than that in which the Certificates surrendered in exchange therefor are registered, it will be a condition of the issuance thereof
that the Certificates so surrendered will be properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the
issuance of certificates for shares of Parent Common Stock in any name other than that of the registered holders of the Certificates
surrendered, or established to the reasonable satisfaction of Parent or any agent designated by it that such tax has been paid or is
not payable. (f) No Liability. Notwithstanding anything to the contrary in this Section 1.8, neither the Exchange Agent,
Parent, the Surviving Corporation nor any party hereto shall be liable to a holder of shares of Parent Common Stock or Company Common
Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.8 No Further Ownership Rights in Company Common Stock . All shares of Parent Common Stock issued in
accordance with the terms hereof (including any cash paid in respect thereof pursuant to Section 1.6(f) and 1.7(d)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares -5- of Parent Common Stock, cash for fractional shares, if any, as may be required pursuant to Section 1.6(f) and any
dividends or distributions payable pursuant to Section 1.7(d); provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in
such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with
respect to the Certificates alleged to have been lost, stolen or destroyed. 1.10 Tax and Accounting Consequences. (a) It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning
of Section 368 of the Code. The parties hereto adopt this Agreement as a "plan of reorganization" within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations. (b) It is also intended by the parties hereto that the Merger shall qualify for accounting treatment as a
purchase transaction. 1.11 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action
is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title
and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and
directors of the Company and Merger Sub will take all such lawful and necessary action. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Merger Sub, subject to the exceptions specifically
disclosed in the disclosure letter supplied by the Company to Parent (the "COMPANY SCHEDULES"), as follows: 2.1 Organization of the Company (a) The Company and each of its subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; has the corporate power and authority to own, lease and operate its
assets and property and to carry on its business as now being conducted; and is duly qualified to do business and in good standing
(which respect to jurisdictions which recognize such concept) as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a Material Adverse Effect (as defined in Section 8.3) on the Company. (b) The Company has delivered to Parent a true and complete list of all of the Company's subsidiaries,
indicating the jurisdiction of incorporation of each subsidiary and the Company's equity interest therein. (c) The Company has delivered or made available to Parent a true and correct copy of the Certificate of
Incorporation and Bylaws of the Company and similar governing instruments of each of its material subsidiaries, each as amended to
date, and each such instrument is -6- in full force and effect. Neither the Company nor any of its subsidiaries is in violation of any of the provisions
of its Certificate of Incorporation or Bylaws or equivalent governing instruments. 2.2 The Company Capital Structure. The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $0.001 per share, of which there were 46,196,238 shares issued and outstanding and 9,684,210 shares
reserved for conversion of the 5_% Convertible Subordinated Notes due 2004 as of April 24, 2000, and 9,100,000 shares of Preferred
Stock, par value $0.001 per share, of which no shares are issued or outstanding. All outstanding shares of Company Common Stock are
duly authorized, validly issued, fully paid and nonassessable and are not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of the Company or any agreement or document to which the Company is a party or by which it is
bound. As of April 24, 2000, 5,440,016 shares of Company Common Stock were reserved for issuance to employees, consultants and non-
employee directors pursuant to Company Stock Option Plans, under which options are outstanding for an aggregate of 5,311,170 shares
and under which 128,846 shares are available for grant as of April 24, 2000 and 1,023,950 shares of Company Common Stock reserved for
issuance under the Company ESPP. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable, would be duly authorized, validly issued, fully paid and
nonassessable. 2.3 Obligations With Respect to Capital Stock. Except as set forth in Section 2.2, as of March 31, 2000 there
are no equity securities, partnership interests or similar ownership interests of any class of the Company, or any securities
exchangeable or convertible into or exercisable for such equity securities, partnership interests or similar ownership interests
issued, reserved for issuance or outstanding. Except for securities the Company owns, directly or indirectly through one or more
subsidiaries, as of March 31, 2000 there are no equity securities, partnership interests or similar ownership interests of any class
of any subsidiary of the Company, or any security exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests issued, reserved for issuance or outstanding. Except as set forth in Section
2.2, as of March 31, 2000 there are no options, warrants, equity securities, partnership interests or similar ownership interests,
calls, rights (including preemptive rights), commitments or agreements of any character to which the Company or any of its
subsidiaries is a party or by which it is bound obligating the Company or any of its subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or acquisition, of
any shares of capital stock of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant, equity security, partnership interest or similar ownership
interest, call, right, commitment or agreement. Except for the Company Voting Agreements, there are no registration rights and, to
the knowledge of the Company there are no voting trusts, proxies or other agreements or understandings with respect to any equity
security of any class of the Company or with respect to any equity security, partnership interest or similar ownership interest of
any class of any of its subsidiaries. 2.4 Authority. (a) The Company has all requisite corporate power and authority to enter into this Agreement and the Stock
Option Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, and the execution and delivery of the Stock Option Agreements and the
consummation of the -7- transactions contemplated thereby, have been duly authorized by all necessary corporate action on the part of the
Company, subject only to the adoption of this Agreement by the Company's stockholders and the filing and recordation of the
Certificate of Merger pursuant to Delaware Law. A vote of the holders of at least a majority of the outstanding shares of Company
Common Stock is required for the Company's stockholders to adopt this Agreement. This Agreement and the Company Stock Option
Agreements have been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent
and, if applicable, Merger Sub, constitute the valid and binding obligations of the Company, enforceable in accordance with their
respective terms, except as enforcement thereof may be limited by bankruptcy and other similar laws and general principles of equity.
The execution and delivery of this Agreement and the Stock Option Agreements by the Company do not, and the performance of this
Agreement and the Stock Option Agreements by the Company will not, (i) conflict with or violate the Certificate of Incorporation or
Bylaws of the Company or the equivalent organizational documents of any of its subsidiaries, (ii) subject to the adoption of this
Agreement by Parent's stockholders as contemplated in Section 5.2 and compliance with the requirements set forth in Section 2.4(b)
below, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its
subsidiaries or by which its or any of their respective properties is bound or affected, or (iii) result in any breach of, or
constitute a default (or an event that with notice or lapse of time or both would become a default) under, or impair the Company's
rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company
or any of its subsidiaries pursuant to, any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or its or any of their respective properties is bound or affected, except to the extent such conflict, violation,
breach, default, impairment or other effect would not, in the case of clause (ii) or (iii), individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Company. (b) No consent, approval, order or authorization of, or registration, declaration or filing with any court,
administrative agency or commission or other governmental authority or instrumentality ("GOVERNMENTAL ENTITY") is required by or with
respect to the Company in connection with the execution and delivery of this Agreement and the Stock Option Agreements or the
consummation of the transactions contemplated hereby or thereby, except for (i) applicable requirements of the Securities Act of
1933, as amended (the "SECURITIES ACT"), (ii) the filing and recordation of the Certificate of Merger with the Secretary of State of
Delaware, (iii) applicable requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (iv) the rules and
regulations of Nasdaq, (v) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws, and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR ACT"), and the laws of any foreign country and (vi) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not reasonably be expected to have a Material Adverse Effect on the Company or
Parent or have a material adverse effect on the ability of the parties to consummate the Merger. 2.5 SEC Filings; The Company Financial Statements. -8- (a) The Company has filed all forms, reports and documents the Company has been required to file with the SEC
since January 1, 1998, and has made available to Parent such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that the Company may file subsequent to the date hereof) are referred to
herein as the "COMPANY SEC REPORTS." As of their respective dates, the Company SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Reports, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of the Company's subsidiaries is required to file any forms, reports or other
documents with the SEC. (b) Each set of consolidated financial statements (including, in each case, any related notes thereto)
contained in the Company SEC Reports (the "COMPANY FINANCIALS"), including any Company SEC Reports filed after the date hereof until
the Closing, (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect
thereto, (ii) was prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial
statements, as may be permitted by the SEC on Form 10-Q under the Exchange Act) and (iii) fairly presented the consolidated financial
position of the Company and its subsidiaries at the respective dates thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring
year-end adjustments which were not, or are not expected to be, material in amount. The balance sheet of the Company contained in the
Company SEC Reports as of December 31, 1999 is hereinafter referred to as the "COMPANY BALANCE SHEET." The operating results for the
period ending March 31, 2000 in the Company's press release dated April 20, 2000 (the "COMPANY PRESS RELEASE") do not materially
differ from the financial statements that will be contained in the Company's next report on Form 10-K. Except as disclosed in the
Company Financials, neither the Company nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise)
of a nature required to be disclosed on a balance sheet or in the related notes to the consolidated financial statements prepared in
accordance with GAAP which are, individually or in the aggregate, material to the business, results of operations or financial
condition of the Company and its subsidiaries taken as a whole, except liabilities (i) provided for in the Company Balance Sheet, or
(ii) incurred since the date of the Company Balance Sheet in the ordinary course of business consistent with past practices and
immaterial in the aggregate. (c) The Company has heretofore furnished to Parent a complete and correct copy of any amendments or
modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act or the Exchange Act. 2.6 Absence of Certain Changes or Events. Since the date of the Company Balance Sheet, there has not been: (i)
any Material Adverse Effect on the Company, (ii) any material change by the Company in its accounting methods, principles or
practices, except as required by GAAP or -9- the rules and regulations promulgated by the SEC, or (iii) any revaluation by the Company of any of its assets,
including, without limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business. 2.7 Taxes. (a) Definition of Taxes. For the purposes of this Agreement, "TAX" or "TAXES" refers to any and all federal,
state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities relating to taxes,
including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties
and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person
with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. (i) The Company and each of its subsidiaries have timely filed all federal, state, local and foreign returns,
estimates, information statements and reports ("RETURNS") relating to Taxes required to be filed by the Company and each of its
subsidiaries with any Tax authority, except such Returns which are not material to the Company. The Company and each of its
subsidiaries have paid all Taxes shown to be due on such Returns. (ii) The Company and each of its subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, Taxes pursuant to the Federal Insurance Contribution Act, Taxes pursuant to the Federal
Unemployment Tax Act and other Taxes required to be withheld, except such Taxes which are not material to the Company. (iii) Neither the Company nor any of its subsidiaries has any material Tax deficiency outstanding, proposed or
assessed against the Company or any of its subsidiaries, nor has the Company or any of its subsidiaries executed any unexpired waiver
of any statute of limitations on or extending the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of the Company or any of its subsidiaries by any Tax
authority is presently in progress, nor has the Company or any of its subsidiaries been notified of any request for such an audit or
other examination. (v) No material adjustment relating to any Returns filed by the Company or any of its subsidiaries has been
proposed in writing formally or informally by any Tax authority to the Company or any of its subsidiaries or any representative
thereof. (vi) Neither the Company nor any of its subsidiaries has any liability for any material unpaid Taxes which has
not been accrued for or reserved on the Company Balance Sheet in accordance with GAAP, whether asserted or unasserted, contingent or
otherwise, which is material to the Company, other than any liability for unpaid Taxes that may have accrued since December 31, 1999
in connection with the operation of the business of the Company and its subsidiaries in the ordinary course. -10- (vii) There is no contract, agreement, plan or arrangement to which the Company or any of its subsidiaries is
a party as of the date of this Agreement, including but not limited to the provisions of this Agreement, covering any employee or
former employee of the Company or any of its subsidiaries that, individually or collectively, would reasonably be expected to give
rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code. There is no
contract, agreement, plan or arrangement to which the Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries is bound as of the date of this Agreement to compensate any individual for excise taxes paid pursuant to Section 4999 of
the Code. (viii) Neither the Company nor any of its subsidiaries has filed any consent agreement under Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by the Company or any of its subsidiaries. (ix) Neither the Company nor any of its subsidiaries is party to or has any obligation under any tax-sharing,
tax indemnity or tax allocation agreement or arrangement. (x) None of the Company's or its subsidiaries' assets are tax exempt use property within the meaning of
Section 168(h) of the Code. (xi) Neither the Company nor any of its subsidiaries has constituted either a "distributing corporation" or a
"controlled corporation" in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (x) in the two
years prior to the date of this Agreement or (y) in a distribution which could otherwise constitute part of a "plan" or "series or
related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the Merger. 2.8 Company Intellectual Property. For the purposes of this Agreement, the following terms have the following
definitions: "INTELLECTUAL PROPERTY" shall mean any or all of the following and all rights in, arising out of, or
associated therewith: (i) all United States, international and foreign patents and applications therefor and all reissues, divisions,
renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists,
and all documentation relating to any of the foregoing; (iii) all copyrights, copyrights registrations and applications therefor, and
all other rights corresponding thereto throughout the world; (iv) all industrial designs and any registrations and applications
therefor throughout the world; (v) all trade names, logos, common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (vi) all databases and data collections and all rights therein
throughout the world; (vii) all moral and economic rights of authors and inventors, however denominated, throughout the world, and
(viii) any similar or equivalent rights to any of the foregoing anywhere in the world. "COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property that is owned by, or exclusively licensed
to, the Company. -11- "REGISTERED INTELLECTUAL PROPERTY" means all United States, international and foreign: (i) patents and patent
applications (including provisional applications); (ii) registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations or applications related to trademarks; (iii) registered copyrights and applications for
copyright registration; and (iv) any other Intellectual Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any state, government or other public legal authority. "COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered Intellectual Property owned by, or
filed in the name of, the Company or any of its subsidiaries. (a) Section 2.8(a) of the Company Schedules is a complete and accurate list of all the Company's issued
patents, and the jurisdictions in which each such patent has been issued or registered. (b) No Company Intellectual Property or product or service of the Company or any of its subsidiaries is
subject to any judicial proceeding or outstanding decree, order, judgment or stipulation restricting in any manner the use, transfer,
or licensing thereof by the Company or any of its subsidiaries, or which may affect the validity, use or enforceability of such
Company Intellectual Property. (c) The Company owns and has good and exclusive title to, or has a license for (sufficient for the conduct of
its business as currently conducted), each material item of Company Intellectual Property or other Intellectual Property used by the
Company free and clear of any lien or encumbrance (excluding licenses and related restrictions); and the Company is the exclusive
owner of all trademarks and trade names used in connection with the operation or conduct of the business of the Company and its
subsidiaries, including the sale of any products or the provision of any services by the Company and its subsidiaries. (d) To the extent that any material Intellectual Property has been developed or created by a third party for
the Company or any of its subsidiaries, the Company has a written agreement with such third party with respect thereto and the
Company either (i) has obtained ownership by operation of law or by valid assignment and is the exclusive owner of, or (ii) has
obtained a license (sufficient for the conduct of its business as currently conducted) to all such third party's Intellectual
Property in such work, material or invention by operation of law or by valid assignment. (e) To the knowledge of the Company, the operation of the business of the Company and its subsidiaries as such
business currently is conducted, including the Company's and its subsidiaries' design, development, manufacture, marketing and sale
of the products or services of the Company and its subsidiaries (including products currently under development), has not, does not
and will not infringe any patent of, or infringe or misappropriate any other Intellectual Property of, any third party. (f) Neither the Company nor any of its subsidiaries has received notice from any third party that the
operation of the business of the Company or any of its subsidiaries or any act, -12- product or service of the Company or any of its subsidiaries, infringes or misappropriates the Intellectual
Property of any third party. (g) The Company and each of its subsidiaries has taken reasonable steps to protect the Company's and its
subsidiaries' rights in the Company's confidential information and trade secrets that it wishes to protect or any trade secrets or
confidential information of third parties provided to the Company or any of its subsidiaries, and, without limiting the foregoing,
each of the Company and its subsidiaries has and enforces a policy requiring each employee and contractor to execute a proprietary
information/confidentiality agreement in reasonable and customary form provided to Parent and all current and former employees and
contractors of the Company and any of its subsidiaries have executed such an agreement, except where the failure to do so is not
reasonably expected to be material to the Company. 2.9 Compliance; Permits; Restrictions. (a) Neither the Company nor any of its subsidiaries is, in any material respect, in conflict with, or in
default or violation of (i) any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries
or by which its or any of their respective properties is bound or affected except for any conflicts, defaults or violations that
(individually or in the aggregate) would not cause the Company to lose any material benefit or incur any material liability, or (ii)
any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or
any of their respective properties is bound or affected. To the knowledge of the Company, no investigation or review by any
Governmental Entity is pending or threatened against the Company or its subsidiaries, nor has any Governmental Entity indicated an
intention to conduct the same. There is no material agreement, judgment, injunction, order or decree binding upon the Company or any
of its subsidiaries which has or could reasonably be expected to have the effect of prohibiting or materially impairing the conduct
of business by the Company as currently conducted. (b) The Company and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals
from governmental authorities which are material to the operation of the business of the Company (collectively, the "COMPANY
PERMITS"). The Company and its subsidiaries are in compliance in all material respects with the terms of Company Permits. 2.10 Litigation. As of the date of this Agreement, and except as disclosed in the Company SEC Documents, there
is no action, suit, proceeding, claim, arbitration or investigation pending, or as to which the Company or any of its subsidiaries
has received any notice of assertion nor, to the Company's knowledge, is there a threatened action, suit, proceeding, claim,
arbitration or investigation against the Company or any of its subsidiaries which reasonably would be likely to be material to the
Company, or which in any manner challenges or seeks to prevent, enjoin, alter or delay any of the transactions contemplated by this
Agreement. 2.11 Brokers' and Finders' Fees. Except for fees payable to Salomon Smith Barney Inc. pursuant to an
engagement letter dated October 15, 1999, a copy of which has been provided to Parent, the Company has not incurred, nor will it
incur, directly or indirectly, any liability for -13- brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby. 2.12 Employee Benefit Plans. (a) All employee compensation, incentive, fringe or benefit plans, programs, policies, commitments, agreements
or other arrangements (whether or not set forth in a written document and including, without limitation, all "employee benefit plans"
within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) covering any active
or former employee, director or consultant of the Company ("COMPANY EMPLOYEE" which shall for this purpose mean an employee of the
Company or an Affiliate (as defined below)), any subsidiary of the Company or any trade or business (whether or not incorporated)
which is a member of a controlled group or which is under common control with the Company within the meaning of Section 414 of the
Code (an "AFFILIATE"), or with respect to which the Company has or, to its knowledge, may in the future have liability, are listed in
Section 2.12(a) of the Company Schedules (the "COMPANY PLANS"). Company will provide or make available correct and complete copies of
all documents embodying each Company Plan and all documents relevant to the administration of such Plans prior to the Closing Date.
(b) Each Company Plan has been maintained and administered in all material respects in compliance with its
terms and with the requirements prescribed by any and all statutes, orders, rules and regulations (foreign or domestic), including
but not limited to ERISA and the Code, which are applicable to such Company Plans. All contributions, reserves or premium payments
required to be made or accrued as of the date hereof to the Company Plans have been timely made or accrued. Company has performed in
all material respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge
of any default or violation by any other party to each Plan. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of Plan activities) has been brought, or to the knowledge of Company is threatened against or with
respect to any such Plan. There are no audits, inquiries or proceedings pending or to the knowledge of the Company, threatened by the
IRS or U.S. Department of Labor with respect to any Company Plan. Any Company Plan intended to be qualified under Section 401(a) of
the Code and each trust intended to qualify under Section 501(a) of the Code: (i) has either obtained a favorable determination,
notification, advisory and/or opinion letter, as applicable, as to its tax-qualified status from the IRS or still has a remaining
period of time under applicable Treasury Regulations or IRS pronouncements in which to apply for such letter and to make any
amendments necessary to obtain a favorable determination, and (ii) incorporates or has been amended to incorporate all provisions
required to comply with the Tax Reform Act of 1986 and subsequent legislation. (c) Neither the Company, any of its subsidiaries, nor any of their Affiliates has at any time ever maintained,
established, sponsored, participated in, or contributed to any plan subject to Title IV of ERISA or Section 412 of the Code and at no
time has the Company contributed to or been requested to contribute to any "multiemployer plan," as such term is defined in ERISA.
Neither the Company, any of its subsidiaries, nor any officer or director of the Company or any of its subsidiaries is subject to any
material liability or penalty under Section 4975 through 4980B of the Code or Title I of ERISA. No "prohibited transaction," within
the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 4975 of the Code
-14- and Section 408 of ERISA, has occurred with respect to any Company Plan which could subject the Company or its
Affiliates to material liability. (d) Neither the Company nor any of its subsidiaries is bound by or subject to (and none of its respective
assets or properties is bound by or subject to) any arrangement with any labor union. No employee of the Company or any of its
subsidiaries is represented by any labor union or covered by any collective bargaining agreement and, to the knowledge of the
Company, no campaign to establish such representation is in progress. There is no pending or, to the knowledge of the Company,
threatened labor dispute involving the Company or any of its subsidiaries and any group of its employees nor has the Company or any
of its subsidiaries experienced any labor interruptions over the past three (3) years, and the Company and its subsidiaries consider
their relationships with their employees to be good. The Company is in compliance in all material respects with all applicable
material foreign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours. (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute, bonus or otherwise) becoming
due to any Company Employee under any Company Plan or otherwise, (ii) materially increase any benefits otherwise payable under any
Company Plan, or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (f) No Company Plan promises or provides retiree medical benefits to any person except as required by
applicable law, and neither Company nor any of its Affiliates has represented, promised or contracted (whether in oral or written
form) to provide such retiree benefits to any Company Employee or dependent thereof except as required by law. 2.13 Absence of Liens and Encumbrances. The Company and each of its subsidiaries has good and valid title to,
or, in the case of leased properties and assets, valid leasehold interests in, all of its material tangible properties and assets,
real, personal and mixed, used in its business, free and clear of any liens or encumbrances except as reflected in the Company
Financials and except for liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, as do not
materially detract from the value of or materially interfere with the present use of the property affected thereby. 2.14 Environmental Matters. Except as would not reasonably be likely to result in a material liability to the
Company (in any individual case or in the aggregate), (i) neither the Company nor any of its subsidiaries has transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to any substance that has been designated by any
Governmental Entity or by applicable federal, state or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or
defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to said laws, but excluding office and janitorial supplies (a "HAZARDOUS MATERIAL") in violation of
any law in effect on or before the -15- Closing Date, (ii) neither the Company nor any of its subsidiaries has disposed of, transported, sold, used,
released, exposed its employees or others to or manufactured any product containing a Hazardous Material (collectively, "HAZARDOUS
MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior
to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity and (iii) as a
result of the actions of the Company or any of its subsidiaries or any affiliate of the Company, or, to the Company's knowledge, as a
result of any actions of any third party or otherwise, no underground storage tank is present in, on or under any property that the
Company or any of its subsidiaries has at any time owned, operated, occupied or leased and no amount of any Hazardous Material is
present under any property and in the land, ground water and surface water of any property, that the Company or any of its
subsidiaries has at any time owned, operated, occupied or leased. 2.15 Labor Matters. (i) There are no controversies pending or, to the knowledge of each of the Company and its
respective subsidiaries, threatened, between the Company or any of its subsidiaries and any of their respective employees, and (ii)
as of the date of this Agreement, neither the Company nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work
stoppages or lockouts, or threats thereof, by or with respect to any employees of the Company or any of its subsidiaries. 2.16 Agreements, Contracts and Commitments. As of the date of this Agreement, neither Company nor any of its
subsidiaries is a party to or is bound by: (a) any employment or consulting agreement, contract or commitment with any officer or director or higher
level employee or member of the Company's Board of Directors, other than those that are terminable by the Company or any of its
subsidiaries on no more than thirty (30) days' notice without liability or financial obligation to the Company; (b) any agreement, contract or commitment containing any covenant that materially limits the right of the
Company or any of its subsidiaries to engage in any line of business or to compete with any person or granting any exclusive
distribution rights; (c) any agreement, contract or commitment currently in force relating to the disposition or acquisition by the
Company or any of its subsidiaries after the date of this Agreement of a material amount of assets not in the ordinary course of
business or pursuant to which the Company has any material ownership interest in any corporation, partnership, joint venture or other
business enterprise other than the Company's subsidiaries; (d) any dealer, distributor, joint marketing or development agreement currently in force under which the
Company or any of its subsidiaries have continuing material obligations to jointly market any product, technology or service and
which may not be canceled without penalty upon notice of ninety (90) days or less, or any material agreement pursuant to which the
Company or any of its subsidiaries have continuing material obligations to jointly develop any intellectual property that will not be
owned, in whole or in part, by the Company or any of its subsidiaries and which may not be canceled without penalty upon notice of
ninety (90) days or less; -16- (e) any agreement, contract or commitment currently in force to license any third party to manufacture or
reproduce any Company product or technology or any agreement, contract or commitment currently in force to sell or distribute any
Company products, service or technology except agreements with distributors or sales representative in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and substantially in the form previously provided to Parent; (f) any mortgages, indentures, guarantees, loans or credit agreements, security agreements or other agreements
or instruments relating to the borrowing of money or extension of credit; (g) any settlement agreement entered into within three (3) years prior to the date of this Agreement; or (h) any other agreement, contract or commitment that has a value of $500,000 or more individually. Neither the Company nor any of its subsidiaries, nor to the Company's knowledge any other party to a Company
Contract (as defined below), is in breach, violation or default under, and neither the Company nor any of its subsidiaries has
received written notice that it is in breach, violation or default under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which the Company or any of its subsidiaries is a party or by which it is bound that are
required to be disclosed in the Company Schedules (any such agreement, contract or commitment, a "COMPANY CONTRACT") in such a manner
as would permit any other party to cancel or terminate any such Company Contract, or would permit any other party to seek material
damages (for any or all of such breaches, violations or defaults, in the aggregate). 2.17 Statements; Proxy Statement/Prospectus. None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of the Parent Common Stock in or as a result of the Merger (the "REGISTRATION STATEMENT") will at the
time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements therein not misleading. The proxy
statement/prospectus to be sent to the stockholders of the Company and stockholders of Parent in connection with the meeting of the
Company's stockholders to consider the adoption of this Agreement (the "COMPANY STOCKHOLDERS' MEETING") and in connection with the
meeting of Parent's stockholders to consider the approval of the issuance of shares of Parent Common Stock pursuant to the terms of
the Merger (the "PARENT STOCKHOLDERS' MEETING") (such proxy statement/prospectus as amended or supplemented is referred to herein as
the "PROXY STATEMENT") will not, on the date the Proxy Statement is first mailed to the Company's stockholders or Parent's
stockholders, or at the time of the Company Stockholders' Meeting or the Parent Stockholders' Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company
Stockholders' Meeting or the Parent Stockholders' Meeting which has become false or misleading. The Proxy Statement will comply as to
form in all material respects -17- with the provisions of the Exchange Act and the rules and regulations thereunder. If at any time prior to the
Effective Time, any event relating to the Company or any of its affiliates, officers or directors is required to be discovered by the
Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, the Company
shall promptly inform Parent. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any
information supplied or to be supplied by Parent or Merger Sub which is, will be, or is required to be contained in any of the
foregoing documents. 2.18 Board Approval. The Board of Directors of the Company has, as of the date of this Agreement, (i)
determined that the Merger is fair to, advisable and in the best interests of the Company and its stockholders, (ii) determined to
recommend that the stockholders of the Company adopt this Agreement and (iii) duly approved the Merger, this Agreement and the
transactions contemplated hereby. 2.19 State Takeover Statutes. The Board of Directors of the Company has approved the Merger, this Agreement,
the Stock Option Agreements, the Parent Voting Agreement and the transactions contemplated hereby and thereby, and such approval is
sufficient to render inapplicable to the Merger, this Agreement, the Stock Option Agreements, the Parent Voting Agreement and the
transactions contemplated hereby and thereby the provisions of Section 203 of Delaware Law to the extent, if any, such section is
applicable to the Merger, this Agreement, the Stock Option Agreements, the Parent Voting Agreement and the transactions contemplated
hereby and thereby. No other state takeover statute or similar statute or regulation applies to or purports to apply to the Merger,
this Agreement, the Stock Option Agreements, the Parent Voting Agreement or the transactions contemplated hereby and thereby. 2.20 Fairness Opinion. The Company has received an opinion from Salomon Smith Barney Inc., dated as of the
date hereof, to the effect that as of the date hereof, the Exchange Ratio is fair to the Company's stockholders (other than Parent)
from a financial point of view and will deliver to Parent a written confirmation of such opinion as soon as practicable after the
date hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company, subject to the exceptions specifically
disclosed in the disclosure letter supplied by Parent to the Company (the "PARENT SCHEDULES"), as follows: 3.1 Organization of Parent. (a) Parent and each of its subsidiaries is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation; has the corporate power and authority to own, lease and operate its assets
and property and to carry on its business as now being conducted and as proposed to be conducted; and is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a
Material Adverse Effect (as defined in Section 8.3) on Parent. -18- (b) Parent has delivered to the Company a true and complete list of all of Parent's subsidiaries, indicating
the jurisdiction of incorporation of each subsidiary and Parent's equity interest therein. (c) Parent has delivered or made available to the Company a true and correct copy of the Certificate of
Incorporation and Bylaws of Parent and similar governing instruments of each of its material subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Parent nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws or equivalent governing instruments. 3.2 Parent Capital Structure. The authorized capital stock of Parent consists of 150,000,000 shares of Common
Stock, par value $0.01 per share, of which 66,054,041 shares are issued and outstanding as of April 19, 2000 and 1,000,000 shares of
Preferred Stock, par value $0.01 per share, of which no shares are issued or outstanding. The authorized capital stock of Merger Sub
consists of 1,000 shares of Common Stock, par value $0.001 per share, all of which, as of the date hereof, are issued and outstanding
and are held by Parent. All outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid and non-
assessable and are not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of Parent or any
agreement or document to which Parent is a party or by which it is bound. As of April 2, 2000, 17,138,042 shares of Parent Common
Stock were reserved for issuance to employees, consultants and non-employee directors pursuant to Parent's 1997 Supplemental Stock
Option Plan, Restated 1987 Stock Option Plan and Komag Material Technology, Inc. Stock Option Plan (the "PARENT STOCK OPTION PLAN"),
under which options are outstanding for 14,011,761 shares and under which 3,126,281 shares are available for grant as of April 2,
2000. As of April 2, 2000, 7,400,000 shares of Parent Common Stock reserved for issuance under the 1988 Employee Stock Purchase Plan
(the "PARENT ESPP"). All shares of Parent Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, would be duly authorized, validly issued, fully paid and
nonassessable. 3.3 Obligations With Respect to Capital Stock. Except as set forth in Section 3.2 as of March 31, 2000, there
are no equity securities, partnership interests or similar ownership interests of any class of Parent, or any securities exchangeable
or convertible into or exercisable for such equity securities, partnership interests or similar ownership interests issued, reserved
for issuance or outstanding. Except for securities Parent owns, directly or indirectly through one or more subsidiaries, as of March
31, 2000 there are no equity securities, partnership interests or similar ownership interests of any class of any subsidiary of
Parent, or any security exchangeable or convertible into or exercisable for such equity securities, partnership interests or similar
ownership interests issued, reserved for issuance or outstanding. Except as set forth in Section 3.2, as of March 31, 2000 there are
no options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive
rights), commitments or agreements of any character to which Parent or any of its subsidiaries is a party or by which it is bound
obligating Parent or any of its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase,
redeem or otherwise acquire, or cause the repurchase, redemption or acquisition, of any shares of capital stock of Parent or any of
its subsidiaries or obligating Parent or any of its subsidiaries to grant, extend, accelerate the vesting of or enter into any such
option, warrant, equity security, partnership interest or similar ownership interest, call, right, commitment or agreement. Except
for the Parent Voting Agreements, there are no registration rights and, to the knowledge of Parent there -19- are no voting trusts, proxies or other agreements or understandings with respect to any equity security of any
class of Parent or with respect to any equity security, partnership interest or similar ownership interest of any class of any of its
subsidiaries. 3.4 Authority. (a) Parent has all requisite corporate power and authority to enter into this Agreement and the Stock Option
Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and the execution and delivery of the Stock Option Agreements and the
consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate action on the part of
Parent, subject only to the approval of the issuance of Parent Common stock in the Merger by Parent's stockholders and the filing and
recordation of the Certificate of Merger pursuant to Delaware Law. A vote of the holders of at least a majority of the shares of the
Parent Common Stock present at the Parent Stockholders' meeting (defined below) is required for Parent's stockholders to approve the
issuance of Parent Common Stock in the Merger. This Agreement and the Stock Option Agreements have been duly executed and delivered
by Parent and, assuming the due authorization, execution and delivery by the Company and, if applicable, Merger Sub, constitute the
valid and binding obligations of Parent, enforceable in accordance with their respective terms, except as enforcement thereof may be
limited by bankruptcy and other similar laws and general principles of equity. The execution and delivery of this Agreement and the
Stock Option Agreements by Parent do not, and the performance of this Agreement and the Stock Option Agreements by Parent will not,
(i) conflict with or violate the Certificate of Incorporation or Bylaws of Parent the equivalent organizational documents of any of
its subsidiaries, (ii) subject to the approval of the issuance of Parent Common Stock in the Merger by Parent's stockholders as
contemplated in Section 5.2 and compliance with the requirements set forth in Section 3.4(b) below, conflict with or violate any law,
rule, regulation, order, judgment or decree applicable to Parent or any of its subsidiaries or by which its or any of their
respective properties is bound or affected, or (iii) result in any breach of, or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or impair Parent's rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the properties or assets of Parent or any of its subsidiaries pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any
of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties is bound or
affected, except to the extent such conflict, violation, breach, default, impairment or other effect would not, in the case of clause
(ii) or (iii), individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent. (b) No consent, approval, order or authorization of, or registration, declaration or filing with any
Governmental Entity is required by or with respect to Parent in connection with the execution and delivery of this Agreement and the
Stock Option Agreements or the consummation of the transactions contemplated hereby or thereby, except for (i) applicable
requirements of the Securities Act, (ii) the filing and recordation of the Certificate of Merger with the Secretary of State of
Delaware, (iii) applicable requirements of the Exchange Act, (iv) the rules and regulations of Nasdaq; (v) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws
and the HSR Act and the laws of -20- any foreign country and (vi) such other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not reasonably be expected to have a Material Adverse Effect on Parent or the Company or have a material
adverse effect on the ability of the parties to consummate the Merger. 3.5 SEC Filings; Parent Financial Statements. (a) Parent has filed all forms, reports and documents Parent has been required to file with the SEC since
January 1, 1998, and has made available to the Company such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that Parent may file subsequent to the date hereof) are referred to herein as
the "PARENT SEC REPORTS." As of their respective dates, the Parent SEC Reports (i) were prepared in accordance with the requirements
of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Reports, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were
made, not misleading. None of Parent's subsidiaries is required to file any forms, reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case, any related notes thereto)
contained in the Parent SEC Reports (the "PARENT FINANCIALS"), including any Parent SEC Reports filed after the date hereof until the
Closing, (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto,
(ii) was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated
in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (iii) fairly presented the consolidated financial position of Parent and its subsidiaries at the respective dates
thereof and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end adjustments which were not, or are not expected to be,
material in amount. The balance sheet of Parent contained in the Parent SEC Reports as of January 2, 2000 is hereinafter referred to
as the "PARENT BALANCE SHEET." Except as disclosed in the Parent Financials, neither Parent nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related
notes to the consolidated financial statements prepared in accordance with GAAP which are, individually or in the aggregate, material
to the business, results of operations or financial condition of Parent and its subsidiaries taken as a whole, except liabilities (i)
provided for in the Parent Balance Sheet, or (ii) incurred since the date of the Parent Balance Sheet in the ordinary course of
business consistent with past practices and immaterial in the aggregate. (c) Parent has heretofore furnished to the Company a complete and correct copy of any amendments or
modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to the Securities Act or the Exchange Act. -21- 3.6 Absence of Certain Changes or Events. Since the date of the Parent Balance Sheet, there has not been: (i)
any Material Adverse Effect on Parent, (ii) any material change by Parent in its accounting methods, principles or practices, except
as required by GAAP or the rules and regulations promulgated by the SEC, or (iii) any revaluation by Parent of any of its assets,
including, without limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business. 3.7 Taxes. (a) Parent and each of its subsidiaries have timely filed all Returns relating to Taxes required to be filed
by Parent and each of its subsidiaries with any Tax authority, except such Returns which are not material to Parent. Parent and each
of its subsidiaries have paid all Taxes shown to be due on such Returns. (b) Parent and each of its subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, Taxes pursuant to the Federal Insurance Contribution Act, Taxes pursuant to the Federal
Unemployment Tax Act and other Taxes required to be withheld, except such Taxes which are not material to Parent. (c) Neither Parent nor any of its subsidiaries has any material Tax deficiency outstanding, proposed or
assessed against Parent or any of its subsidiaries, nor has Parent or any of its subsidiaries executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or collection of any Tax. (d) No audit or other examination of any Return of Parent or any of its subsidiaries by any Tax authority is
presently in progress, nor has Parent or any of its subsidiaries been notified of any request for such an audit or other examination.
(e) No material adjustment relating to any Returns filed by Parent or any of its subsidiaries has been
proposed in writing formally or informally by any Tax authority to Parent or any of its subsidiaries or any representative thereof.
(f) Neither Parent nor any of its subsidiaries has any liability for any material unpaid Taxes which has not
been accrued for or reserved on Parent Balance Sheet in accordance with GAAP, whether asserted or unasserted, contingent or
otherwise, which is material to Parent, other than any liability for unpaid Taxes that may have accrued since December 31, 1999 in
connection with the operation of the business of Parent and its subsidiaries in the ordinary course. (g) There is no contract, agreement, plan or arrangement to which Parent or any of its subsidiaries is a party
as of the date of this Agreement, including but not limited to the provisions of this Agreement, covering any employee or former
employee of Parent or any of its subsidiaries that, individually or collectively, would reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code. There is no contract,
agreement, plan or arrangement to which Parent or any of its subsidiaries is a party or by which it or any of its subsidiaries is
bound as of the date hereof to compensate any individual for excise taxes paid pursuant to Section 4999 of the Code. -22- (h) Neither Parent nor any of its subsidiaries has filed any consent agreement under Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by Parent or any of its subsidiaries. (i) Neither Parent nor any of its subsidiaries is party to or has any obligation under any tax-sharing, tax
indemnity or tax allocation agreement or arrangement. (j) None of Parent's or its subsidiaries' assets are tax exempt use property within the meaning of Section
168(h) of the Code. (k) Neither the Parent nor any of its subsidiaries has constituted either a "distributing corporation" or a
"controlled corporation" in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (x) in the two
years prior to the date of this Agreement or (y) in a distribution which could otherwise constitute part of a "plan" or "series or
related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the Merger. 3.8 Parent Intellectual Property. For the purposes of this Agreement, the following terms have the following
definitions: "PARENT INTELLECTUAL PROPERTY" shall mean any Intellectual Property that is owned by, or exclusively licensed
to, Parent. "PARENT REGISTERED INTELLECTUAL PROPERTY" means all of the Registered Intellectual Property owned by, or filed
in the name of, Parent or any of its subsidiaries. (a) Section 3.8(a) of the Parent Schedules is a complete and accurate list of all Parent Registered
Intellectual Property and specifies, where applicable, and the jurisdictions in which each such item of Parent Registered
Intellectual Property has been issued or registered. (b) No Parent Intellectual Property or product or service of Parent or any of its subsidiaries is subject to
any proceeding or outstanding decree, order, judgment, or stipulation restricting in any manner the use, transfer, or licensing
thereof by Parent or any of its subsidiaries, or which may affect the validity, use or enforceability of such Parent Intellectual
Property. (c) Parent owns and has good and exclusive title to, or has a license for (sufficient for the conduct of its
business as currently conducted), each material item of Parent Intellectual Property or other Intellectual Property used by Parent
free and clear of any lien or encumbrance (excluding licenses and related restrictions); and Parent is the exclusive owner of all
trademarks and trade names used in connection with the operation or conduct of the business of Parent and its subsidiaries, including
the sale of any products or the provision of any services by Parent and its subsidiaries. (d) To the extent that any material Intellectual Property has been developed or created by a third party for
Parent or any of its subsidiaries, Parent has a written agreement with such third party with respect thereto and Parent either (i)
has obtained ownership of, by operation of law or by valid assignment and is the exclusive owner of, or (ii) has obtained a license
(sufficient for the -23- conduct of its business as currently conducted) to all such third party's Intellectual Property in such work,
material or invention by operation of law or by valid assignment. (e) To the knowledge of Parent, the operation of the business of Parent and its subsidiaries as such business
currently is conducted, including Parent's and its subsidiaries' design, development, manufacture, marketing and sale of the products
or services of Parent and its subsidiaries (including products currently under development) has not, does not and will not infringe
any patent of, or infringe or misappropriate any other Intellectual Property of, any third party. (f) Neither Parent nor any of its subsidiaries has received notice from any third party that the operation of
the business of Parent or any of its subsidiaries or any act, product or service of Parent or any of its subsidiaries, infringes or
misappropriates the Intellectual Property of any third party. (g) Parent and each of its subsidiaries has taken reasonable steps to protect Parent's and its subsidiaries'
rights in Parent's confidential information and trade secrets that it wishes to protect or any trade secrets or confidential
information of third parties provided to Parent or any of its subsidiaries, and, without limiting the foregoing, each of Parent and
its subsidiaries has and enforces a policy requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to the Company and all current and former employees and
contractors of Parent and any of its subsidiaries have executed such an agreement, except where the failure to do so is not
reasonably expected to be material to Parent. 3.9 Compliance; Permits; Restrictions. (a) Neither Parent nor any of its subsidiaries is, in any material respect, in conflict with, or in default or
violation of (i) any law, rule, regulation, order, judgment or decree applicable to Parent or any of its subsidiaries or by which its
or any of their respective properties is bound or affected except for any conflicts, defaults or violations that (individually or in
the aggregate) would not cause Parent to lose any material benefit or incur any material liability, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any
of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties is bound or
affected. To the knowledge of Parent, no investigation or review by any Governmental Entity is pending or threatened against Parent
or its subsidiaries, nor has any Governmental Entity indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Parent or any of its subsidiaries which has or could reasonably be expected to
have the effect of prohibiting or materially impairing the conduct of business by Parent as currently conducted. (b) Parent and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals from
governmental authorities which are material to the operation of the business of Parent (collectively, the "PARENT PERMITS"). Parent
and its subsidiaries are in compliance in all material respects with the terms of the Parent Permits. 3.10 Litigation. As of the date of this Agreement, and except as disclosed in the Parent SEC Documents, there
is no action, suit, proceeding, claim, arbitration or investigation pending, or -24- as to which Parent or any of its subsidiaries has received any notice of assertion nor, to Parent's knowledge, is
there a threatened action, suit, proceeding, claim, arbitration or investigation against Parent or any of its subsidiaries which
reasonably would be likely to be material to Parent, or which in any manner challenges or seeks to prevent, enjoin, alter or delay
any of the transactions contemplated by this Agreement. 3.11 Brokers' and Finders' Fees. Except for fees payable to Chase H&Q pursuant to an engagement letter
dated September 3, 1999, a copy of which has been provided to the Company, Parent has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby. 3.12 Employee Benefit Plans. (a) All employee compensation, incentive, fringe or benefit plans, programs, policies, commitments, agreements
or other arrangements (whether or not set forth in a written document and including, without limitation, all "employee benefit plans"
within the meaning of Section 3(3) of ERISA) covering any active or former employee, director or consultant of Parent ("PARENT
EMPLOYEE" which shall for this purpose mean an employee of the Company or any Affiliate (as defined below)), any subsidiary of Parent
or any trade or business (whether or not incorporated) which is an Affiliate, or with respect to which Parent has or, to its
knowledge, may in the future have liability, are listed in Section 3.12(a) of the Parent Schedules (the "PARENT PLANS"). Parent will
provide or make available correct and complete copies of all documents embodying each Parent Plan and all documents relevant to the
administration of such Plans prior to the Closing Date. (b) Each Parent Plan has been maintained and administered in all material respects in compliance with its
terms and with the requirements prescribed by any and all statutes, orders, rules and regulations (foreign or domestic), including
but not limited to ERISA and the Code, which are applicable to such Parent Plans. All contributions, reserves or premium payments
required to be made or accrued as of the date hereof to the Parent Plans have been timely made or accrued. Parent has performed in
all material respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge
of any default or violation by any other party to each Plan. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of Plan activities) has been brought, or to the knowledge of Parent is threatened, against or with
respect to any such Plan. There are no audits, inquiries or proceedings pending or to the knowledge of Parent, threatened by the IRS
or U.S. Department of Labor with respect to any Parent Plan. Any Parent Plan intended to be qualified under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code: (i) has either obtained a favorable determination,
notification, advisory and/or opinion letter, as applicable, as to its tax-qualified status from the IRS or still has a remaining
period of time under applicable Treasury Regulations or IRS pronouncements in which to apply for such letter and to make any
amendments necessary to obtain a favorable determination, and (ii) incorporates or has been amended to incorporate all provisions
required to comply with the Tax Reform Act of 1986 and subsequent legislation. (c) Neither Parent, any of its subsidiaries, nor any of their Affiliates has at any time ever maintained,
established, sponsored, participated in, or contributed to any plan subject to Title IV of ERISA or Section 412 of the Code and at no
time has Parent contributed to or been -25- requested to contribute to any "multiemployer plan," as such term is defined in ERISA. Neither Parent, any of its
subsidiaries, nor any officer or director of Parent or any of its subsidiaries is subject to any material liability or penalty under
Section 4975 through 4980B of the Code or Title I of ERISA. No "prohibited transaction," within the meaning of Section 4975 of the
Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 4975 of the Code and Section 408 of ERISA, has occurred
with respect to any Parent Plan which could subject Parent or its Affiliates to material liability. (d) Neither Parent nor any of its subsidiaries is bound by or subject to (and none of its respective assets or
properties is bound by or subject to) any arrangement with any labor union. No employee of Parent or any of its subsidiaries is
represented by any labor union or covered by any collective bargaining agreement and, to the knowledge of Parent, no campaign to
establish such representation is in progress. There is no pending or, to the knowledge of Parent, threatened labor dispute involving
Parent or any of its subsidiaries and any group of its employees nor has Parent or any of its subsidiaries experienced any labor
interruptions over the past three (3) years, and Parent and its subsidiaries consider their relationships with their employees to be
good. Parent is in compliance in all material respects with all applicable material foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of employment and wages and hours. (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute, bonus or otherwise) becoming
due to any Parent Employee under any Parent Plan or otherwise, (ii) materially increase any benefits otherwise payable under any
Parent Plan, or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (f) No Parent Plan promises or provides retiree medical benefits to any person except as required by
applicable law, and neither Parent nor any of its Affiliates has represented, promised or contracted (whether in oral or written
form) to provide such retiree benefits to any Parent Employee or dependent thereof except as required by law. 3.13 Absence of Liens and Encumbrances. Parent and each of its subsidiaries has good and valid title to, or,
in the case of leased properties and assets, valid leasehold interests in, all of its material tangible properties and assets, real,
personal and mixed, used in its business, free and clear of any liens or encumbrances except as reflected in the Parent Financials
and except for liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, which as do not
materially detract from the value of or materially interfere with the present use of the property affected thereby. 3.14 Environmental Matters. Except as would not reasonably be likely to result in a material liability to
Parent (in any individual case or in the aggregate), (i) neither Parent nor any of its subsidiaries has transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or
before the Closing Date, (ii) neither Parent nor any of its subsidiaries has engaged in Hazardous Materials Activities in violation
of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any -26- Hazardous Material Activity and (iii) as a result of the actions of the Parent or any of its subsidiaries or any
affiliate of the Parent or, to the Parent's knowledge, as a result of any actions of any third party or otherwise, no underground
storage tank is present in, on or under any property that the Parent or any of its subsidiaries has at any time owned, operated,
occupied or leased and no amount of any Hazardous Material is present under any property and in the land, ground water and surface
water of any property, that the Parent or any of its subsidiaries has at any time owned, operated, occupied or leased. 3.15 Labor Matters. (i) There are no controversies pending or, to the knowledge of each of Parent and its
respective subsidiaries, threatened, between Parent or any of its subsidiaries and any of their respective employees, and (ii) as of
the date of this Agreement, neither Parent nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work stoppages or
lockouts, or threats thereof, by or with respect to any employees of Parent or any of its subsidiaries. 3.16 Agreements, Contracts and Commitments. As of the date hereof, neither the Company nor any of its
subsidiaries is a party to or is bound by: (a) any employment or consulting agreement, contract or commitment with any officer or director or higher
level employee or member of Parent's Board of Directors, other than those that are terminable by Parent or any of its subsidiaries on
no more than thirty (30) days' notice without liability or financial obligation to Parent; (b) any agreement, contract or commitment containing any covenant that materially limits the right of Parent
or any of its subsidiaries to engage in any line of business or to compete with any person or granting any exclusive distribution
rights; (c) any agreement, contract or commitment currently in force relating to the disposition or acquisition by
Parent or any of its subsidiaries after the date of this Agreement of a material amount of assets not in the ordinary course of
business or pursuant to which Parent has any material ownership interest in any corporation, partnership, joint venture or other
business enterprise other than Parent's subsidiaries; (d) any dealer, distributor, joint marketing or development agreement currently in force under which Parent or
any of its subsidiaries have continuing material obligations to jointly market any product, technology or service and which may not
be canceled without penalty upon notice of ninety (90) days or less, or any material agreement pursuant to which Parent or any of its
subsidiaries have continuing material obligations to jointly develop any intellectual property that will not be owned, in whole or in
part, by Parent or any of its subsidiaries and which may not be canceled without penalty upon notice of ninety (90) days or less;
(e) any agreement, contract or commitment currently in force to license any third party to manufacture or
reproduce any Parent product or technology or any agreement, contract or commitment currently in force to sell or distribute any
Parent products, service or technology except agreements with distributors or sales representative in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and substantially in the form previously provided to the Company;
-27- (f) any mortgages, indentures, guarantees, loans or credit agreements, security agreements or other agreements
or instruments relating to the borrowing of money or extension of credit; (g) any settlement agreement entered into within three (3) years prior to the date of this Agreement; or (h) any other agreement, contract or commitment that has a value of $500,000 or more individually. Neither Parent nor any of its subsidiaries, nor to Parent's knowledge any other party to a Parent Contract (as
defined below), is in breach, violation or default under, and neither Parent nor any of its subsidiaries has received written notice
that it is in breach, violation or default under, any of the material terms or conditions of any of the agreements, contracts or
commitments to which Parent or any of its subsidiaries is a party or by which it is bound that are required to be disclosed in the
Parent Schedules (any such agreement, contract or commitment, a "PARENT CONTRACT") in such a manner as would permit any other party
to cancel or terminate any such Parent Contract, or would permit any other party to seek material damages or other remedies (for any
or all of such breaches, violations or defaults, in the aggregate). 3.17 Statements; Proxy Statement/Prospectus. None of the information supplied or to be supplied by Parent for
inclusion or incorporation by reference in the Registration Statement will at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The Proxy Statement, on the date the Proxy Statement is first mailed to Parent's
stockholders and the Company's stockholders, at the time of the Parent Stockholders' Meeting or the Company Stockholders' Meeting,
contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies
for the Parent Stockholders' Meeting or the Company Stockholders' Meeting which has become false or misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. If
at any time prior to the Effective Time, any event relating to Parent or any of its affiliates, officers or directors is required to
be discovered by Parent which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Parent shall promptly inform the Company. Notwithstanding the foregoing, Parent makes no representation or warranty with
respect to any information supplied or to be supplied by the Company which is, will be, or is required to be contained in any of the
foregoing documents. 3.18 Board Approval. The Board of Directors of Parent has, as of the date of this Agreement, (i) determined
that the Merger is fair to and in the best interests of Parent and its stockholders, (ii) determined to recommend that the
stockholders of Parent approve the Issuance of the Shares and (iii) duly approved the Merger, this Agreement and the transactions
contemplated hereby. -28- 3.19 State Takeover Statutes. The Board of Directors of Parent has approved the Merger, this Agreement, the
Stock Option Agreements, and the Company Voting Agreement and the transactions contemplated hereby and thereby, and such approval is
sufficient to render inapplicable to the Merger, this Agreement, the Stock Option Agreements, the Company Voting Agreement and the
transactions contemplated hereby and thereby the provisions of Section 203 of Delaware Law to the extent, if any, such section is
applicable to the Merger, this Agreement, the Stock Option Agreements, the Company Voting Agreement and the transactions contemplated
hereby and thereby. No other state takeover statute or similar statute or regulation applies to or purports to apply to the Merger,
this Agreement, the Stock Option Agreements, the Company Voting Agreement or the transactions contemplated hereby and thereby. 3.20 Fairness Opinion. Parent has received a written opinion from Chase H&Q, dated as of the date hereof,
to the effect that as of the date hereof, the Exchange Ratio is fair to Parent from a financial point of view and will deliver to the
Company a written confirmation copy of such opinion as soon as practicable after the date hereof. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 Conduct of Business. During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms or the Effective Time, the Company (which for the purposes of this
Article IV shall include the Company and each of its subsidiaries) and Parent (which for the purposes of this Article IV shall
include Parent and each of its subsidiaries) agree, except (i) as required by this Agreement, (ii) in the case of the Company as
provided in Article IV of the Company Schedules and in the case of Parent as provided in Article IV of the Parent Schedules, or (iii)
to the extent that the other party shall otherwise consent (which consent shall not be unreasonably withheld or delayed with regard
to actions that would be reasonably necessary to carry on the business of Parent or Company, as applicable, in the ordinary course,
as a standalone entity if the Merger were not consummated) in writing, to carry on its business in the ordinary course, in
substantially the same manner as heretofore conducted and in compliance with all applicable laws and regulations, to pay its debts
and taxes when due subject to good faith disputes over such debts or taxes, to pay or perform other material obligations when due
subject to good faith disputes over such obligations, and use its commercially reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available the services of its present officers and employees and
preserve its relationships with customers, suppliers, distributors, licensors, licensees and others with which it has business
dealings. In addition, except (i) in the case of the Company as provided in Article IV of the Company Schedules, (ii) in the case of
Parent as provided in Article IV of the Parent Schedules, or (iii) as required by this Agreement, without the prior written consent
(which consent shall not be unreasonably withheld or delayed with regard to actions that would be reasonably necessary carry on the
business of Parent or Company, as applicable, in the ordinary course, as a standalone entity if the Merger were not consummated) of
the other, neither the Company nor Parent shall do any of the following, and neither the Company nor Parent shall permit its
subsidiaries to do any of the following: (a) Except as required by law or pursuant to the terms of a Company Plan or a Parent Plan, as the case may be,
in effect as of the date hereof, waive any stock repurchase rights, -29- accelerate, amend or change the period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize cash payments in exchange for any options granted under
any of such plans; (b) Enter into any material partnership arrangements, joint development agreements or strategic alliances
other than in the ordinary course of business consistent with past practice; (c) Grant any severance or termination pay to any officer or employee except pursuant to written agreements
outstanding, or policies existing, on the date hereof and as previously disclosed in writing to the other, or adopt any new severance
plan or amend or modify or alter in any manner any severance plan, agreement or arrangement existing on the date hereof; (d) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity
securities or property) in respect of any capital stock (other than distributions from a subsidiary (i) of Company to Company or (ii)
of Parent to Parent as the case may be) or split, combine or reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for any capital stock; (e) Purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital stock of the Company
or its subsidiaries, or Parent or its subsidiaries, as the case may be, except repurchases of unvested shares at cost in connection
with the termination of the employment relationship with any employee pursuant to stock option or purchase agreements in effect on
the date hereof; (f) Issue, deliver, sell, authorize, pledge or otherwise encumber or propose any of the foregoing with respect
to any shares of capital stock or any securities convertible into shares of capital stock, or subscriptions, rights, warrants or
options to acquire any shares of capital stock or any securities convertible into shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such shares or convertible securities, other than (i) the
issuance, delivery and/or sale of shares of Company Common Stock or Parent Common Stock, as the case may be, pursuant to the exercise
of stock options therefor outstanding as of the date of this Agreement, (ii) the granting of options to purchase shares of Company
Common Stock or Parent Common Stock, as the case may be, to be granted at fair market value in the ordinary course of business,
consistent with past practice and in accordance with existing stock option plans in an amount not to exceed options to purchase
500,000 shares in the aggregate, (iii) shares of Company Common Stock or Parent Common Stock, as the case may be, issuable upon the
exercise of the options referred to in clause (ii), and (iv) shares of Company Common Stock or Parent Common Stock, as the case may
be, issuable to participants in the Parent ESPP or Company ESPP consistent with the terms thereof; (g) Cause, permit or propose any amendments to any charter document or Bylaw (or similar governing instruments
of any subsidiaries); (h) Acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a
material portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other
business organization or division -30- thereof, or enter into any joint ventures, strategic partnerships or alliances, other than in the ordinary course
of business consistent with past practice; (i) Adopt a plan of complete or partial liquidation, dissolution, consolidation, restructuring,
recapitalization or other reorganization; (j) Sell, lease, license, encumber or otherwise dispose of any properties or assets except sales of inventory
in the ordinary course of business consistent with past practice, except for the sale, lease or disposition (other than through
licensing) of property or assets which are not material, individually or in the aggregate, to the business of the Company or Parent,
as the case may be; (k) Incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or
sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of the Company or Parent, as the
case may be, enter into any "keep well" or other agreement to maintain any financial statement condition or enter into any
arrangement having the economic effect of any of the foregoing other than (i) in connection with the financing of ordinary course
trade payables consistent with past practice or (ii) pursuant to existing credit facilities in the ordinary course of business; (l) Adopt or amend any employee benefit plan or employee stock purchase or employee stock option plan, or
enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in
the ordinary course of business consistent with past practice with employees who are terminable "at will"), pay any special bonus or
special remuneration to any director or employee other than in the ordinary course of business consistent with past practice, or
increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers,
employees or consultants; (m) Make any individual or series of related payments outside of the ordinary course of business in excess of
$500,000; (n) Revalue any of its assets or, except as required by GAAP, make any change in accounting methods,
principles or practices; (o) Engage in any action that could reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code whether or not otherwise permitted by the provisions of this Article IV; (p) Make any tax election that individually or in the aggregate, is reasonably likely to adversely affect in
any material respect the tax liability or tax attributes of Company or Parent, as the case may be, or settle or compromise any
material tax liability; (q) Pay, discharge, settle or satisfy any material litigation; or (r) Agree in writing or otherwise to take any of the actions described in Section 4.1 (a) through (q) above. -31- ARTICLE V ADDITIONAL AGREEMENTS 5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings. (a) As promptly as practicable after the execution of this Agreement, the Company and Parent will prepare and
file with the SEC the Proxy Statement, and Parent will prepare and file with the SEC the Registration Statement in which the Proxy
Statement will be included as a prospectus. Each of the Company and Parent will respond to any comments of the SEC, will use its
respective best efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable
after such filing and will cause the Proxy Statement to be mailed to its stockholders at the earliest practicable time. As promptly
as practicable after the date of this Agreement, the Company and Parent will prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal, foreign or Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "OTHER FILINGS"). Each party will notify the other promptly upon the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff or any other government officials for amendments or supplements to
the Registration Statement, the Proxy Statement or any Other Filing or for additional information and will supply the other with
copies of all correspondence between such party or any of its representatives, on the one hand, and the SEC, or its staff or any
other government officials, on the other hand, with respect to the Registration Statement, the Proxy Statement, the Merger or any
Other Filing. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement, the
Registration Statement or any Other Filing, the Company or Parent, as the case may be, will promptly inform the other party of such
occurrence and cooperate in filing with the SEC or its staff or any other government officials, and/or mailing to stockholders of the
Company or stockholders of Parent, such amendment or supplement. (b) Subject to Sections 5.2(c) and 5.2(d), the Proxy Statement will also include the recommendations of (i)
the Board of Directors of the Company in favor of adoption of this Agreement, and (ii) the Board of Directors of Parent in favor of
the issuance of shares of Parent Common Stock in the Merger. 5.2 Meetings of Stockholders. (a) Promptly after the date hereof, the Company will take all action necessary in accordance with Delaware Law
and its Certificate of Incorporation and Bylaws to convene the Company Stockholders' Meeting to be held as promptly as practicable,
for the purpose of voting upon this Agreement. The Company will consult with Parent and use its commercially reasonable efforts to
hold the Company Stockholders' Meeting on the same day as the Parent Stockholders' Meeting. Promptly after the date hereof, Parent
will take all action necessary in accordance with Delaware Law and its Certificate of Incorporation and Bylaws to convene the Parent
Stockholders' Meeting to be held as promptly as practicable for the purpose of voting upon the issuance of shares of Parent Common
Stock by virtue of the Merger. Parent will consult with the Company and will use its commercially reasonable efforts to hold the
Parent Stockholders' Meeting on the same day as the Company Stockholders' Meeting. Subject to Sections 5.2(c) and 5.2(d), Parent and
the Company will each use its commercially reasonable efforts to solicit from its stockholders proxies in favor of the adoption and
approval of this Agreement and the approval of the Merger and will take all other -32- action necessary or advisable to secure the vote or consent of their respective stockholders or stockholders
required by the rules of Nasdaq or Delaware Law and all other applicable legal requirements to obtain such approvals. (b) Subject to Sections 5.2(c) and 5.2(d): (i) the Board of Directors of the Company shall recommend that the
Company's stockholders vote in favor of and adopt this Agreement at the Company Stockholders' Meeting, and the Board of Directors of
Parent shall recommend that Parent's stockholders vote in favor of the issuance of shares of Parent Common Stock in the Merger at the
Parent Stockholders' Meeting; (ii) the Proxy Statement shall include a statement to the effect that the Board of Directors of the
Company has recommended that the Company's stockholders vote in favor of and adopt this Agreement at the Company Stockholders'
Meeting, and a statement to the effect that the Board of Directors of Parent has recommended that Parent's stockholders vote in favor
of the issuance of shares of Parent Common Stock in the Merger at the Parent Stockholders' Meeting; and (iii) neither the Board of
Directors of the Company, the Board of Directors of Parent, nor any committee of either shall withdraw, amend or modify, or propose
or resolve to withdraw, amend or modify in a manner adverse to the other party, the recommendations set forth in subsections
5.2(b)(i) or 5.2(b)(ii). (c) Nothing in this Agreement shall prevent the Board of Directors of the Company from withholding,
withdrawing, amending or modifying its recommendation in favor of the Merger if (i) a Company Superior Offer (as defined below) is
made to the Company and is not withdrawn, (ii) neither the Company nor any of its representatives shall have violated any of the
restrictions set forth in Section 5.4(a), and (iii) the Board of Directors of the Company concludes in good faith, after consultation
with its outside counsel, that, in light of such Company Superior Offer, the withholding, withdrawal, amendment or modification of
such recommendation is required in order for the Board of Directors of the Company to comply with its fiduciary obligations to the
Company's stockholders under applicable law. Nothing contained in this Section 5.2 shall limit the Company's obligation to hold and
convene the Company Stockholders' Meeting (regardless of whether the recommendation of the Board of Directors of the Company shall
have been withdrawn, amended or modified). For purposes of this Agreement, "COMPANY SUPERIOR OFFER" shall mean an unsolicited, bona
fide written offer made by a third party to consummate any of the following transactions: (i) a merger, consolidation, business
combination, recapitalization or similar transaction involving the Company, pursuant to which the stockholders of the Company
immediately preceding such transaction hold less than 50% of the equity interest in the surviving or resulting entity of such
transaction; (ii) a sale or other disposition by the Company of all or substantially all of its assets, or (iii) the acquisition by
any person or group (including by way of a tender offer or an exchange offer or issuance by the Company), directly or indirectly, of
beneficial ownership or a right to acquire beneficial ownership of shares representing in excess of 50% of the voting power of the
then outstanding shares of capital stock of the Company, in each case on terms that the Board of Directors of the Company determines,
in its reasonable judgment (after consultation with its financial advisor) to be more favorable to the Company stockholders from a
financial point of view than the terms of the Merger; provided, however, that any such offer shall not be deemed to be a "COMPANY
SUPERIOR OFFER" if any financing required to consummate the transaction contemplated by such offer is not committed and is not likely
in the judgment of the Company's Board of Directors to be obtained by such third party on a timely basis. -33- (d) Nothing in this Agreement shall prevent the Board of Directors of Parent from withholding, withdrawing,
amending or modifying its recommendation in favor of the Merger if (i) a Parent Superior Offer (as defined below) is made to Parent
and is not withdrawn, (ii) neither Parent nor any of its representatives shall have violated any of the restrictions set forth in
Section 5.4(b), and (iii) the Board of Directors of Parent concludes in good faith, after consultation with its outside counsel,
that, in light of such Parent Superior Offer, the withholding, withdrawal, amendment or modification of such recommendation is
required in order for the Board of Directors of Parent to comply with its fiduciary obligations to Parent's stockholders under
applicable law. Nothing contained in this Section 5.2 shall limit Parent's obligation to hold and convene the Parent Stockholders'
Meeting (regardless of whether the recommendation of the Board of Directors of Parent shall have been withdrawn, amended or
modified). For purposes of this Agreement, "PARENT SUPERIOR OFFER" shall mean an unsolicited, bona fide written offer made by a third
party to consummate any of the following transactions: (i) a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Parent, pursuant to which the stockholders of Parent immediately preceding
such transaction hold less than 50% of the equity interest in the surviving or resulting entity of such transaction; (ii) a sale or
other disposition by Parent of assets (excluding inventory and used equipment sold in the ordinary course of business) representing
in excess of 50% of the fair market value of Parent's business immediately prior to such sale, or (iii) the acquisition by any person
or group (including by way of a tender offer or an exchange offer or issuance by Parent), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing in excess of 50% of the voting power of the then
outstanding shares of capital stock of the Parent, in each case on terms that the Board of Directors of Parent determines, in its
reasonable judgment (after consultation with its financial advisor) to be more favorable to the Parent stockholders from a financial
point of view than the terms of the Merger; provided, however, that any such offer shall not be deemed to be a "Parent Superior
Offer" if any financing required to consummate the transaction contemplated by such offer is not committed and is not likely in the
judgment of Parent's Board of Directors to be obtained by such third party on a timely basis. 5.3 Access to Information; Confidentiality. (a) Each party will afford the other party and its accountants, counsel and other representatives reasonable
access during normal business hours to the properties (including the performance of any soil and ground water testing thereon),
books, records and personnel of the other party during the period prior to the Effective Time to obtain all information concerning
the business, including the status of product development efforts, properties, results of operations and personnel of such party, as
the other party may reasonably request. No information or knowledge obtained in any investigation pursuant to this Section 5.3 will
affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger. (b) The parties acknowledge that the Company and Parent have previously executed a Confidentiality Agreement,
dated August 31, 1999 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in full force and effect in
accordance with its terms. 5.4 No Solicitation. -34- (a) Restrictions on the Company. (i) From and after the date of this Agreement until the Effective Time or termination of this Agreement
pursuant to Article VII, the Company's and its subsidiaries' officers and directors will not and the Company and its subsidiaries
will not authorize or permit any of their respective officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them, to, directly or indirectly (i) solicit, initiate, knowingly encourage or
knowingly induce the making, submission or announcement of any Company Acquisition Proposal (as defined below), (ii) participate in
any discussions or negotiations regarding, or furnish to any person any non-public information with respect to, or take any other
action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any
Company Acquisition Proposal, (iii) engage in discussions with any person with respect to any Company Acquisition Proposal, except as
to the existence of these provisions, (iv) subject to Section 5.2(c), approve, endorse or recommend any Company Acquisition Proposal
or (v) enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or providing for
any Company Acquisition Transaction (as defined below); provided, however, until the date on which this Agreement is adopted by the
required vote of the Company stockholders, nothing in this Section 5.4(a) or elsewhere in this Agreement shall prohibit the Company
or any of its subsidiaries or any of their respective officers, directors, affiliates, employees, investment bankers, attorneys or
other advisors or representatives from furnishing nonpublic information regarding the Company and its subsidiaries to, entering into
a confidentiality agreement with or entering into discussions or negotiating with, any person or group in response to a Company
Superior Offer submitted by such person or group (and not withdrawn) if (1) neither the Company nor any representative of the Company
and its subsidiaries shall have violated any of the restrictions set forth in this Section 5.4(a), (2) the Board of Directors of the
Company concludes in good faith, after consultation with its outside legal counsel, that such action is required in order for the
Board of Directors of the Company to comply with its fiduciary obligations to the Company's stockholders under applicable law, (3)
(x) at least three (3) days prior to furnishing any such nonpublic information to, or entering into discussions or negotiations with,
such person or group, the Company gives Parent written notice of the identity of such person or group and of the Company's intention
to furnish nonpublic information to, or enter into discussions or negotiations with, such person or group and (y) the Company
receives from such person or group an executed confidentiality agreement containing customary limitations on the use and disclosure
of all nonpublic written and oral information furnished to such person or group by or on behalf of the Company and containing terms
no less favorable to the disclosing party than the terms of the Confidentiality Agreement, and (4) contemporaneously with furnishing
any such nonpublic information to such person or group, the Company furnishes such nonpublic information to Parent (to the extent
such nonpublic information has not been previously furnished by the Company to Parent). The Company and its subsidiaries will
immediately cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to
any Company Acquisition Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth
in the preceding two sentences by any officer or director of the Company or any of its subsidiaries or any investment banker,
attorney or other advisor or representative of the Company or any of its subsidiaries shall be deemed to be a breach of this Section
5.4(a) by the Company. In addition to the foregoing, the Company shall (i) provide Parent with at least forty-eight (48) hours prior
notice (or such lesser prior notice as provided to the members of the Company's Board of Directors but in no event less than eight
hours) of any meeting of the Company's Board of Directors at which the Company's Board of -35- Directors is reasonably expected to consider a Company Superior Offer and (ii) provide Parent with at least three
(3) business days prior written notice of a meeting of the Company's Board of Directors at which the Company's Board of Directors is
reasonably expected to recommend a Company Superior Offer to its stockholders and together with such notice a copy of the definitive
documentation relating to such Company Superior Offer. (ii) For purposes of this Agreement, "Company Acquisition Proposal" shall mean any offer or proposal (other
than an offer or proposal by Parent or any of its affiliates) providing for any Company Acquisition Transaction. For the purposes of
this Agreement, "Company Acquisition Transaction" shall mean any transaction or series of related transactions other than the
transactions contemplated by this Agreement involving: (A) any acquisition or purchase from the Company by any person or "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a 15% interest in the total
outstanding voting securities of the Company or any of its subsidiaries or any tender offer or exchange offer that if consummated
would result in any person or "group" (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 15% or more of the total outstanding voting securities of the Company or any of its subsidiaries or any merger,
consolidation, business combination or similar transaction involving the Company pursuant to which the stockholders of the Company
immediately preceding such transaction hold less than 85% of the equity interests in the surviving or resulting entity of such
transaction or (B) any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the
ordinary course of business), acquisition or disposition of all or substantially all of the assets of the Company. (iii) In addition to the obligations of the Company set forth in paragraph (i) of this Section 5.4(a), the
Company as promptly as practicable, and in any event within twenty-four (24) hours, shall advise Parent orally and in writing of any
request received by the Company for non-public information which the Company reasonably believes would lead to a Company Acquisition
Proposal or of any Company Acquisition Proposal, the material terms and conditions of such request, Company Acquisition Proposal or
inquiry, and the identity of the person or group making any such request, Company Acquisition Proposal or inquiry. The Company will
keep Parent informed in all material respects of the status and details (including material amendments or proposed amendments) of any
such request, Company Acquisition Proposal or inquiry. (iv) Nothing contained in this Section 5.4(a) or elsewhere in this Agreement shall prohibit the Company or its
Board of Directors from complying with Rule 14d-9 or Rule 14e-2 under the Exchange Act. (b) Restrictions on Parent. (i) From and after the date of this Agreement until the Effective Time or termination of this Agreement
pursuant to Article VII, Parent's and its subsidiaries' officers and directors will not and Parent and its subsidiaries will not, nor
will they authorize or permit any of their respective officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them to, directly or indirectly (i) solicit, initiate, knowingly encourage or
induce the making, submission or announcement of any Parent Acquisition Proposal (as defined below), (ii) participate in any
discussions or negotiations regarding, or furnish to any person any non-public information with respect to, or take any other action
to facilitate any -36- inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Parent
Acquisition Proposal, (iii) engage in discussions with any person with respect to any Parent Acquisition Proposal, except as to the
existence of these provisions, (iv) subject to Section 5.2(d), approve, endorse or recommend any Parent Acquisition Proposal or (v)
enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or providing for any
Parent Acquisition Transaction (as defined below); provided, however, until the date on which the issuance of Parent Common Stock in
the Merger is approved by the required vote of the Parent stockholders, nothing in this Section 5.4(b) or elsewhere in this Agreement
shall prohibit Parent or any of its subsidiaries or any of their respective officers, directors, affiliates, employees, investment
bankers, attorneys or other advisors or representatives from furnishing nonpublic information regarding Parent and its subsidiaries
to, entering into a confidentiality agreement with or entering into discussions or negotiating with, any person or group in response
to a Parent Superior Offer submitted by such person or group (and not withdrawn) if (1) neither Parent nor any representative of
Parent and its subsidiaries shall have violated any of the restrictions set forth in this Section 5.4(b), (2) the Board of Directors
of Parent concludes in good faith, after consultation with its outside legal counsel, that such action is required in order for the
Board of Directors of Parent to comply with its fiduciary obligations to Parent's stockholders under applicable law, (3) (x) at least
three (3) days prior to furnishing any such nonpublic information to, or entering into discussions or negotiations with, such person
or group, Parent gives the Company written notice of the identity of such person or group and of Parent's intention to furnish
nonpublic information to, or enter into discussions or negotiations with, such person or group and (y) Parent receives from such
person or group an executed confidentiality agreement containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such person or group by or on behalf of Parent and containing terms no less favorable to
the disclosing party than the terms of the Confidentiality Agreement, and (4) contemporaneously with furnishing any such nonpublic
information to such person or group, Parent furnishes such nonpublic information to the Company (to the extent such nonpublic
information has not been previously furnished by Parent to the Company). Parent and its subsidiaries will immediately cease any and
all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Parent Acquisition
Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding two
sentences by any officer or director of Parent or any of its subsidiaries or any investment banker, attorney or other advisor or
representative of Parent or any of its subsidiaries shall be deemed to be a breach of this Section 5.4(b) by Parent. In addition to
the foregoing, Parent shall (i) provide the Company with at least forty eight (48) hours prior notice (or such lesser prior notice as
provided to the members of Parent's Board of Directors but in no event less than eight hours) of any meeting of Parent's Board of
Directors at which Parent's Board of Directors is reasonably expected to consider a Parent Superior Offer and (ii) provide the
Company with at least three (3) business days prior written notice of a meeting of Parent's Board of Directors at which Parent's
Board of Directors is reasonably expected to recommend a Parent Superior Offer to its stockholders and together with such notice a
copy of the definitive documentation relating to such Parent Superior Offer. (ii) For purposes of this Agreement, "PARENT ACQUISITION PROPOSAL" shall mean any offer or proposal (other
than an offer or proposal by the Company) or any of its affiliates) providing for any Parent Acquisition Transaction. For the
purposes of this Agreement, "PARENT ACQUISITION TRANSACTION" shall mean any transaction or series of related transactions other than
the transactions contemplated by this Agreement involving: (A) any acquisition or purchase from -37- Parent by any person or "group" (as defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of more than a 15% interest in the total outstanding voting securities of Parent or any of its subsidiaries or any tender
offer or exchange offer that if consummated would result in any person or "group" (as defined under Section 13(d) of the Exchange Act
and the rules and regulations thereunder) beneficially owning 15% or more of the total outstanding voting securities of Parent or any
of its subsidiaries or any merger, consolidation, business combination or similar transaction involving Parent pursuant to which the
stockholders of Parent immediately preceding such transaction hold less than 85% of the equity interests in the surviving or
resulting entity of such transaction; (B) any sale, lease (other than in the ordinary course of business), exchange, transfer,
license (other than in the ordinary course of business), acquisition or disposition of all or substantially all of the assets of
Parent. (iii) In addition to the obligations of Parent set forth in paragraph (i) of this Section 5.4(b), Parent as
promptly as practicable, and in any event within twenty-four (24) hours, shall advise the Company orally and in writing of any
request received by Parent for non-public information which Parent reasonably believes would lead to a Parent Acquisition Proposal or
of any Parent Acquisition Proposal, the material terms and conditions of such request, Parent Acquisition Proposal or inquiry, and
the identity of the person or group making any such request, Parent Acquisition Proposal or inquiry. Parent will keep the Company
informed in all material respects of the status and details (including material amendments or proposed amendments) of any such
request, Parent Acquisition Proposal or inquiry. (iv) Nothing contained in this Section 5.4(b) or elsewhere in this Agreement shall prohibit Parent or its
Board of Directors from complying with Rule 14d-9 or Rule 14e-2 under the Exchange Act. 5.5 Public Disclosure. Parent and the Company will consult with each other and agree before issuing any press
release or otherwise making any public statement with respect to the Merger, this Agreement, a Company Acquisition Proposal or a
Parent Acquisition Proposal and will not issue any such press release or make any such public statement prior to such agreement,
except as may be required by law or any listing agreement with a national securities exchange or Nasdaq, in which case reasonable
efforts to consult with the other party will be made prior to such release or public statement; provided, however, that no such
consultation or agreement shall be required if, prior to the date of such release or public statement, either party shall have
withheld, withdrawn, amended or modified in substance adverse to the other party, its recommendation in favor of the Merger. 5.6 Legal Requirements. Each of Parent, Merger Sub and the Company will take all reasonable actions necessary
or desirable to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the
transactions contemplated by this Agreement (including furnishing all information required in connection with approvals of or filings
with any Governmental Entity, and prompt resolution of any litigation prompted hereby) and will promptly cooperate with and furnish
information to any party hereto necessary in connection with any such requirements imposed upon any of them or their respective
subsidiaries in connection with the consummation of the transactions contemplated by this Agreement. Each of Parent, Merger Sub and
the Company will take all reasonable steps as may be necessary to avoid any suit, claim, action investigation or proceeding by any
Governmental Entity; provided, however, that, notwithstanding -38- any provision of this Agreement to the contrary, Parent shall not be required to agree to any divestiture by
Parent or the Company or any of Parent's subsidiaries or affiliates of shares of capital stock or of any business, assets or property
of Parent or its subsidiaries or affiliates or of the Company, its affiliates, or the imposition of any limitation on the ability of
any of them to conduct their businesses or to own or exercise control of such assets, properties and stock in any case that could
reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of Parent and
its subsidiaries, including the Surviving Corporation, taken as a whole following the consummation of the Merger. Parent will use its
commercially reasonable efforts to take such steps as may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of Parent Common Stock pursuant hereto. The Company will use its commercially
reasonable efforts to assist Parent as may be necessary to comply with the securities and blue sky laws of all jurisdictions which
are applicable in connection with the issuance of Parent Common Stock pursuant hereto. 5.7 Third Party Consents. As soon as practicable following the date hereof, Parent and the Company will each
use its commercially reasonable efforts to obtain all material consents, waivers and approvals under any of its or its subsidiaries'
agreements, contracts, licenses or leases required to be obtained in connection with the consummation of the transactions
contemplated hereby. Parent shall consult with the Company regarding the terms of the Bank Consents (as defined below). 5.8 FIRPTA. At or prior to the Closing, the Company, if requested by Parent, shall deliver to the IRS a notice
that Company Common Stock is not a "U.S. Real Property Interest" as defined and in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2). 5.9 Notification of Certain Matters. Parent and Merger Sub will give prompt notice to the Company, and the
Company will give prompt notice to Parent, of the occurrence, or failure to occur, of any event, which occurrence or failure to occur
would be reasonably likely to cause (a) any representation or warranty contained in this Agreement to be untrue or inaccurate at any
time from the date of this Agreement to the Effective Time, such that the conditions set forth in Section 6.2(a) or 6.3(a), as the
case may be, would not be satisfied as a result thereof, or (b) any material failure of Parent and Merger Sub or the Company, as the
case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement such that the conditions set forth in Section 6.2(b) or 6.3(b), as the
case may be, would not be satisfied as a result. Notwithstanding the above, the delivery of any notice pursuant to this section will
not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 5.10 Reasonable Efforts and Further Assurances. Subject to the respective rights and obligations of Parent and
the Company under this Agreement, each of the parties to this Agreement will use all reasonable efforts to effectuate the Merger as
expeditiously as practicable and the other transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions
to closing under this Agreement. Each of Parent, Merger Sub and the Company will take all reasonable steps as may be necessary to
defend any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered
by any court of other Governmental Entity vacated or reversed. Each party hereto, at the reasonable -39- request of another party hereto, will execute and deliver such other instruments and do and perform such other
acts and things as may be necessary or desirable for effecting completely the consummation of the transactions contemplated hereby.
5.11 Stock Options; Employee Stock Purchase Plans. (a) Stock Options. At the Effective Time, each outstanding option to purchase shares of Company Common Stock
(each, a "COMPANY STOCK OPTION") under Company Stock Option Plans, whether or not vested, shall by virtue of the Merger be assumed by
Parent. Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock
for issuance upon exercise of all Company Stock Options assumed in accordance with this Section 5.11. Each Company Stock Option so
assumed by Parent under this Agreement will continue to have, and be subject to, the same terms and conditions of such options
immediately prior to the Effective Time (including, without limitation, any repurchase rights or vesting provisions), except that (i)
each Company Stock Option will be exercisable (or will become exercisable in accordance with its terms) for that number of whole
shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock that were issuable upon exercise
of such Company Stock Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of Parent Common Stock, (ii) the per share exercise price for the shares of Parent Common Stock issuable upon
exercise of such assumed Company Stock Option will be equal to the quotient determined by dividing the exercise price per share of
Company Common Stock at which such Company Stock Option was exercisable immediately prior to the Effective Time by the Exchange
Ratio, rounded up to the nearest whole cent and (iii) references to the Company in the agreement setting forth the terms of each
Company Stock Option shall mean Parent. (b) ESPP. At the Effective Time, in accordance with the terms of the Company ESPP, all rights to purchase
shares of Company Common Stock under the Company ESPP shall be converted (in accordance with the Exchange Ratio) into rights to
purchase shares of Parent Common Stock (with the number of shares rounded down to the nearest whole share and the purchase price as
of the offering date for each offering period in effect as of the Effective Time rounded up to the nearest whole cent) and all such
converted rights shall be assumed by Parent and the offering periods in effect under the Company ESPP immediately prior to the
Effective Time shall be continued in accordance with the terms of the Company ESPP until the end of the offering periods in effect as
of the Effective Time. The Company ESPP shall terminate with the exercise of the last assumed right, and no additional purchase
rights shall be granted under the Company ESPP following the Effective Time except that references to the Company in the Company ESPP
and related documents shall mean Parent (except that the purchase price as of the offering date for a relevant period shall be
determined with respect to the fair market value of the Company's common stock, as adjusted hereby). Parent shall take all corporate
action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for issuance upon exercise of rights to
purchase Shares of Parent Common Stock under the Company ESPP assumed in accordance with this Section 5.11. Parent agrees that from
and after the Effective Time, the Company employees may participate in the Parent ESPP, subject to the terms and conditions of the
Parent ESPP, and service with the Company shall be treated as service with the Parent for determining eligibility of the Company
Employees under the Parent ESPP. -40- 5.12 Form S-8. Parent agrees to file a registration statement on Form S-8 for the shares of Parent Common
Stock issuable with respect to assumed Company Stock Options or the terms of the Company ESPP as soon as is reasonably practicable
(and in any event within thirty (30) days) after the Effective Time. 5.13 Indemnification. (a) From and after the Effective Time, the Surviving Corporation will fulfill and honor in all respects the
obligations of the Company pursuant to any indemnification agreements between the Company and its directors and officers existing
prior to the date hereof. The Certificate of Incorporation and Bylaws of the Surviving Corporation will contain the provisions with
respect to indemnification and elimination of liability for monetary damages set forth in the Certificate of Incorporation and Bylaws
of the Company, which provisions will not be amended, repealed or otherwise modified for a period of six (6) years from the Effective
Time in any manner that would adversely affect the rights thereunder of individuals who, at the Effective Time, were directors,
officers, employees or agents of the Company, unless such modification is required by law. (b) For a period of six years after the Effective Time, Parent will cause the Surviving Corporation to
maintain in effect, to the extent available, directors' and officers' liability insurance covering those persons who are currently
covered by the Company's directors' and officers' liability insurance policy on terms comparable to those applicable to the then
current directors and officers of Parent; provided, however, that in no event will Parent or the Surviving Corporation be required to
expend in excess of $450,000 in an annual premium for such coverage (or such coverage as is available for such annual premium). (c) This Section 5.13 will survive the consummation of the Merger at the Effective Time and will be binding on
all successors and assigns of the Surviving Corporation. 5.14 Tax-Free Reorganization. Parent and the Company will each use its commercially reasonable efforts to
cause the Merger to be treated as a reorganization within the meaning of Section 368 of the Code. Parent and the Company will each
make available to the other party and their respective legal counsel copies of all returns requested by the other party. 5.15 Nasdaq Qualification. Parent agrees to authorize for trading on Nasdaq the shares of Parent Common Stock
issuable, and those required to be reserved for issuance, in connection with the Merger, upon official notice of issuance. 5.16 Action by Boards of Directors. Prior to the Effective Time, the board of directors of each of Parent and
the Company shall comply as applicable with the provisions of the SEC's no-action letter dated January 12, 1999 addressed to Skadden,
Arps, Slate, Meagher and Flom LLP relating to Rule 16b of the Exchange Act. 5.17 The Company Affiliate Agreement. Set forth in Section 5.17 of the Company Schedules is a list of those
persons who may be deemed to be, in the Company's reasonable judgment, affiliates of the Company within the meaning of Rule 145
promulgated under the Securities Act (a "COMPANY AFFILIATE"). The Company will provide Parent with such information and documents as
Parent reasonably requests for purposes of reviewing such list. The Company will use its best efforts to deliver or cause to be
delivered to Parent as promptly as practicable on or -41- following the date hereof from each Company Affiliate an executed affiliate agreement in substantially the form
attached hereto as Exhibit E (the "COMPANY AFFILIATE AGREEMENT"), each of which will be in full force and effect as of the Effective
Time. Parent will be entitled to place appropriate legends on the certificates evidencing any Parent Common Stock to be received by a
Company Affiliate pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent
for the Parent Common Stock, consistent with the terms of the Company Affiliate Agreement. 5.18 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably practicable, the Company and Parent
each shall execute and file, or join in the execution and filing of, any application, notification (including, without limitation,
any notification or provision of information, if any, that may be required under the HSR Act) or any other document that may be
necessary in order to obtain the authorization, approval or consent of any Governmental Entity, whether federal, state, local or
foreign, which may be reasonably required, or which the other party hereto may reasonably request, in connection with the
consummation of the Merger or any other transactions contemplated by this Agreement. The Company and Parent shall in good faith use
their best efforts to as expeditiously as possible obtain, and to cooperate with the other to expeditiously obtain, all such
authorizations, approvals and consents. The Company and Parent each shall promptly (a) supply the other with any information which
may be required in order to effectuate such filings and (b) supply any additional information which reasonably may be required by the
United States Federal Trade Commission (the "FTC"), the Antitrust Division of the United States Department of Justice (the "DOJ") or
the competition or merger control authorities of any other jurisdiction and which the parties may reasonably deem appropriate. 5.19 Board of Directors; Officers. (a) At or prior to the Effective Time, each of the Company and Parent agrees to take such action as is
necessary to cause the number of directors comprising the full Board of Directors of Parent to be nine persons, including (i) six of
the current members of Parent's Board of Directors (or, if fewer than six of the current members of Parent's Board of Directors are
available or willing to serve as a director of Parent after the Effective Time, such replacement directors as may be nominated by the
remaining members of Parent's Board of Directors in accordance with the Bylaws of Parent) (the "PARENT DESIGNEES") and (ii) three of
the Company's current directors nominated by the Company (or, if fewer than three of the current members of the Company's Board of
Directors are available or willing to serve as a director of Parent after the Effective Time, such replacement directors as may be
nominated by the remaining directors of the Company) (the "COMPANY DESIGNEES"). -42- (b) From and after the Effective Time, and until successors are duly elected or appointed and qualified in
accordance with applicable law, the following persons (the "PARENT OFFICERS") shall hold the titles indicated at Parent and shall
serve at the pleasure of the Board of Directors of Parent: Chief Executive Officer T. H. Tan Chief Operating Officer Ronald J. Buschur Chief Technical Officer Michael A. Russak Chief Financial Officer Edward Siegler ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party
to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following
conditions: (a) Stockholder Approval. This Agreement shall have been adopted by the requisite vote under applicable law by
the stockholders of the Company, and the issuance of shares of Parent Common Stock by virtue of the Merger shall have been duly
approved by the requisite vote under Delaware law, the Parent Charter Documents and the rules of the National Association of
Securities Dealers, Inc. by the stockholders of Parent. (b) Registration Statement Effective; Proxy Statement. The SEC shall have declared the Registration Statement
effective. No stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of the Proxy Statement shall have been initiated or threatened in
writing by the SEC. (c) No Order; HSR Act. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is
in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions contemplated hereby will have expired or terminated early. (d) Tax Opinions. Parent and the Company shall each have received substantially identical written opinions
from their counsel, Wilson Sonsini Goodrich & Rosati, Professional Corporation, and Cooley Godward LLP, respectively, in form and
substance reasonably satisfactory to them, to the effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinions shall not have been withdrawn; provided, however, that if the counsel to either Parent
or the Company does not render such opinion or renders but withdraws such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders and does not withdraw such opinion to such party. The
parties to -43- this Agreement agree to make reasonable representations as requested by such counsel for the purpose of rendering
such opinions. (e) Nasdaq Qualification. The shares of Parent Common Stock issuable to stockholders of the Company pursuant
to this Agreement and such other shares required to be reserved for issuance in connection with the Merger shall have been authorized
for trading on the Nasdaq upon official notice of issuance. 6.2 Additional Conditions to Obligations of the Company. The obligation of the Company to consummate and
effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of
which may be waived, in writing, exclusively by the Company: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in
this Agreement shall have been true and correct in all material respects as of the date of this Agreement, except where the failure
to be so true and correct would not, in the aggregate, have a Material Adverse Effect on Parent. In addition, the representations and
warranties of Parent and Merger Sub contained in this Agreement shall be true and correct in all material respects on and as of the
Effective Time except for changes contemplated by this Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect
as if made on and as of the Effective Time, except in such cases (other than the representations in Sections 3.2 and 3.3) where the
failure to be so true and correct would not, in the aggregate, have a Material Adverse Effect on Parent. The Company shall have
received a certificate with respect to the foregoing signed on behalf of Parent by the Chief Executive Officer and the Chief
Financial Officer of Parent; and (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such effect signed on behalf of Parent by the Chief Executive Officer and
the Chief Financial Officer of Parent. (c) Bank Consent. Prior to August 15, 2000, Parent shall have (a) entered into amendments to the Credit
Agreements (as described below) such that Parent is not, at the time of entering into such amendments, in default under the Credit
Agreements, and (b) obtained all necessary approvals of the Merger and the transactions contemplated hereby from the lenders party to
each of the following credit agreements: (i) the Amended and Restated Credit Agreement dated as of June 20, 1997 with Fleet National
Bank as agent, (ii) the Credit Agreement dated as of October 7, 1996 with the Dai Ichi Kangyo Bank, Limited, (iii) the Credit
Agreement dated as of December 15, 1995 with The Industrial Bank of Japan, Limited, San Francisco Agency ("IBJ") as agent, and (iv)
the Credit Agreement dated as of February 7, 1997 with IBJ as agent (the agreements described in clauses (i) through (iv) are,
collectively, the "CREDIT AGREEMENTS"), as the Credit Agreements may be amended, modified or restructured prior to or as of the
Closing Date (the "BANK CONSENTS"). 6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The obligations of Parent and Merger
Sub to consummate and effect the Merger shall be subject to the satisfaction at -44- or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing,
exclusively by Parent: (a) Representations and Warranties. The representations and warranties of the Company contained in this
Agreement shall have been true and correct in all material respects as of the date of this Agreement, except where the failure to be
so true and correct would not, in the aggregate, have a Material Adverse Effect on the Company. In addition, the representations and
warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Effective
Time except for changes contemplated by this Agreement and except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect as if made
on and as of the Effective Time, except in such cases (other than the representations in Sections 2.2 and 2.3)where the failure to be
so true and correct would not, in the aggregate, have a Material Adverse Effect on the Company. Parent shall have received a
certificate with respect to the foregoing signed on behalf of the Company by the President and the Chief Financial Officer of the
Company; and (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and the
Parent shall have received a certificate to such effect signed on behalf of the Company by the President and the Chief Financial
Officer of the Company. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. This Agreement may be terminated at any time prior to the Effective Time of the Merger,
whether before or after approval of the Merger by the stockholders of the Company or the approval of the issuance of Parent Common
Stock in connection with the Merger by the stockholders of Parent: (a) by mutual written consent duly authorized by the Boards of Directors of Parent and the Company; (b) by either the Company or Parent if the Merger shall not have been consummated by 5:00 p.m. Pacific Time,
on October 31, 2000 (the "INITIAL END DATE"); provided, that if at the Initial End Date the only condition to the obligation of the
parties to effect the Merger that shall not then be satisfied or waived is that described in the second sentence of Section 6.1(c),
then such date shall be automatically extended to December 31, 2000; provided, however, that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action or failure to act has been a principal cause of or
resulted in the failure of the Merger to occur on or before such date and such action or failure to act constitutes a breach of this
Agreement; (c) by either the Company or Parent if a Governmental Entity shall have issued an order, decree or ruling or
taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger,
which order, decree or ruling is final and nonappealable; -45- (d) by either the Company or Parent if the required approvals of the stockholders of the Company or the
stockholders of Parent contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required
vote upon a vote taken at the Company Stockholders' Meeting or the Parent Stockholders' Meeting, respectively, duly convened therefor
or at any adjournment thereof; provided, however, that the right to terminate this Agreement under this Section 7.1(d) shall not be
available to any party where the failure to obtain stockholder approval of such party shall have been caused by the action or failure
to act of such party in breach of this Agreement; (e) by the Company, upon (i) a breach of any representation, warranty, covenant or agreement on the part of
Parent set forth in this Agreement, or if any representation or warranty of Parent shall have become untrue, in either case such that
the conditions set forth in Section 6.2(a) or Section 6.2(b) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue, provided, that if such inaccuracy in Parent's representations and
warranties or breach by Parent is curable by Parent through the exercise of its commercially reasonable efforts, then the Company may
not terminate this Agreement under this Section 7.1(e) for thirty (30) days after delivery of written notice from the Company to
Parent of such breach, provided Parent continues to exercise commercially reasonable efforts to cure such breach (it being understood
that the Company may not terminate this Agreement pursuant to this paragraph (e) if such breach by Parent is cured) or (ii) if the
conditions set forth in Section 6.2(c) have not been met prior to August 15, 2000; (f) by Parent, upon a breach of any representation, warranty, covenant or agreement on the part of the Company
set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that
the conditions set forth in Section 6.3(a) or Section 6.3(b) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue, provided, that if such inaccuracy in the Company's representations and
warranties or breach by the Company is curable by the Company through the exercise of its commercially reasonable efforts, then
Parent may not terminate this Agreement under this Section 7.1(f) for thirty (30) days after delivery of written notice from Parent
to the Company of such breach, provided the Company continues to exercise commercially reasonable efforts to cure such breach (it
being understood that Parent may not terminate this Agreement pursuant to this paragraph (f) if such breach by the Company is cured);
(g) by the Company if a Company Triggering Event (as defined below) shall have occurred; or (h) by Parent if a Parent Triggering Event (as defined below) shall have occurred. For the purposes of this Agreement, a "COMPANY TRIGGERING EVENT" shall be deemed to have occurred if: (i) the
Board of Directors of Parent or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to the Company its recommendation in favor of the adoption of this Agreement; (ii) Parent shall have failed to include
in the Proxy Statement the recommendation of the Board of Directors of Parent in favor of the issuance of shares of Parent Common
Stock in connection with the Merger; (iii) Board of Directors of Parent fails to reaffirm its recommendation in favor of the issuance
of shares of Parent Common Stock in connection with the Merger within ten (10) business days after the Company requests in writing
that -46- such recommendation be reaffirmed at any time following the announcement of a Parent Acquisition Offer; (iv) the
Board of Directors of Parent or any committee thereof shall have approved or recommended any Parent Acquisition Offer; (v) Parent
shall have entered into any letter of intent or similar document or any agreement, contract or commitment accepting any Parent
Acquisition Offer; (vi) a tender or exchange offer relating to securities of Parent constituting an Acquisition Proposal shall have
been commenced by a person unaffiliated with the Company and Parent shall not have sent to its securityholders pursuant to Rule 14e-2
promulgated under the Securities Act, within ten (10) business days after such tender or exchange offer is first published sent or
given, a statement disclosing that Parent recommends rejection of such tender or exchange offer; or (vii) Parent shall have breached
in any material respect the provisions of Section 5.4(b) of this Agreement. For purposes of this Agreement, "PARENT ACQUISITION
OFFER" shall mean any offer or proposal (other than an offer or proposal by the Company) relating to any transaction or series of
related transactions other than the transactions contemplated by this Agreement involving: (A) any acquisition or purchase from
Parent by any person or "group" (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more
than a 50% interest in the total outstanding voting securities of Parent or any of its subsidiaries or any tender offer or exchange
offer that if consummated would result in any person or "group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) beneficially owning 50% or more of the total outstanding voting securities of Parent or any of its
subsidiaries or any merger, consolidation, business combination or similar transaction involving Parent pursuant to which the
stockholders of Parent immediately preceding such transaction hold less than 50% of the equity interests in the surviving or
resulting entity of such transaction or (B) any sale, lease (other than in the ordinary course of business), exchange, transfer,
license (other than in the ordinary course of business), acquisition or disposition of all or substantially all of the assets of
Parent. (i) For the purposes of this Agreement, a "PARENT TRIGGERING EVENT" shall be deemed to have occurred if: (i)
the Board of Directors of the Company or any committee thereof shall for any reason have withdrawn or shall have amended or modified
in a manner adverse to Parent its recommendation in favor of adoption of this Agreement; (ii) the Company shall have failed to
include in the Proxy Statement the recommendation of the Board of Directors of the Company in favor of adoption of the Agreement;
(iii) Board of Directors of the Company fails to reaffirm its recommendation in favor of adoption of the Agreement within ten (10)
business days after Parent requests in writing that such recommendation be reaffirmed at any time following the announcement of a
Company Acquisition Proposal; (iv) the Board of Directors of the Company or any committee thereof shall have approved or recommended
any the Company Acquisition Offer; (v) the Company shall have entered into any letter of intent or similar document or any agreement,
contract or commitment accepting any Company Acquisition Offer; (vi) a tender or exchange offer relating to securities of the Company
constituting an Acquisition Proposal shall have been commenced by a person unaffiliated with Parent and the Company shall not have
sent to its securityholders pursuant to Rule 14e-2 promulgated under the Securities Act, within ten (10) business days after such
tender or exchange offer is first published sent or given, a statement disclosing that the Company recommends rejection of such
tender or exchange offer; or (vii) the Company shall have breached in any material respect the provisions of Section 5.4(a) of this
Agreement. For purposes of this Agreement, "COMPANY ACQUISITION OFFER" shall mean any offer or proposal (other than an offer or
proposal by Parent) relating to any transaction or series of related transactions other than the transactions contemplated by this
Agreement involving: (A) any acquisition or purchase from the Company by any person or "group" (as defined under Section 13(d) -47- of the Exchange Act and the rules and regulations thereunder) of more than a 50% interest in the total outstanding
voting securities of the Company or any of its subsidiaries or any tender offer or exchange offer that if consummated would result in
any person or "group" (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) beneficially
owning 50% or more of the total outstanding voting securities of the Company or any of its subsidiaries or any merger, consolidation,
business combination or similar transaction involving the Company pursuant to which the stockholders of the Company immediately
preceding such transaction hold less than 50% of the equity interests in the surviving or resulting entity of such transaction; (B)
any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of all or substantially all of the assets of the Company. 7.2 Notice of Termination; Effect of Termination. Any termination of this Agreement under Section 7.1 above
will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto. In the event
of the termination of this Agreement as provided in Section 7.1, this Agreement shall be of no further force or effect, except (i) as
set forth in this Section 7.2, Section 7.3 and Article 8 (General Provisions), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for any willful breach of this Agreement. 7.3 Fees and Expenses. (a) General. Except as set forth in this Section 7.3, all fees and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Parent and the Company shall share equally all fees and expenses, other than attorneys' and
accountants' fees and expenses, incurred (i) in relation to the printing and filing of the Proxy Statement (including any preliminary
materials related thereto) and the Registration Statement (including financial statements and exhibits) and any amendments or
supplements thereto or (ii) for the pre-merger notification and report forms under the HSR Act. (b) Company Payments. (i) the Company shall pay to Parent in immediately available funds, within two (2) business days after demand
by Parent, an amount equal to $5,000,000 (the "COMPANY TERMINATION FEE") if this Agreement is terminated by Parent pursuant to
Section 7.1(h). (ii) the Company shall pay Parent in immediately available funds, within two (2) business days after demand by
Parent, an amount equal to the Company Termination Fee, if this Agreement is terminated by Parent or the Company, as applicable,
pursuant to Section 7.1(b) or Section 7.1(d) as a result of the Company's failure to obtain the required approvals of the
stockholders of the Company and any of the following shall occur: (1) if following the date hereof and prior to the termination of this Agreement, a third party has publicly
announced (and not publicly and irrevocably withdrawn) a Company Acquisition Offer and within the Applicable Period (as defined
below) a Company Acquisition (as defined below) is consummated; or -48- (2) if following the date hereof and prior to the termination of this Agreement, a third party has publicly
announced (and not publicly and irrevocably withdrawn) a Company Acquisition Offer and within the Applicable Period the Company
enters into an agreement or letter of intent providing for a Company Acquisition. (iii) the Company acknowledges that the agreements contained in this Section 7.3(b) are an integral part of
the transactions contemplated by this Agreement, and that, without these agreements, Parent would not enter into this Agreement;
accordingly, if the Company fails to pay in a timely manner the amounts due pursuant to this Section 7.3(b) and, in order to obtain
such payment, Parent commences a lawsuit that results in a judgment against the Company for the amounts set forth in this Section
7.3(b), the Company shall pay to Parent its reasonable costs and expenses (including reasonable attorneys' fees and expenses) in
connection with such lawsuit, together with interest on the amounts set forth in this Section 7.3(b) at the prime rate of The Chase
Manhattan Bank in effect on the date such payment was required to be made. Payment of the fees described in this Section 7.3(b) shall
not be in lieu of damages incurred in the event of breach of this Agreement. For the purposes of this Agreement, "COMPANY
ACQUISITION" shall mean any of the following transactions (other than the transactions contemplated by this Agreement): (i) a merger,
consolidation, business combination, recapitalization, or similar transaction involving the Company pursuant to which the
stockholders of the Company immediately preceding such transaction hold less than 50% of the aggregate equity interests in the
surviving or resulting entity of or Parent Company involved in such transaction, (ii) a sale or other disposition by the Company of
all or substantially all of its assets or (iii) the acquisition by any person or group (including by way of a tender offer or an
exchange offer or issuance by the Company), directly or indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 50% of the voting power of the then outstanding shares of capital stock of the Company.
(c) Parent Payments. (i) Parent shall pay to the Company in immediately available funds, within two (2) business days after demand
by the Company, an amount equal to $5,000,000 (the "PARENT TERMINATION FEE") if this Agreement is terminated by the Company pursuant
to Section 7.1(g). (ii) Parent shall pay the Company in immediately available funds, within two (2) business days after demand by
the Company, an amount equal to the Parent Termination Fee, if this Agreement is terminated by the Company or Parent, as applicable,
pursuant to Section 7.1(b) or Section 7.1(d) as a result of Parent's failure to obtain the required approvals of the stockholders of
Parent and any of the following shall occur: (1) if following the date hereof and prior to the termination of this Agreement, a third party has publicly
announced (and not publicly and irrevocably withdrawn) a Parent Acquisition Offer and within the Applicable Period a Parent
Acquisition (as defined below) is consummated; or (2) if following the date hereof and prior to the termination of this Agreement, a third party has publicly
announced (and not publicly and irrevocably withdrawn) a -49- Parent Acquisition Offer, and within the Applicable Period Parent enters into an agreement or letter of intent
providing for a Parent Acquisition. (iii) Parent acknowledges that the agreements contained in this Section 7.3(c) are an integral part of the
transactions contemplated by this Agreement, and that, without these agreements, the Company would not enter into this Agreement;
accordingly, if Parent fails to pay in a timely manner the amounts due pursuant to this Section 7.3(c) and, in order to obtain such
payment, the Company commences a lawsuit that results in a judgment against Parent for the amounts set forth in this Section 7.3(c),
Parent shall pay to the Company its reasonable costs and expenses (including reasonable attorneys' fees and expenses) in connection
with such lawsuit, together with interest on the amounts set forth in this Section 7.3(c) at the prime rate of The Chase Manhattan
Bank in effect on the date such payment was required to be made. Payment of the fees described in this Section 7.3(c) shall not be in
lieu of damages incurred in the event of breach of this Agreement. For the purposes of this Agreement, "PARENT ACQUISITION" shall
mean any of the following transactions (other than the transactions contemplated by this Agreement): (i) a merger, consolidation,
business combination, recapitalization, or similar transaction involving Parent pursuant to which the stockholders of Parent
immediately preceding such transaction hold less than 50% of the aggregate equity interests in the surviving or resulting entity of
or Parent Company involved in such transaction, (ii) a sale or other disposition by Parent all or substantially all or (iii) the
acquisition by any person or group (including by way of a tender offer or an exchange offer or issuance by Parent), directly or
indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing in excess of 50% of the voting
power of the then outstanding shares of capital stock of Parent. (d) Applicable Period. For the purposes of this Agreement, "APPLICABLE PERIOD" shall mean (i) the 12-month
period following the termination of this Agreement if the party with whom the Company (in the case of Section 7.3(b)) or Parent (in
the case of Section 7.3(c)) consummates a Company Acquisition or Parent Acquisition, respectively, or enters into an agreement or
letter of intent providing for a Company Acquisition or Parent Acquisition, respectively, or an affiliate thereof, has publicly
announced and not publicly and irrevocably withdrawn a Company Acquisition Offer or Parent Acquisition Offer, respectively, following
the date hereof and prior to the termination of this Agreement or (ii) the 6-month period following the termination of this
Agreement. 7.4 Amendment. Subject to applicable law, this Agreement may be amended by the parties hereto at any time by
execution of an instrument in writing signed on behalf of each of the parties hereto. 7.5 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right. -50- ARTICLE VIII GENERAL PROVISIONS 8.1 Non-Survival of Representations and Warranties. The representations, warranties and pre-closing
covenants of the Company, Parent and Merger Sub contained in this Agreement or in any certificate or instrument delivered pursuant
hereto shall terminate at the Effective Time, and only the covenants that by their terms survive the Effective Time shall survive the
Effective Time. 8.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on
the day of delivery, if delivered personally or on the second business day after delivery if delivered by commercial delivery
service, or sent via facsimile (receipt confirmed), to the parties at the following addresses or facsimile numbers (or at such other
address or facsimile numbers for a party as shall be specified by like notice): (a) if to Parent or Merger Sub, to: Komag, Incorporated 1710 Automation Parkway San Jose, CA 95131 Attention: Chief Executive Officer Fax No.: (408) 944-9540 with copies to: Wilson Sonsini Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Alan Austin, Esq. / Kathleen B. Bloch, Esq. Fax No.: (650) 461-5375 and to: Wilson Sonsini Goodrich & Rosati, Professional Corporation One Market Street Spear Street Tower, Suite 1600 San Francisco, California 94105 Attention: Steve L. Camahort, Esq. Fax No.: (415) 947-2099 (b) if to the Company, to: HMT Technology Corp. 1055 Page Avenue Freemont, CA 94538 Attention: Chief Executive Officer Fax No.: (510) 623-9570 -51- with a copy to: Cooley Godward LLP 3000 El Camino Real Palo Alto, CA 94306 Attention: James C. Kitch, Esq. Fax No.: (650) 849-7004 8.3 Interpretation; Knowledge. (a) When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this
Agreement unless otherwise indicated. The words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each case
to be followed by the words "WITHOUT LIMITATION." The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to "THE
BUSINESS OF" an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such
entity. Reference to the subsidiaries of an entity shall be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with respect to any matter in question, that
the executive officers of the Company or Parent, as the case may be, have actual knowledge of such matter. (c) For purposes of this Agreement, the term "Material Adverse Effect" when used in connection with an entity
means any change, event, violation, inaccuracy, circumstance, condition or effect which has had a material adverse effect on the
business, financial condition or results of operations of such entity and its subsidiaries taken as a whole; provided, however, that
in no event shall any of the following constitute a Material Adverse Effect or be taken into account in determining whether a
Material Adverse Effect has occurred: (i) a change in the trading prices of either of Parent's or Company's equity securities between
the date hereof and the Effective Time, in and of itself; (ii) a failure of Parent or Company to meet the publicly available forecast
financial information prepared by equity research analysts between the date hereof and the Effective Time; (iii) changes, events,
violations, inaccuracies, circumstances, conditions or effects generally affecting the industry in which either Parent or Company
operate or arising from changes in general business or economic conditions in the United States or in any jurisdiction in which
Parent or Company transacts business; (iv) changes, events, violations, inaccuracies, circumstances, conditions or effects resulting
from the announcement or pendency of this Agreement or of any of the transactions contemplated by this Agreement (including, without
limitation, any delays in customer orders or reductions in sales so resulting); and (v) changes that result directly from the
unreasonable delay or withholding of consent by the other party to actions otherwise prohibited by Section 4.1. 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered
one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and
delivered to the other party, it being understood that all parties need not sign the same counterpart. -52- 8.5 Entire Agreement. This Agreement and the documents and instruments and other agreements among the parties
hereto as contemplated by or referred to herein, including the Company Schedules and the Parent Schedules (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder, except as set forth herein. 8.6 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is
declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to
effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such
void or unenforceable provision. 8.7 Other Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or
equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties
hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at
law or in equity. In any action at law or suit in equity to enforce this Agreement or the rights of any of the parties hereunder, the
prevailing party in such action or suit shall be entitled to receive a reasonable sum for its attorneys' fees and all other
reasonable costs and expenses incurred in such action or suit. 8.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State
of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. 8.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the
negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement
or document. 8.10 Assignment. No party may assign either this Agreement or any of its rights, interests, or obligations
hereunder without the prior written approval of the of the parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. -53- 8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB IN THE NEGOTIATION, ADMINISTRATION,
PERFORMANCE AND ENFORCEMENT HEREOF. -54- IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed by their duly
authorized respective officers, as of the date first written above. KOMAG, INCORPORATED By: /s/ THIAN H. TAN Name: Thian H. Tan Title: President and Chief Executive Officer HMT TECHNOLOGY CORP. By: /s/ RONALD J. BUSCHUR Name: Ronald J. Buschur Title: President and Chief Operating Officer KHM, INC. By: /s/ EDWARD H. SIEGLER Name: Edward H. Siegler Title: Vice President ****REORGANIZATION AGREEMENT**** EXHIBIT A PARENT STOCK OPTION AGREEMENT THIS PARENT STOCK OPTION AGREEMENT (this "AGREEMENT") is made and entered into as of April 26, 2000, among HMT
Technology Corp., a Delaware corporation (the "COMPANY"), and Komag, Incorporated, a Delaware corporation ("PARENT"). Capitalized
terms used but not otherwise defined herein will have the meanings ascribed to them in the Merger Agreement (as defined below). RECITALS A. The Company, Merger Sub (as defined below) and Parent have entered into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the "MERGER") of a wholly-owned subsidiary of Parent ("MERGER
SUB") with and into the Company. Pursuant to the Merger, all outstanding capital stock of the Company will be converted into Common
Stock of Parent. B. As a condition to Parent's willingness to enter into the Merger Agreement, Parent has requested that the
Company agree, and the Company has so agreed, to grant to Parent an option to acquire shares of the Company's Common Stock, par value
$.01 per share (the "COMPANY SHARES"), upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein
and in the Merger Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged,
the parties hereto agree as follows: 1. Grant of Option. Parent hereby grants to the Company an irrevocable option (the "OPTION") to acquire up to
13,144,754 Parent Shares (the "OPTION SHARES"), in the manner set forth below by paying cash at a price of $3.0313 per share (the
"EXERCISE PRICE"). 2. Exercise of Option; Maximum Proceeds. (a) The Option may be exercised by the Company in whole or in part, at any time or from time to time (i) if
the Merger Agreement is terminated pursuant to 7.1(g) thereof or (ii) immediately prior to the occurrence of any event causing the
Parent Termination Fee to become payable pursuant to Section 7.3(c)(ii) thereof (any of the events being referred to herein as an
"EXERCISE EVENT"). In the event the Company wishes to exercise the Option, the Company will deliver to Parent a written notice (each
an "EXERCISE NOTICE") specifying the total number of Option Shares it wishes to acquire. Each closing of a purchase of Option Shares
(a "CLOSING") will occur on a date and at a time prior to the termination of the Option designated by the Company in an Exercise
Notice delivered at least two (2) business days prior to the date of such Closing, which Closing will be held at the principal
offices of Parent. (b) The Option will terminate upon the earliest of (i) the Effective Time, (ii) twelve (12) months following
the date on which the Merger Agreement is terminated pursuant to Section 7.1(b) or 7.1(d) thereof, if no event causing the
Termination Fee to become payable pursuant to Section 7.3(c)(ii) of the Merger Agreement has occurred, (iii) six (6) months following the date on which the
Merger Agreement is terminated pursuant to Section 7.1(h) thereof, (iv) in the event the Merger Agreement has been terminated
pursuant to Section 7.1(b) or 7.1(d) thereof and the Termination Fee became payable pursuant to Section 7.3(c)(ii) thereof, six (6)
months after payment of the Termination Fee; and (v) the date on which the Merger Agreement is otherwise terminated; provided,
however, that if the Option cannot be exercised by reason of any applicable government order, judgment or decree or because the
waiting period related to the issuance of the Option Shares under the HSR Act will not have expired or been terminated, then the
Option will not terminate until the tenth (10th) business day after such impediment to exercise will have been removed or will have
become final and not subject to appeal. 3. Conditions to Closing. The obligation of Parent to issue Option Shares to the Company hereunder is subject
to the conditions that (A) any waiting period under the HSR Act applicable to the issuance of the Option Shares hereunder will have
expired or been terminated; (B) all material consents, approvals, orders or authorizations of, or registrations, declarations or
filings with, any Federal, state or local administrative agency or commission or other Federal state or local governmental authority
or instrumentality, if any, required in connection with the issuance of the Option Shares hereunder will have been obtained or made,
as the case may be; and (C) no preliminary or permanent injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance will be in effect. It is understood and agreed that at any time during which the Option is
exercisable, the parties will use their respective commercially reasonable best efforts to satisfy all conditions to Closing, so that
a Closing may take place as promptly as practicable. 4. Closing. At any Closing, (A) Parent will deliver to the Company a single certificate in definitive form
representing the number of Parent Shares designated by Company in its Exercise Notice, such certificate to be registered in the name
of the Company and to bear the legend set forth in Section 11 hereof, against delivery of (B) payment by the Company to Parent of the
aggregate purchase price for the Parent Shares so designated and being purchased by delivery of a certified check or bank check. 5. Representations and Warranties. (a) By the Parent. Parent represents and warrants to the Company that (A) Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (B) the execution and delivery of this Agreement by Parent and
consummation by Parent of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the
part of Parent and no other corporate proceedings on the part of Parent are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (C) this Agreement has been duly executed and delivered by Parent and constitutes a legal, valid
and binding obligation of Parent and, assuming this Agreement constitutes a legal, valid and binding obligation of the Company, is
enforceable against Parent in accordance with its terms; (D) except for any filings required under the HSR Act, Parent has taken all
necessary corporate and other action to authorize and reserve for issuance and to permit it to issue upon exercise of the Option, and
at all times from the date hereof until the termination of the Option will have reserved for issuance, a sufficient number of
unissued Parent Shares for the Company to exercise the Option in full and will -2- take all necessary corporate or other action to authorize and reserve for issuance all additional Parent Shares or
other securities which may be issuable pursuant to Section 8(a) upon exercise of the Option, all of which, upon their issuance and
delivery in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable; (E) upon delivery of
the Parent Shares and any other securities to the Company upon exercise of the Option, the Company will acquire such Parent Shares or
other securities free and clear of all material claims, liens, charges, encumbrances and security interests of any kind or nature
whatsoever, excluding those imposed by the Company; (F) the execution and delivery of this Agreement by Parent do not, and the
performance of this Agreement by Parent will not, (i) conflict with or violate the Certificate of Incorporation or Bylaws or
equivalent organizational documents of Parent or any of its subsidiaries, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Parent or any of its subsidiaries or by which its or any of their respective properties is
bound or affected or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Parent's or any of its subsidiaries' rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the properties or assets of Parent or any of its subsidiaries pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any
of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties are bound
or affected; and (G) the execution and delivery of this Agreement by Parent does not, and the performance of this Agreement by Parent
will not, require any consent, approval, authorization or permit of, or filing with, or notification to, any Governmental Entity
except pursuant to the HSR Act. (b) By Parent. The Option and any Option Shares which Parent may hereafter acquire are being acquired by
Parent for its own account, for investment and not with a view to the distribution or resale thereof, except in compliance with the
Securities Act of 1933, as amended, and applicable state securities and blue sky laws. Parent has sufficient knowledge and experience
in investing in securities similar to the Option and to the Option Shares so as to be able to evaluate the risks and merits of any
investment in the Option and in the Option Shares and is able financially to bear the risks thereof, including a complete loss of its
investment. 6. The Company Put. At the request of and upon notice by the Company (the "PUT NOTICE"), at any time during
the period during which the Option is exercisable pursuant to Section 2 (the "PURCHASE PERIOD"), Parent (or any successor entity
thereof) will purchase from the Company the Option, to the extent not previously exercised, at the price set forth in subparagraph
(i) below (as limited by Section 10, below), and the Option Shares, if any, acquired by the Company pursuant thereto, at the price
set forth in subparagraph (ii) below (as limited by Section 10, below): (i) The amount, if any, by which the "MARKET/TENDER OFFER PRICE" for the Parent Shares as of the date the
Company gives notice of its intent to exercise its rights under this Section 6(a) exceeds the Exercise Price, multiplied by the
number of Parent Shares purchasable pursuant to the Option. "MARKET/TENDER OFFER PRICE" shall mean the highest of: (i) the highest
purchase price per share paid after the date of this Agreement and on or prior to the delivery of the Put Notice pursuant to any
tender or exchange offer made for shares of Company Common Stock, (ii) the highest price per share paid or to be paid by any Person
for shares of Company Common Stock pursuant to any agreement contemplating a merger or other business combination transaction -3- involving the Company that was entered into after the date of this Agreement and on or prior to the delivery of
the Put Notice or (iii) the average of the highest bid prices per share of Company Common Stock as quoted on the Nasdaq National
Market (or if Company share of Company Common Stock as quoted on the Nasdaq National Market (or if Company Common Stock is not quoted
on the Nasdaq National Market, the highest bid price per share of Company Common Stock as quoted on any other market comprising a
part of the Nasdaq Stock Market or, if the shares of Company Common Stock are not quoted thereon, on the principal trading market (as
defined in Regulation M under the Exchange Act) on which such shares are traded as reported by a recognized source) during the 20-day
period ending on the date of delivery of the Put Notice. For purposes of determining the highest price offered pursuant to any Parent
Acquisition Proposal which involves consideration other than cash, the value of such consideration will be equal to the higher of (x)
if securities of the same class of the proponent as such consideration are traded on any national securities exchange or by any
registered securities association, a value based on the closing sale price or asked price for such securities on their principal
trading market on such date and (y) the value ascribed to such consideration by the proponent of such Parent Acquisition Proposal, or
if no such value is ascribed, a value determined in good faith by the Board of Directors of Parent. (ii) The Exercise Price paid by the Company for Parent Shares acquired pursuant to the Option plus the amount
by which the Market/Tender Offer Price exceeds the Exercise Price multiplied by the number of Parent Shares so purchased. 7. Payment and Redelivery of Option or Shares. In the event the Company exercises its rights under Section 6,
Parent will, within five (5) business days after the Company delivers notice pursuant to Section 6, pay the required amount to the
Company in immediately available funds and the Company will surrender to Parent the Option and the certificates evidencing the Parent
Shares purchased by the Company pursuant thereto. 8. Registration Rights. (a) Following the termination of the Merger Agreement and until such time as all Option Shares issued to
Parent may be sold pursuant to Rule 144(d) of the Securities Act of 1933 (the "REGISTRATION PERIOD"), the Company (sometimes referred
to herein as the "HOLDER") may by written notice (a "REGISTRATION NOTICE") to Parent (the "REGISTRANT") request the Registrant to
register under the Securities Act all or any part of the shares acquired by the Holder pursuant to this Agreement (such shares
requested to be registered, the "REGISTRABLE SECURITIES") in order to permit the sale or other disposition of any or all shares of
the Registrable Securities that have been acquired by or are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision. Holder agrees to cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement to be effected on a widely distributed basis so that
upon consummation thereof no purchaser or transferee will own beneficially more than 5.0% of the then-outstanding voting power of
Registrant. Upon a request for registration, the Registrant will have the option exercisable by written notice delivered to the
Holder within ten (10) business days after the receipt of the Registration Notice, irrevocably to agree to purchase all or any part
of the Registrable Securities for cash at a price (the "OPTION PRICE") equal to the product of (i) the number of Registrable
Securities so purchased and (ii) the per share average of the closing sale prices of the Registrant's Common -4- Stock on Nasdaq for the ten (10) trading days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder will take place at a closing to be held at the principal executive
offices of the Registrant or its counsel at any reasonable date and time designated by the Registrant in such notice within ten (10)
business days after delivery of such notice. The payment for the shares to be purchased will be made by delivery at the time of such
closing of the Option Price in immediately available funds. (b) The Registrant will use all reasonable efforts to effect, as promptly as practicable, the registration
under the Securities Act of the unpurchased Registrable Securities requested to be registered in the Registration Notice and to keep
such registration statement effective for such period not in excess of 120 calendar days from the day such registration statement
first becomes effective as may be reasonably necessary to effect such sale or other disposition; provided, however, that the Holder
will not be entitled to more than an aggregate of two (2) effective registration statements hereunder. The obligations of Registrant
hereunder to file a registration statement and to maintain its effectiveness may be suspended for up to 90 calendar days in the
aggregate if the Board of Directors of Registrant shall have determined that the filing of such registration statement or the
maintenance of its effectiveness would require premature disclosure of material nonpublic information that would materially and
adversely affect Registrant or otherwise interfere with or adversely affect any pending or proposed offering of securities of
Registrant or any other material transaction involving Registrant. The Registrant will use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified for sale under the securities or blue sky laws of such
jurisdictions as the Holder may reasonably request and will continue such registration or qualification in effect in such
jurisdictions; provided, however, that the Registrant will not be required to qualify to do business in, or consent to general
service of process in, any jurisdiction by reason of this provision. If during the Registration Period, Registrant effects a
registration under the Securities Act of Parent Common Stock for its own account or for any other stockholders of Registrant (other
than on Form S-4 or Form S-8, or any successor form), it will, in addition to the Registrant's other obligations under this Section
8, allow Holder the right to participate in such registration by selling its Registrable Securities; provided that the Holder
participates in the underwriting; provided, however, that if the managing underwriter of such offering advises the Registrant in
writing that in its opinion the number of shares of Company Stock requested to be included therein by Holder pro rata (based on the
number of shares intended to be included therein) with the shares intended to be included therein by Persons other than the
Registrant. In connection with any offering, sale and delivery of Company Common Stock pursuant to a registration effected pursuant
to this Section 8, the Registrant and the Holder shall provide each other and each underwriter of the offering with customary
representations, warranties and covenants, including covenants of indemnification and contribution. (c) The registration rights set forth in this Section 8 are subject to the condition that the Holder will
provide the Registrant with such information with respect to the Holder's Registrable Securities, the plan for distribution thereof,
and such other information with respect to the Holder as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all facts required to be disclosed with respect to a registration
thereunder. (d) A registration effected under this Section 8 will be effected at the Registrant's expense, except for
underwriting discounts and commissions and the fees and expenses of counsel to -5- the Holder, and the Registrant will provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in connection with underwritten public offerings and as
such underwriters may reasonably require. In connection with any registration, the Holder and the Registrant agree to enter into an
underwriting agreement reasonably acceptable to each such party, in form and substance customary for transactions of this type with
the underwriters participating in such offering. (e) Indemnification. (i) The Registrant will indemnify the Holder, each of its directors and officers and each person who controls
the Holder within the meaning of Section 15 of the Securities Act, and each underwriter of the Registrant's securities, with respect
to any registration, qualification or compliance which has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration, qualification or compliance, and the Registrant will reimburse
the Holder and, each of its directors and officers and each person who controls the Holder within the meaning of Section 15 of the
Securities Act, and each underwriter for any legal and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action; provided, that the Registrant will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the
Registrant by such Holder or director or officer or controlling person or underwriter seeking indemnification. (ii) The Holder will indemnify the Registrant, each of its directors and officers and each underwriter of the
Registrant's securities covered by such registration statement and each person who controls the Registrant within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the Holder of any rule or regulation promulgated under
the Securities Act applicable to the Holder in connection with any such registration, qualification or compliance, and will reimburse
the Registrant, such directors, officers or control persons or underwriters for any legal or any other expenses reasonably incurred
in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in
such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written
information -6- furnished to the Registrant by the Holder for use therein; provided, that in no event will any indemnity under
this Section 8(e) exceed the net proceeds of the offering received by the Holder. (iii) Each party entitled to indemnification under this Section 8(e) (the "INDEMNIFIED PARTY") will give
notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and will permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided, that counsel for the Indemnifying Party, who will conduct the defense of such
claim or litigation, will be approved by the Indemnified Party (whose approval will not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party will pay
such expense if representation of the Indemnified Party by counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further, however, that the failure of any Indemnified Party to give notice as provided herein will not
relieve the Indemnifying Party of its obligations under this Section 8(e) unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or
litigation will, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. No Indemnifying Party will be required to indemnify any
Indemnified Party with respect to any settlement entered into without such Indemnifying Party's prior consent (which will not be
unreasonably withheld). 9. Adjustment Upon Changes in Capitalization. (a) In the event of any change in the Parent Shares by reason of stock dividends, stock splits, reverse stock
splits, mergers (other than the Merger), recapitalizations, combinations, exchanges of shares and the like, the type and number of
shares or securities subject to the Option, and the Exercise Price will be adjusted appropriately, and proper provision will be made
in the agreements governing such transaction so that the Company will receive, upon exercise of the Option, the number and class of
shares or other securities or property that the Company would have received in respect of the Parent Shares if the Option had been
exercised immediately prior to such event or the record date therefor, as applicable. (b) Without limiting the parties' relative rights and obligations under the Merger Agreement, if the number of
outstanding shares of Parent Common Stock increases or decreases after the date of this Agreement (other than pursuant to an event
described in Section 9(a)), the number of shares of Parent Common Stock subject to the Option (including those Option Shares which
may have already been exercised) will be adjusted so that it equals 19.99% of the number of shares of Parent Common Stock then issued
and outstanding, without giving effect to any Option Shares. 10. Profit Limitation. -7- (a) Notwithstanding any other provision in this Agreement or the Reorganization Agreement, in no event shall
Parent's Total Profit (as defined below) exceed $6,000,000 (the "MAXIMUM PROFIT") and, if Parent's Total Profit otherwise would
exceed the Maximum Profit, Parent, at its sole discretion, shall either (i) reduce the number of Option Shares subject to the Option,
(ii) deliver to the Company for cancellation Option Shares (or other securities into which such Option Shares are converted or
exchanged) previously purchased by Parent, (iii) pay cash to the Company, or (iv) any combination of the foregoing, so that Parent's
actually realized Total Profit shall not exceed the Maximum Profit after taking into account the foregoing actions. (b) For purposes of this Agreement, "TOTAL PROFIT" shall mean: (i) the aggregate amount (before taxes) of (A)
any excess of (x) the net cash amounts or fair market value of any property received by Parent pursuant to a sale of Option Shares
(or securities into which such shares are converted or exchanged) over (y) the Parent's aggregate purchase price for such Option
Shares (or other securities), plus (B) any amounts received by Parent pursuant to the repurchase of the Option by the Company
pursuant to Section 6, plus (C) any termination fee paid in cash by the Company and received by Parent pursuant to the Reorganization
Agreement, minus (ii) the amounts of any cash previously paid by Parent to the Company pursuant to this Section 10 plus the value of
the Option Shares (or other securities) previously delivered by Parent to the Company for cancellation pursuant to this Section 10.
(c) For purposes of Section 10(a) and clause (ii) of Section 10(b), the value of any Option Shares delivered
by Parent to the Company shall be the Market/Tender Offer Price of such Option Shares. 11. Restrictive Legends. Each certificate representing Option Shares issued to the Company hereunder will
include a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF APRIL 25, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. It is understood and agreed that (i) the reference to restrictions arising under the Securities Act in the
above legend will be removed by delivery of substitute certificate(s) without such reference if such Option Shares have been
registered pursuant to the Securities Act, such Option Shares have been sold in reliance on and in accordance with Rule 144 under the
Securities Act or Holder has delivered to Registrant a copy of a letter from the staff of the SEC, or an opinion of counsel in form
and substance reasonably satisfactory to Registrant and its counsel, to the effect that such legend is not required for purposes of
the Securities Act and (ii) the reference to restrictions pursuant to this Agreement in the above legend will be removed by delivery
of substitute certificate(s) without such reference if the Option Shares evidenced by certificate(s) containing such reference have
been sold or transferred in compliance with the provisions of this Agreement under circumstances that do not require the retention of
such reference. -8- 12. Listing and HSR Filing. Parent, upon the request of the Company, will promptly file an application to list
the Parent Shares to be acquired upon exercise of the Option for quotation on Nasdaq and will use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each of the parties hereto will promptly file with the
Federal Trade Commission and the Antitrust Division of the United States Department of Justice all required premerger notification
and report forms and other documents and exhibits required to be filed under the HSR Act to permit the acquisition of the Parent
Shares subject to the Option at the earliest possible date. 13. Binding Effect. This Agreement will be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer
upon any person other than the parties hereto and their respective successors and permitted assigns any rights or remedies of any
nature whatsoever by reason of this Agreement. Any shares sold by a party in compliance with the provisions of Section 8 will, upon
consummation of such sale, be free of the restrictions imposed with respect to such shares by this Agreement and any transferee of
such shares will not be entitled to the rights of such party. Certificates representing shares sold in a registered public offering
pursuant to Section 8 will not be required to bear the legend set forth in Section 11. 14. Specific Performance. The parties hereto recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm
or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party hereto agrees that in
addition to other remedies the other party hereto will be entitled to an injunction restraining any violation or threatened violation
of the provisions of this Agreement or the right to enforce any of the covenants or agreements set forth herein by specific
performance. In the event that any action will be brought in equity to enforce the provisions of the Agreement, neither party hereto
will allege, and each party hereto hereby waives the defense, that there is an adequate remedy at law. 15. Entire Agreement. This Agreement and the Merger Agreement (including the appendices thereto) constitute
the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof. 16. Further Assurances. Each party hereto will execute and deliver all such further documents and instruments
and take all such further action as may be necessary in order to consummate the transactions contemplated hereby. 17. Validity. The invalidity or unenforceability of any provision of this Agreement will not affect the
validity or enforceability of the other provisions of this Agreement, which will remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this Agreement to be null, void or unenforceable, the parties
hereto will negotiate in good faith and will execute and deliver an amendment to this Agreement in order, as nearly as possible, to
effectuate, to the extent permitted by law, the intent of the parties hereto with respect to such provision. -9- 18. Notices. All notices and other communications hereunder will be in writing and will be deemed given if
delivered personally or by commercial delivery service, or sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers for a party as will be specified by like notice): (a) if to the Company, to: HMT Technology Corp. 1055 Page Avenue Fremont, CA 94538 Attention: Chief Financial Officer Facsimile: (510) 623-9570 with a copy to: Cooley Godward LLP 3000 El Camino Real Palo Alto, CA 94306 Attention: James C. Kitch, Esq. Facsimile: (650) 849-7004 (b) if to Parent, to: Komag, Incorporated 1710 Automation Parkway San Jose, CA 95131 Attention: Chief Executive Officer Facsimile: (408) 944-9540 with copies to: Wilson, Sonsini, Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Alan K. Austin, Esq./Kathleen B. Bloch, Esq. Facsimile: (650) 461-5375 -10- and to: Wilson Sonsini Goodrich & Rosati Professional Corporation One Market Street Spear Street Tower, Suite 1600 San Francisco, California 94105 Attention: Steve L. Camahort, Esq. Facsimile: (415) 947-2099 19. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State
of Delaware applicable to agreements made and to be performed entirely within such State. 20. Expenses. Except as otherwise expressly provided herein or in the Merger Agreement, all costs and expenses
incurred in connection with the transactions contemplated by this Agreement will be paid by the party incurring such expenses. 21. Attorney's Fees. In any action at law or suit in equity to enforce this Option Agreement or the rights of
any of the parties hereunder, the prevailing party in such action or suit shall be entitled to receive a reasonable sum for its
attorney's fees and all other reasonable costs and expenses incurred in such action or suit. 22. Amendments; Waiver. This Agreement may be amended by the parties hereto and the terms and conditions
hereof may be waived only by an instrument in writing signed on behalf of each of the parties hereto, or, in the case of a waiver, by
an instrument signed on behalf of the party waiving compliance. 23. Assignment. Neither of the parties hereto may sell, transfer, assign or otherwise dispose of any of its
rights or obligations under this Agreement or the Option created hereunder to any other person, without the express written consent
of the other party, except that the rights and obligations hereunder will inure to the benefit of and be binding upon any successor
of a party hereto. 24. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed to be an
original, but both of which, taken together, will constitute one and the same instrument. -11- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly
authorized officers as of the date first above written. HMT TECHNOLOGY CORP. By: Name: Title: KOMAG, INCORPORATED By: Name: Title: [SIGNATURE PAGE TO PARENT STOCK OPTION AGREEMENT] EXHIBIT B COMPANY STOCK OPTION AGREEMENT THIS COMPANY STOCK OPTION AGREEMENT (this "AGREEMENT") is made and entered into as of April 26, 2000,
among Komag, Incorporated, a Delaware corporation ("PARENT"), and HMT Technology Corp., a Delaware corporation (the "COMPANY").
Capitalized terms used but not otherwise defined herein will have the meanings ascribed to them in the Merger Agreement (as defined
below). RECITALS A. The Company, Merger Sub (as defined below) and Parent have entered into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the "MERGER") of a wholly-owned subsidiary of Parent ("MERGER
SUB") with and into the Company. Pursuant to the Merger, all outstanding capital stock of the Company will be converted into Common
Stock of Parent. B. As a condition to Parent's willingness to enter into the Merger Agreement, Parent has requested that the
Company agree, and the Company has so agreed, to grant to Parent an option to acquire shares of the Company's Common Stock, par value
$.001 per share (the "COMPANY SHARES"), upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein
and in the Merger Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged,
the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to Parent an irrevocable option (the "OPTION") to acquire up to
9,193,051 Company Shares (the "OPTION SHARES"), in the manner set forth below by paying cash at a price of $2.7566 per share (the
"EXERCISE PRICE"). 2. Exercise of Option; Maximum Proceeds. (a) The Option may be exercised by Parent, in whole or in part, at any time or from time to time (i) if the
Merger Agreement is terminated pursuant to 7.1(h) thereof or (ii) immediately prior to the occurrence of any event causing the
Company Termination Fee to become payable pursuant to Section 7.3(b)(ii) thereof (any of the events being referred to herein as an
"EXERCISE EVENT"). In the event Parent wishes to exercise the Option, Parent will deliver to the Company a written notice (each an
"EXERCISE NOTICE") specifying the total number of Option Shares it wishes to acquire. Each closing of a purchase of Option Shares (a
"CLOSING") will occur on a date and at a time prior to the termination of the Option designated by Parent in an Exercise Notice
delivered at least two (2) business days prior to the date of such Closing, which Closing will be held at the principal offices of
the Company. (b) The Option will terminate upon the earliest of (i) the Effective Time, (ii) twelve (12) months following
the date on which the Merger Agreement is terminated pursuant to Section 7.1(b) or 7.1(d) thereof, if no event causing the
Termination Fee to become payable pursuant to Section 7.3(b)(ii) of the Merger Agreement has occurred, (iii) six (6) months following the date on which the
Merger Agreement is terminated pursuant to Section 7.1(h) thereof, (iv) in the event the Merger Agreement has been terminated
pursuant to Section 7.1(b) or 7.1(d) thereof and the Termination Fee became payable pursuant to Section 7.3(b)(ii) thereof, six (6)
months after payment of the Termination Fee; and (v) the date on which the Merger Agreement is otherwise terminated; provided,
however, that if the Option cannot be exercised by reason of any applicable government order, judgment or decree or because the
waiting period related to the issuance of the Option Shares under the HSR Act will not have expired or been terminated, then the
Option will not terminate until the tenth (10th) business day after such impediment to exercise will have been removed or will have
become final and not subject to appeal. 3. Conditions to Closing. The obligation of the Company to issue Option Shares to Parent hereunder is subject
to the conditions that (A) any waiting period under the HSR Act applicable to the issuance of the Option Shares hereunder will have
expired or been terminated; (B) all material consents, approvals, orders or authorizations of, or registrations, declarations or
filings with, any Federal, state or local administrative agency or commission or other Federal state or local governmental authority
or instrumentality, if any, required in connection with the issuance of the Option Shares hereunder will have been obtained or made,
as the case may be; and (C) no preliminary or permanent injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance will be in effect. It is understood and agreed that at any time during which the Option is
exercisable, the parties will use their respective commercially reasonable efforts to satisfy all conditions to Closing, so that a
Closing may take place as promptly as practicable. 4. Closing. At any Closing, (A) the Company will deliver to Parent a single certificate in definitive form
representing the number of Company Shares designated by Parent in its Exercise Notice, such certificate to be registered in the name
of Parent and to bear the legend set forth in Section 11 hereof, against delivery of (B) payment by Parent to the Company of the
aggregate purchase price for the Company Shares so designated and being purchased by delivery of a certified check or bank check.
5. Representations and Warranties. (a) By the Company. The Company represents and warrants to Parent that (A) the Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (B) the execution and delivery of this Agreement by the Company
and consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or
any of the transactions contemplated hereby; (C) this Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company and, assuming this Agreement constitutes a legal, valid and binding obligation of
Parent, is enforceable against the Company in accordance with its terms; (D) except for any filings required under the HSR Act, the
Company has taken all necessary corporate and other action to authorize and reserve for issuance and to permit it to issue upon
exercise of the Option, and at all times from the date hereof until the -2- termination of the Option will have reserved for issuance, a sufficient number of unissued Company Shares for
Parent to exercise the Option in full and will take all necessary corporate or other action to authorize and reserve for issuance all
additional Company Shares or other securities which may be issuable pursuant to Section 8(a) upon exercise of the Option, all of
which, upon their issuance and delivery in accordance with the terms of this Agreement, will be validly issued, fully paid and
nonassessable; (E) upon delivery of the Company Shares and any other securities to Parent upon exercise of the Option, Parent will
acquire such Company Shares or other securities free and clear of all material claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, excluding those imposed by Parent; (F) the execution and delivery of this Agreement by
the Company do not, and the performance of this Agreement by the Company will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws or equivalent organizational documents of the Company or any of its subsidiaries, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected or (iii) result in any breach of or constitute a default (or an event that
with notice or lapse of time or both would become a default) under, or impair the Company's or any of its subsidiaries' rights or
alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or its or any of their respective properties are bound or affected; and (G) the execution and delivery of this Agreement
by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization
or permit of, or filing with, or notification to, any Governmental Entity except pursuant to the HSR Act. (b) By Parent. The Option and any Option Shares which Parent may hereafter acquire are being acquired by
Parent for its own account, for investment and not with a view to the distribution or resale thereof, except in compliance with the
Securities Act of 1933, as amended, and applicable state securities and blue sky laws. Parent has sufficient knowledge and experience
in investing in securities similar to the Option and to the Option Shares so as to be able to evaluate the risks and merits of any
investment in the Option and in the Option Shares and is able financially to bear the risks thereof, including a complete loss of its
investment. 6. Parent Put. At the request of and upon notice by Parent (the "PUT NOTICE"), at any time during the period
during which the Option is exercisable pursuant to Section 2 (the "PURCHASE PERIOD"), the Company (or any successor entity thereof)
will purchase from Parent the Option, to the extent not previously exercised, at the price set forth in subparagraph (i) below (as
limited by Section 10, below), and the Option Shares, if any, acquired by Parent pursuant thereto, at the price set forth in
subparagraph (ii) below (as limited by Section 10, below): (i) The amount, if any, by which the "MARKET/TENDER OFFER PRICE" for the Company Shares as of the date Parent
gives notice of its intent to exercise its rights under this Section 6(a) exceeds the Exercise Price, multiplied by the number of
Company Shares purchasable pursuant to the Option. "Market/Tender Offer Price" shall mean the highest of: (i) the highest purchase
price per share paid after the date of this Agreement and on or prior to the delivery of the -3- Put Notice pursuant to any tender or exchange offer made for shares of Company Common Stock, (ii) the highest
price per share paid or to be paid by any Person for shares of Company Common Stock pursuant to any agreement contemplating a merger
or other business combination transaction involving the Company that was entered into after the date of this Agreement and on or
prior to the delivery of the Put Notice or (iii) the average of the highest bid prices per share of Company Common Stock as quoted on
the Nasdaq National Market (or if Company Common Stock is not quoted on the Nasdaq National Market, the highest bid price per share
of Company Common Stock as quoted on any other market comprising a part of the Nasdaq Stock Market or, if the shares of Company
Common Stock are not quoted thereon, on the principal trading market (as defined in Regulation M under the Exchange Act) on which
such shares are traded as reported by a recognized source) during the 20-day period ending on the date of delivery of the Put Notice.
For purposes of determining the highest price offered pursuant to any Company Acquisition Proposal which involves consideration other
than cash, the value of such consideration will be equal to the higher of (x) if securities of the same class of the proponent as
such consideration are traded on any national securities exchange or by any registered securities association, a value based on the
closing sale price or asked price for such securities on their principal trading market on such date and (y) the value ascribed to
such consideration by the proponent of such Company Acquisition Proposal, or if no such value is ascribed, a value determined in good
faith by the Board of Directors of the Company. (ii) The Exercise Price paid by Parent for the Company Shares acquired pursuant to the Option plus the amount
by which the Market/Tender Offer Price exceeds the Exercise Price multiplied by the number of Company Shares so purchased. 7. Payment and Redelivery of Option or Shares. In the event Parent exercises its rights under Section 6, the
Company will, within five (5) business days after Parent delivers notice pursuant to Section 6, pay the required amount to Parent in
immediately available funds and Parent will surrender to the Company the Option and the certificates evidencing the Company Shares
purchased by Parent pursuant thereto. 8. Registration Rights. (a) Following the termination of the Merger Agreement and until such time as all Option Shares issued to
Parent may be sold pursuant to Rule 144(k) of the Securities Act of 1933 (the "REGISTRATION PERIOD"), Parent (sometimes referred to
herein as the "HOLDER") may by written notice (a "REGISTRATION NOTICE") to the Company (the "REGISTRANT") request the Registrant to
register under the Securities Act all or any part of the shares acquired by the Holder pursuant to this Agreement (such shares
requested to be registered, the "REGISTRABLE SECURITIES") in order to permit the sale or other disposition of any or all shares of
the Registrable Securities that have been acquired by or are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision. Holder agrees to cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement to be effected on a widely distributed basis so that
upon consummation thereof no purchaser or transferee will own beneficially more than 5.0% of the then-outstanding voting power of
Registrant. Upon a request for registration, the Registrant will have the option exercisable -4- by written notice delivered to the Holder within ten (10) business days after the receipt of the Registration
Notice, irrevocably to agree to purchase all or any part of the Registrable Securities for cash at a price (the "OPTION PRICE" equal
to the product of (i) the number of Registrable Securities so purchased and (ii) the per share average of the closing sale prices of
the Registrant's Common Stock on Nasdaq for the ten (10) trading days immediately preceding the date of the Registration Notice. Any
such purchase of Registrable Securities by the Registrant hereunder will take place at a closing to be held at the principal
executive offices of the Registrant or its counsel at any reasonable date and time designated by the Registrant in such notice within
ten (10) business days after delivery of such notice. The payment for the shares to be purchased will be made by delivery at the time
of such closing of the Option Price in immediately available funds. (b) The Registrant will use all reasonable efforts to effect, as promptly as practicable, the registration
under the Securities Act of the unpurchased Registrable Securities requested to be registered in the Registration Notice and to keep
such registration statement effective for such period not in excess of 120 calendar days from the day such registration statement
first becomes effective as may be reasonably necessary to effect such sale or other disposition; provided, however, that the Holder
will not be entitled to more than an aggregate of two (2) effective registration statements hereunder. The obligations of Registrant
hereunder to file a registration statement and to maintain its effectiveness may be suspended for up to 90 calendar days in the
aggregate if the Board of Directors of Registrant shall have determined that the filing of such registration statement or the
maintenance of its effectiveness would require premature disclosure of material nonpublic information that would materially and
adversely affect Registrant or otherwise interfere with or adversely affect any pending or proposed offering of securities of
Registrant or any other material transaction involving Registrant. The Registrant will use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified for sale under the securities or blue sky laws of such
jurisdictions as the Holder may reasonably request and will continue such registration or qualification in effect in such
jurisdictions; provided, however, that the Registrant will not be required to qualify to do business in, or consent to general
service of process in, any jurisdiction by reason of this provision. If during the Registration Period, Registrant effects a
registration under the Securities Act of the Company Common Stock for its own account or for any other stockholders of Registrant
(other than on Form S-4 or Form S-8, or any successor form), it will, in addition to the Registrant's other obligations under this
Section 8, allow Holder the right to participate in such registration by selling its Registrable Securities; provided that the Holder
participates in the underwriting; provided, however, that, if the managing underwriter of such offering advises the Registrant in
writing that in its opinion the number of shares of Company Stock requested to be included therein by Holder pro rata (based on the
number of shares intended to be included therein) with the shares intended to be included therein by Persons other than the
Registrant. In connection with any offering, sale and delivery of Company Common Stock pursuant to a registration effected pursuant
to this Section 8, the Registrant and the Holder shall provide each other and each underwriter of the offering with customary
representations, warranties and covenants, including covenants of indemnification and contribution. (c) The registration rights set forth in this Section 8 are subject to the condition that the Holder will
provide the Registrant with such information with respect to the Holder's Registrable Securities, the plan for distribution thereof,
and such other information with respect to the Holder as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the -5- Registrant to include in a registration statement all facts required to be disclosed with respect to a
registration thereunder. (d) A registration effected under this Section 8 will be effected at the Registrant's expense, except for
underwriting discounts and commissions and the fees and expenses of counsel to the Holder, and the Registrant will provide to the
underwriters such documentation (including certificates, opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may reasonably require. In connection with any registration,
the Holder and the Registrant agree to enter into an underwriting agreement reasonably acceptable to each such party, in form and
substance customary for transactions of this type with the underwriters participating in such offering. (e) Indemnification. (i) The Registrant will indemnify the Holder, each of its directors and officers and each person who controls
the Holder within the meaning of Section 15 of the Securities Act, and each underwriter of the Registrant's securities, with respect
to any registration, qualification or compliance which has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration, qualification or compliance, and the Registrant will reimburse
the Holder and, each of its directors and officers and each person who controls the Holder within the meaning of Section 15 of the
Securities Act, and each underwriter for any legal and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action; provided, that the Registrant will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the
Registrant by such Holder or director or officer or controlling person or underwriter seeking indemnification. (ii) The Holder will indemnify the Registrant, each of its directors and officers and each underwriter of the
Registrant's securities covered by such registration statement and each person who controls the Registrant within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the Holder of any rule or regulation promulgated under
the Securities Act applicable to the Holder in connection with any such -6- registration, qualification or compliance, and will reimburse the Registrant, such directors, officers or control
persons or underwriters for any legal or any other expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with written information furnished to the Registrant by the
Holder for use therein; provided, that in no event will any indemnity under this Section 8(e) exceed the net proceeds of the offering
received by the Holder. (iii) Each party entitled to indemnification under this Section 8(e) (the "INDEMNIFIED PARTY") will give
notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and will permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided, that counsel for the Indemnifying Party, who will conduct the defense of such
claim or litigation, will be approved by the Indemnified Party (whose approval will not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party will pay
such expense if representation of the Indemnified Party by counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further, however, that the failure of any Indemnified Party to give notice as provided herein will not
relieve the Indemnifying Party of its obligations under this Section 8(e) unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or
litigation will, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. No Indemnifying Party will be required to indemnify any
Indemnified Party with respect to any settlement entered into without such Indemnifying Party's prior consent (which will not be
unreasonably withheld). 9. Adjustment Upon Changes in Capitalization. (a) In the event of any change in the Company Shares by reason of stock dividends, stock splits, reverse stock
splits, mergers (other than the Merger), recapitalizations, combinations, exchanges of shares and the like, the type and number of
shares or securities subject to the Option and the Exercise Price will be adjusted appropriately, and proper provision will be made
in the agreements governing such transaction so that Parent will receive, upon exercise of the Option, the number and class of shares
or other securities or property that Parent would have received in respect of the Company Shares if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable. (b) Without limiting the parties' relative rights and obligations under the Merger Agreement, if the number of
outstanding shares of the Company Common Stock increases or decreases after the date of this Agreement (other than pursuant to an
event described in Section 9(a)), the number of shares of the Company Common Stock subject to the Option (including -7- those Option Shares which may have already been exercised) will be adjusted so that it equals 19.99% of the number
of shares of the Company Common Stock then issued and outstanding, without giving effect to any Option Shares. 10. Profit Limitation. (a) Notwithstanding any other provision in this Agreement or the Reorganization Agreement, in no event shall
Parent's Total Profit (as defined below) exceed $6,000,000 (the "Maximum Profit") and, if Parent's Total Profit otherwise would
exceed the Maximum Profit, Parent, at its sole discretion, shall either (i) reduce the number of Option Shares subject to the Option,
(ii) deliver to the Company for cancellation Option Shares (or other securities into which such Option Shares are converted or
exchanged) previously purchased by Parent, (iii) pay cash to the Company, or (iv) any combination of the foregoing, so that Parent's
actually realized Total Profit shall not exceed the Maximum Profit after taking into account the foregoing actions. (b) For purposes of this Agreement, "Total Profit" shall mean: (i) the aggregate amount (before taxes) of (A)
any excess of (x) the net cash amounts or fair market value of any property received by Parent pursuant to a sale of Option Shares
(or securities into which such shares are converted or exchanged) over (y) the Parent's aggregate purchase price for such Option
Shares (or other securities), plus (B) any amounts received by Parent pursuant on the repurchase of the Option by the Company
pursuant to Section 6, plus (C) any termination fee paid in cash by the Company and received by Parent pursuant to the Reorganization
Agreement, minus (ii) the amounts of any cash previously paid by Parent to the Company pursuant to this Section 10 plus the value of
the Option Shares (or other securities) previously delivered by Parent to the Company for cancellation pursuant to this Section 10.
(c) For purposes of Section 10(a) and clause (ii) of Section 10(b), the value of any Option Shares delivered
by Parent to the Company shall be the Market/Tender Offer Price of such Option Shares. 11. Restrictive Legends. Each certificate representing Option Shares issued to Parent hereunder will include a
legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF APRIL 25, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. It is understood and agreed that (i) the reference to restrictions arising under the Securities Act in the
above legend will be removed by delivery of substitute certificate(s) without such reference if such Option Shares have been
registered pursuant to the Securities Act, such Option Shares have been sold in reliance on and in accordance with Rule 144 under the
Securities Act or -8- Holder has delivered to Registrant a copy of a letter from the staff of the SEC, or an opinion of counsel in
form and substance reasonably satisfactory to Registrant and its counsel, to the effect that such legend is not required for purposes
of the Securities Act and (ii) the reference to restrictions pursuant to this Agreement in the above legend will be removed by
delivery of substitute certificate(s) without such reference if the Option Shares evidenced by certificate(s) containing such
reference have been sold or transferred in compliance with the provisions of this Agreement under circumstances that do not require
the retention of such reference. 12. Listing and HSR Filing. The Company, upon the request of Parent, will promptly file an application to list
the Company Shares to be acquired upon exercise of the Option for quotation on Nasdaq and will use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date hereof, each of the parties hereto will promptly file with
the Federal Trade Commission and the Antitrust Division of the United States Department of Justice all required premerger
notification and report forms and other documents and exhibits required to be filed under the HSR Act to permit the acquisition of
the Company Shares subject to the Option at the earliest possible date. 13. Binding Effect. This Agreement will be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer
upon any person other than the parties hereto and their respective successors and permitted assigns any rights or remedies of any
nature whatsoever by reason of this Agreement. Any shares sold by a party in compliance with the provisions of Section 8 will, upon
consummation of such sale, be free of the restrictions imposed with respect to such shares by this Agreement and any transferee of
such shares will not be entitled to the rights of such party. Certificates representing shares sold in a registered public offering
pursuant to Section 8 will not be required to bear the legend set forth in Section 11. 14. Specific Performance. The parties hereto recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm
or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party hereto agrees that in
addition to other remedies the other party hereto will be entitled to an injunction restraining any violation or threatened violation
of the provisions of this Agreement or the right to enforce any of the covenants or agreements set forth herein by specific
performance. In the event that any action will be brought in equity to enforce the provisions of the Agreement, neither party hereto
will allege, and each party hereto hereby waives the defense, that there is an adequate remedy at law. 15. Entire Agreement. This Agreement and the Merger Agreement (including the appendices thereto) constitute
the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof. 16. Further Assurances. Each party hereto will execute and deliver all such further documents and instruments
and take all such further action as may be necessary in order to consummate the transactions contemplated hereby. -9- 17. Validity. The invalidity or unenforceability of any provision of this Agreement will not affect the
validity or enforceability of the other provisions of this Agreement, which will remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this Agreement to be null, void or unenforceable, the parties
hereto will negotiate in good faith and will execute and deliver an amendment to this Agreement in order, as nearly as possible, to
effectuate, to the extent permitted by law, the intent of the parties hereto with respect to such provision. 18. Notices. All notices and other communications hereunder will be in writing and will be deemed given if
delivered personally or by commercial delivery service, or sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers for a party as will be specified by like notice): (a) if to Parent, to: Komag, Incorporated 1710 Automation Parkway San Jose, CA 95131 Attention: Chief Executive Officer Facsimile: (408) 944-9540 with copies to: Wilson, Sonsini, Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Alan K. Austin, Esq./Kathleen B. Bloch, Esq. Facsimile: (650) 461-5375 -10- and to: Wilson Sonsini Goodrich & Rosati, Professional Corporation One Market Street Spear Street Tower, Suite 1600 San Francisco, California 94105 Attention: Steve L. Camahort, Esq. Facsimile: (415) 947-2099 (b) if to the Company to: HMT Technology Corp. 1055 Page Avenue Fremont, CA 94538 Attention: Peter S. Norris Facsimile: (510) 623-9570 with a copy to: Cooley Godward LLP 3000 El Camino Real Palo Alto, CA 94306 Attention: James C. Kitch, Esq. Facsimile: (650) 849-7004 19. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State
of Delaware applicable to agreements made and to be performed entirely within such State. 20. Expenses. Except as otherwise expressly provided herein or in the Merger Agreement, all costs and expenses
incurred in connection with the transactions contemplated by this Agreement will be paid by the party incurring such expenses. 21. Attorney's Fees. In any action at law or suit in equity to enforce this Option Agreement or the rights of
any of the parties hereunder, the prevailing party in such action or suit shall be entitled to receive a reasonable sum for its
attorney's fees and all other reasonable costs and expenses incurred in such action or suit. 22. Amendments; Waiver. This Agreement may be amended by the parties hereto and the terms and conditions
hereof may be waived only by an instrument in writing signed on behalf of each of the parties hereto, or, in the case of a waiver, by
an instrument signed on behalf of the party waiving compliance. 23. Assignment. Neither of the parties hereto may sell, transfer, assign or otherwise dispose of any of its
rights or obligations under this Agreement or the Option created hereunder to -11- any other person, without the express written consent of the other party, except that the rights and obligations
hereunder will inure to the benefit of and be binding upon any successor of a party hereto. 24. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed to be an
original, but both of which, taken together, will constitute one and the same instrument. -12- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly
authorized officers as of the date first above written. KOMAG, INCORPORATED By: Name: Title: HMT TECHNOLOGY CORP. By: Name: Title: [SIGNATURE PAGE TO COMPANY STOCK OPTION AGREEMENT] EXHIBIT C PARENT VOTING AGREEMENT THIS VOTING AGREEMENT (this "AGREEMENT") is made and entered into as of April 26, 2000, among HMT Technology
Corp., a Delaware corporation (the "COMPANY"), and the undersigned stockholder (the "STOCKHOLDER") of Komag, Incorporated, a Delaware
corporation ("PARENT"). RECITALS A. Parent, a subsidiary of Parent ("MERGER SUB") and the Company have entered into an Agreement and Plan
of Reorganization (the "MERGER AGREEMENT"), which provides for the merger (the "MERGER") of Merger Sub with and into the Company.
Pursuant to the Merger, all outstanding capital stock of the Company shall be converted into the right to receive Parent Common
Stock, as set forth in the Merger Agreement (the "SHARE ISSUANCE"). B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT")) of such number of shares of the outstanding capital stock of Parent and shares subject to outstanding
options and warrants as is indicated on the signature page of this Agreement. C. In consideration of the execution of the Merger Agreement by the Company, Stockholder (in his or her
capacity as such) agrees to vote the Shares (as defined below) and other such shares of capital stock of Parent over which
Stockholder has voting power so as to facilitate consummation of the Merger. NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Certain Definitions. Capitalized terms not defined herein shall have the meanings ascribed to them in the
Merger Agreement. For purposes of this Agreement: (a) "EXPIRATION DATE" shall mean the earlier to occur of (i) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof, or (ii) such date and time as the Merger shall become effective in accordance
with the terms and provisions of the Merger Agreement. (b) "PERSON" shall mean any (i) individual, (ii) corporation, limited liability company, partnership or other
entity, or (iii) governmental authority. (c) "SHARES" shall mean: (i) all securities of Parent (including all shares of Parent Common Stock and all
options, warrants and other rights to acquire shares of Parent Common Stock) owned by Stockholder as of the date of this Agreement;
and (ii) all additional securities of Parent (including all additional shares of Parent Common Stock and all additional options,
warrants and other rights to acquire shares of Parent Common Stock) of which Stockholder acquires ownership during the period from
the date of this Agreement through the Expiration Date. (d) "TRANSFER." A Person shall be deemed to have effected a "TRANSFER" of a security if such person directly
or indirectly: (i) sells, pledges, encumbers, grants an option with respect to, transfers or disposes of such security or any interest in such security; or (ii) enters into an agreement or
commitment providing for the sale of, pledge of, encumbrance of, grant of an option with respect to, transfer of or disposition of
such security or any interest therein. 2. Transfer of Shares. (a) Transferee of Shares to be Bound by this Agreement. Stockholder agrees that, during the period from the
date of this Agreement through the Expiration Date, Stockholder shall not cause or permit any Transfer of any of the Shares to be
effected unless each Person to which any of such Shares, or any interest in any of such Shares, is or may be transferred shall have:
(a) executed a counterpart of this Agreement and a proxy in the form attached hereto as Exhibit A (with such modifications as the
Company may reasonably request); and (b) agreed in writing to hold such Shares (or interest in such Shares) subject to all of the
terms and provisions of this Agreement. (b) Transfer of Voting Rights. Stockholder agrees that, during the period from the date of this Agreement
through the Expiration Date, Stockholder shall not deposit (or permit the deposit of) any Shares in a voting trust or grant any proxy
or enter into any voting agreement or similar agreement in contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares. 3. Agreement to Vote Shares. At every meeting of the stockholders of Parent called, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders of Parent, stockholder (in his or her capacity as
such) shall cause the Shares to be voted (to the extent such Shares have voting rights and are entitled to vote thereon) in favor of
the Share Issuance. Notwithstanding the foregoing, and notwithstanding any other provision of this Agreement, nothing in this
Agreement shall limit or restrict stockholder from acting in stockholder's capacity as a director or officer of Parent (it being
understood that this Agreement shall apply to stockholder solely in stockholder's capacity as a stockholder of Parent) or voting in
stockholder's sole discretion on any matter other than those matters referred to in the foregoing sentence of this Section 3. 4. Irrevocable Proxy. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to the
Company a proxy in the form attached hereto as Exhibit A (the "PROXY"), which shall be irrevocable to the fullest extent permissible
by law, with respect to the Shares. 5. Representations and Warranties of the Stockholder. Stockholder (i) is the beneficial owner of the shares of
Parent Common Stock indicated on the final page of this Agreement, free and clear of any liens, claims, options, rights of first
refusal, co-sale rights, charges or other encumbrances; (ii) does not beneficially own any securities of the Parent other than the
shares of Parent Common Stock and options and warrants to purchase shares of Common Stock of Parent indicated on the final page of
this Agreement; and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy.
6. Additional Documents. Stockholder (in his or her capacity as such) hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable opinion of the Company, to carry out the intent of
this Agreement. -2- 7. Termination. This Agreement shall terminate and shall have no further force or effect as of the Expiration
Date. 8. Miscellaneous. (a) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions
of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. (b) Binding Effect and Assignment. This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be
assigned by either of the parties without prior written consent of the other. (c) Amendments and Modification. This Agreement may not be modified, amended, altered or supplemented except
upon the execution and delivery of a written agreement executed by the parties hereto. (d) Specific Performance; Injunctive Relief. The parties hereto acknowledge that the Company shall be
irreparably harmed and that there shall be no adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to the Company
upon any such violation, the Company shall have the right to enforce such covenants and agreements by specific performance,
injunctive relief or by any other means available to the Company at law or in equity. (e) Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to
be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-
recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at
the following address (or at such other address for a party as shall be specified by like notice): If to the Company: HMT Technology Corp. 1055 Page Avenue Fremont, CA 94538 Facsimile: (510) 623-9570 Attention: Ronald L. Schauer With a copy to: Cooley Godward LLP 3000 El Camino Real Palo Alto, CA 94306 Facsimile: (650) 849-7004 Attention: James C. Kitch, Esq. -3- If to Stockholder: To the address for notice set forth on the signature page hereof. (f) Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without reference to
rules of conflicts of law. (g) Entire Agreement. This Agreement and the Proxy contain the entire understanding of the parties in respect
of the subject matter hereof, and supersede all prior negotiations and understandings between the parties with respect to such
subject matter. (h) Officers and Directors. To the extent that Stockholder is or becomes (during the term hereof) a director
or officer of Parent, he or she makes no agreement or understanding herein in his or her capacity as such director or officer, and
nothing herein will limit or affect, or give rise to any liability to Stockholder by virtue of, any actions taken by Stockholder in
his or her capacity as an officer or director of Parent in exercising its rights under the Merger Agreement. (i) Effect of Headings. The section headings are for convenience only and shall not affect the construction or
interpretation of this Agreement. (j) Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original,
but all of which together shall constitute one and the same agreement. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] -4- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above
written. The undersigned is executing this Agreement only in its capacity as a stockholder. Such signature in no way affects its
obligations as an officer or director of Parent. HMT Technology Corp. STOCKHOLDER By: By: Signature Name: Name: Title: Title: Print Address Telephone Facsimile No. Share beneficially owned: ___________ Parent Common Shares ___________ Parent Common Shares issuable upon exercise of outstanding options or warrants [SIGNATURE PAGE TO PARENT VOTING AGREEMENT] EXHIBIT A IRREVOCABLE PROXY The undersigned stockholder of Komag, Incorporated, a Delaware corporation ("PARENT"), hereby irrevocably
(to the fullest extent permitted by law) appoints the directors on the Board of Directors of HMT Technology Corp., a Delaware
corporation (the "COMPANY"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is
entitled to do so) with respect to all of the shares of capital stock of Parent that now are or hereafter may be beneficially owned
by the undersigned, and any and all other shares or securities of Parent issued or issuable in respect thereof on or after the date
hereof (collectively, the "SHARES") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned
stockholder of Parent as of the date of this Proxy are listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the fullest extent permitted by law), is coupled with an interest and is granted
pursuant to that certain Parent Voting Agreement of even date herewith by and among the Company and the undersigned stockholder (the
"VOTING AGREEMENT"), and is granted in consideration of the Company entering into that certain Agreement and Plan and Reorganization
(the "MERGER AGREEMENT"), by and between Parent, a subsidiary of Parent ("MERGER SUB") and the Company. The Merger Agreement provides
for the merger of Merger Sub with and into the Company in accordance with its terms (the "MERGER"). Pursuant to the Merger, all
outstanding capital stock of the Company shall be converted into the right to receive Parent Common Stock, as set forth in the Merger
Agreement (the "SHARE ISSUANCE"). As used herein, the term "EXPIRATION DATE" shall mean the earlier to occur of (i) such date and
time as the Merger Agreement shall have been validly terminated pursuant to Article VII thereof or (ii) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the Merger Agreement. The attorneys and proxies named above, and each of them, are hereby authorized and empowered by the
undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or adjourned meeting of stockholders of Parent and in every
written consent in lieu of such meeting in favor of the Share Issuance. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided
above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the
undersigned. The undersigned is executing this Proxy only in its capacity as a stockholder. Such signature in no way affects its
obligations as an officer or director of Parent. This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no
further force and effect, automatically upon the Expiration Date. Dated: , 2000 Signature of Stockholder: Print Name of Stockholder: Shares beneficially owned: __________ Parent Common Shares __________ Parent Common Shares issuable upon exercise of outstanding options or warrants [SIGNATURE PAGE TO IRREVOCABLE PROXY] EXHIBIT D COMPANY VOTING AGREEMENT THIS VOTING AGREEMENT (this "AGREEMENT") is made and entered into as of April 26, 2000, among Komag,
Incorporated, a Delaware corporation ("PARENT"), and the undersigned stockholder (the "STOCKHOLDER") of HMT Technology Corp., a
Delaware corporation (the "COMPANY"). RECITALS A. The Company and Parent have entered into an Agreement and Plan of Reorganization (the "MERGER
AGREEMENT"), which provides for the merger (the "MERGER") of a subsidiary of Parent with and into the Company. Pursuant to the
Merger, all outstanding capital stock of the Company shall be converted into the right to receive Parent Common Stock, as set forth
in the Merger Agreement. B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT")) of such number of shares of the outstanding capital stock of the Company and shares subject to
outstanding options and warrants as is indicated on the signature page of this Agreement. C. In consideration of the execution of the Merger Agreement by Parent, Stockholder (in his or her capacity as
such) agrees to vote the Shares (as defined below) and other such shares of capital stock of the Company over which Stockholder has
voting power so as to facilitate consummation of the Merger. NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Certain Definitions. Capitalized terms not defined herein shall have the meanings ascribed to them in the
Merger Agreement. For purposes of this Agreement: (a) "EXPIRATION DATE" shall mean the earlier to occur of (i) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof, or (ii) such date and time as the Merger shall become effective in accordance
with the terms and provisions of the Merger Agreement. (b) "PERSON" shall mean any (i) individual, (ii) corporation, limited liability company, partnership or other
entity, or (iii) governmental authority. (c) "SHARES" shall mean: (i) all securities of the Company (including all shares of the Company Common Stock
and all options, warrants and other rights to acquire shares of the Company Common Stock) owned by Stockholder as of the date of this
Agreement; and (ii) all additional securities of the Company (including all additional shares of the Company Common Stock and all
additional options, warrants and other rights to acquire shares of the Company Common Stock) of which Stockholder acquires ownership
during the period from the date of this Agreement through the Expiration Date. (d) "TRANSFER." A Person shall be deemed to have effected a "TRANSFER" of a security if such person directly
or indirectly: (i) sells, pledges, encumbers, grants an option with respect to, transfers or disposes of such security or any
interest in such security; or (ii) enters into an agreement or commitment providing for the sale of, pledge of, encumbrance of, grant
of an option with respect to, transfer of or disposition of such security or any interest therein. 2. Transfer of Shares. (a) Transferee of Shares to be Bound by this Agreement. Stockholder agrees that, during the period from the
date of this Agreement through the Expiration Date, Stockholder shall not cause or permit any Transfer of any of the Shares to be
effected unless each Person to which any of such Shares, or any interest in any of such Shares, is or may be transferred shall have:
(a) executed a counterpart of this Agreement and a proxy in the form attached hereto as Exhibit A (with such modifications as Parent
may reasonably request); and (b) agreed in writing to hold such Shares (or interest in such Shares) subject to all of the terms and
provisions of this Agreement. (b) Transfer of Voting Rights. Stockholder agrees that, during the period from the date of this Agreement
through the Expiration Date, Stockholder shall not deposit (or permit the deposit of) any Shares in a voting trust or grant any proxy
or enter into any voting agreement or similar agreement in contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares. 3. Agreement to Vote Shares. At every meeting of the stockholders of the Company called, and at every
adjournment thereof, and on every action or approval by written consent of the stockholders of the Company, Stockholder (in his or
her capacity as such) shall cause the Shares to be voted (i) in favor of the Merger, (ii) in favor of the Merger Agreement, as
modified or amended from time to time in accordance with its terms and with approval of the Board of Directors of the Company, (iii)
in favor of any matter that could reasonably be expected to facilitate the Merger, and (iv) against any matter that could reasonably
be expected to prevent the Merger. Notwithstanding the foregoing, and notwithstanding any other provision of this Agreement, nothing
in this Agreement shall limit or restrict stockholder from acting in stockholder's capacity as a director or officer of Parent (it
being understood that this Agreement shall apply to stockholder solely in stockholder's capacity as a stockholder of Parent) or
voting in stockholder's sole discretion on any matter other than those matters referred to in the foregoing clauses (i) - (iv) of
this Section 3. 4. Irrevocable Proxy. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to
Parent a proxy in the form attached hereto as Exhibit A (the "PROXY"), which shall be irrevocable to the fullest extent permissible
by law, with respect to the Shares. 5. Representations and Warranties of the Stockholder. Stockholder (i) is the beneficial owner of the shares of
the Company Common Stock and options and warrants to purchase Company Common Stock indicated on the final page of this Agreement,
free and clear of any liens, claims, -2- options, rights of first refusal, co-sale rights, charges or other encumbrances; (ii) does not beneficially own
any securities of the Company other than the shares of the Company Common Stock and options and warrants to purchase shares of Common
Stock of the Company indicated on the final page of this Agreement; and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy. 6. Additional Documents. Stockholder (in his or her capacity as such) hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable opinion of Parent, to carry out the intent of this
Agreement. 7. Termination. This Agreement shall terminate and shall have no further force or effect as of the Expiration
Date. 8. Miscellaneous. (a) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions
of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. (b) Binding Effect and Assignment. This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be
assigned by either of the parties without prior written consent of the other. (c) Amendments and Modification. This Agreement may not be modified, amended, altered or supplemented except
upon the execution and delivery of a written agreement executed by the parties hereto. (d) Specific Performance; Injunctive Relief. The parties hereto acknowledge that Parent shall be irreparably
harmed and that there shall be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set
forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to Parent upon any such
violation, Parent shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any
other means available to Parent at law or in equity. (e) Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to
be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-
recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at
the following address (or at such other address for a party as shall be specified by like notice): -3- If to Parent: Komag, Incorporated 1704 Automation Parkway San Jose, California 95131 Attention: Chief Financial Officer Facsimile: (408) 946-1126 With copies to: Wilson Sonsini Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Facsimile: (650) 461-5375 Attention: Alan K. Austin, Esq. and to: Wilson Sonsini Goodrich & Rosati Professional Corporation One Market Street Spear Street Tower San Francisco, California 94105 Facsimile: (415) 947-2099 Attention: Steve L. Camahort, Esq. If to Stockholder: To the address for notice set forth on the signature page hereof. (f) Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without reference to
rules of conflicts of law. (g) Entire Agreement. This Agreement and the Proxy contain the entire understanding of the parties in respect
of the subject matter hereof, and supersede all prior negotiations and understandings between the parties with respect to such
subject matter. (h) Officers and Directors. To the extent that Stockholder is or becomes (during the term hereof) a director
or officer of the Company, he or she makes no agreement or understanding herein in his or her capacity as such director or officer,
and nothing herein will limit or affect, or give rise to any liability to Stockholder by virtue of, any actions taken by Stockholder
in his or her capacity as an officer or director of the Company in exercising its rights under the Merger Agreement. (i) Effect of Headings. The section headings are for convenience only and shall not affect the construction or
interpretation of this Agreement. (j) Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original,
but all of which together shall constitute one and the same agreement. -4- [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] -5- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above
written. The undersigned is executing this Agreement only in its capacity as a stockholder. Such signature in no way affects its
obligations as an officer or director of the Company. Komag, Incorporated STOCKHOLDER By: By: Signature Name: Name (Print): Title: Title: Print Address Telephone Facsimile No. Share beneficially owned: ___________ shares of the Company Common Stock ___________ shares of the Company Common Stock issuable upon exercise of outstanding options or warrants [SIGNATURE PAGE TO COMPANY VOTING AGREEMENT] EXHIBIT A IRREVOCABLE PROXY The undersigned stockholder of HMT Technology Corp., a Delaware corporation (the "COMPANY"), hereby
irrevocably (to the fullest extent permitted by law) appoints the directors on the Board of Directors of Komag, Incorporated, a
Delaware corporation ("PARENT") and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power
of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is
entitled to do so) with respect to all of the shares of capital stock of the Company that now are or hereafter may be beneficially
owned by the undersigned, and any and all other shares or securities of the Company issued or issuable in respect thereof on or after
the date hereof (collectively, the "SHARES") in accordance with the terms of this Proxy. The Shares beneficially owned by the
undersigned stockholder of the Company as of the date of this Proxy are listed on the final page of this Proxy. Upon the
undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby
revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as
defined below). This Proxy is irrevocable (to the fullest extent permitted by law), is coupled with an interest and is granted
pursuant to that certain Company Voting Agreement of even date herewith by and among Parent and the undersigned stockholder (the
"VOTING AGREEMENT"), and is granted in consideration of Parent entering into that certain Agreement and Plan of Merger (the "MERGER
AGREEMENT"), by and between Parent, a subsidiary of Parent ("MERGER SUB") and the Company. The Merger Agreement provides for the
merger of Merger Sub with and into the Company in accordance with its terms (the "MERGER"). As used herein, the term "EXPIRATION
DATE" shall mean the earlier to occur of (i) such date and time as the Merger Agreement shall have been validly terminated pursuant
to Article VII thereof or (ii) such date and time as the Merger shall become effective in accordance with the terms and provisions of
the Merger Agreement. The attorneys and proxies named above, and each of them, are hereby authorized and empowered by the
undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or adjourned meeting of stockholders of the Company and in
every written consent in lieu of such meeting (i) in favor of the Merger, (ii) in favor of the Merger Agreement, as modified or
amended form time to time in accordance with its terms and with approval of the Board of Directors of the Company, (iii) in favor of
any matter that could reasonably be expected to facilitate the Merger, and (iv) against any matter that could reasonably be expected
to prevent the Merger. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided
above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the
undersigned. The undersigned is executing this Proxy only in its capacity as a stockholder. Such signature in no way affects its
obligations as an officer or director of the Company. This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no
further force and effect, automatically upon the Expiration Date. Dated: April 26, 2000 Signature of Stockholder: Print Name of Stockholder: Shares beneficially owned: __________ shares of the Company Common Stock __________ shares of the Company Common Stock issuable upon exercise of outstanding options or warrants [SIGNATURE PAGE TO IRREVOCABLE PROXY] EXHIBIT E FORM OF COMPANY AFFILIATE AGREEMENT THIS COMPANY AFFILIATE AGREEMENT (this "AGREEMENT") is made and entered into as of April 26, 2000, by and
between Komag, Incorporated, a corporation organized under the laws of the State of Delaware ("PARENT"), and the undersigned
stockholder who may be deemed an affiliate ("AFFILIATE") of HMT Technology Corp., a Delaware corporation (the "COMPANY"). Capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement (as defined below). RECITALS A. The Company, Merger Sub (as defined below) and Parent have entered into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the "MERGER") of a wholly-owned subsidiary of Parent ("MERGER
SUB") with and into the Company. Pursuant to the Merger, all outstanding capital stock of the Company (the "COMPANY CAPITAL STOCK")
shall be converted into the right to receive Common Stock of Parent (the "PARENT COMMON STOCK"). B. Affiliate has been advised that Affiliate may be deemed to be an "affiliate" of the Company, as the term
"affiliate" is used for purposes of Rule 145 of the Rules and Regulations of the Securities and Exchange Commission and of Opinion 16
of the Accounting Principles Board. C. The execution and delivery of this Agreement by Affiliate is a material inducement to Parent to enter into
the Merger Agreement. NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that the representations, warranties
and covenants by Affiliate set forth herein shall be relied upon by Parent, the Company and their respective affiliates, counsel and
accounting firms, and that substantial losses and damages may be incurred by these persons if Affiliate's representations, warranties
or covenants are breached. Affiliate has carefully read this Agreement and the Merger Agreement and has discussed the requirements of
this Agreement with Affiliate's professional advisors, who are qualified to advise Affiliate with regard to such matters. 2. Beneficial Ownership of the Company Capital Stock. The Affiliate is the sole record and beneficial owner of
the number of shares of the Company Capital Stock set forth next to its name on the signature page hereto (the "SHARES"). The Shares
are not subject to any claim, lien, pledge, charge, security interest or other encumbrance or to any rights of first refusal of any
kind. There are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the
Affiliate is party or by which it is bound obligating the Affiliate to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any Shares or obligating the Affiliate to grant or enter into any such option,
warrant, call, right, commitment or agreement. The Affiliate has the sole right to transfer such Shares. The Shares constitute all
shares of the Company Capital Stock owned, beneficially or of record, by the Affiliate. The Shares are not subject to preemptive
rights created by any agreement to which the Affiliate is party. The Affiliate has not engaged in any sale or other transfer of the
Shares in contemplation of the Merger. All shares of the Company Capital Stock and Parent Common Stock acquired by Affiliate
subsequent to the date hereof (including shares of Parent Common Stock acquired in the Merger) shall be subject to the provisions of
this Agreement as if held by Affiliate as of the date hereof. 3. Compliance with Rule 145 and the Securities Act. (a) Affiliate has been advised that (i) the issuance of shares of Parent Common Stock in connection with the
Merger is expected to be effected pursuant to a registration statement on Form S-4 promulgated under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and the resale of such shares shall be subject to restrictions set forth in Rule 145 under the
Securities Act, and (ii) Affiliate may be deemed to be an affiliate of the Company. Affiliate accordingly agrees not to sell,
transfer or otherwise dispose of any Parent Common Stock issued to Affiliate in the Merger unless (i) such sale, transfer or other
disposition is made in conformity with the requirements of Rule 145(d) promulgated under the Securities Act, or (ii) such sale,
transfer or other disposition is made pursuant to an effective registration statement under the Securities Act or an appropriate
exemption from registration, or (iii) Affiliate delivers to Parent a written opinion of counsel, reasonably acceptable to Parent in
form and substance, that such sale, transfer or other disposition is otherwise exempt from registration under the Securities Act.
(b) Parent shall give stop transfer instructions to its transfer agent with respect to any Parent Common Stock
received by Affiliate pursuant to the Merger and there shall be placed on the certificates representing such Common Stock, or any
substitutions therefor, a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY WITH RULE 145(d) OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IN ACCORDANCE WITH A WRITTEN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE, THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED." The legend set forth above shall be removed (by delivery of a substitute certificate without such legend) and
Parent shall so instruct its transfer agent, if Affiliate delivers to Parent (i) satisfactory written evidence that the shares have
been sold in compliance with Rule 145 (in which case, the substitute certificate shall be issued in the name of the transferee), or
(ii) an opinion of counsel, in form and substance reasonably satisfactory to Parent, to the effect that public sale of the shares by
the holder thereof is no longer subject to Rule 145. -2- 4. Termination. This Agreement shall be terminated and shall be of no further force and effect in the event of
the termination of the Merger Agreement pursuant to Article VII of the Merger Agreement. 5. Miscellaneous. (a) Waiver; Severability. No waiver by any party hereto of any condition or of any breach of any provision of
this Agreement shall be effective unless in writing and signed by each party hereto. In the event that any provision of this
Agreement, or the application of any such provision to any person, entity or set of circumstances, shall be determined to be invalid,
unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons,
entities or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be
impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. (b) Binding Effect and Assignment. This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be
assigned by either of the parties without prior written consent of the other party hereto. (c) Amendments and Modification. This Agreement may not be modified, amended, altered or supplemented except
upon the execution and delivery of a written agreement executed by the parties hereto. (d) Injunctive Relief. Each of the parties acknowledge that (i) the covenants and the restrictions contained
in this Agreement are necessary, fundamental and required for the protection of Parent and the Company and to preserve for Parent the
benefits of the Merger; (ii) such covenants relate to matters which are of a special, unique, and extraordinary character that gives
each of such covenants a special, unique, and extraordinary value; and (iii) a breach of any such covenants or any other provision of
this Agreement shall result in irreparable harm and damages to Parent and the Company which cannot be adequately compensated by a
monetary award. Accordingly, it is expressly agreed that in addition to all other remedies available at law or in equity, Parent and
the Company shall be entitled to the immediate remedy of a temporary restraining order, preliminary injunction, or such other form of
injunctive or equitable relief as may be used by any court of competent jurisdiction to restrain or enjoin any of the parties hereto
from breaching any such covenant or provision or to specifically enforce the provisions hereof. (e) Governing Law. This Agreement shall be governed by and construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of
the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the
State of Delaware. -3- (f) Entire Agreement. This Agreement, the Merger Agreement and any other agreements referred to in the Merger
Agreement set forth the entire understanding of Affiliate and Parent relating to the subject matter hereof and thereof and supersede
all prior agreements and understandings between Affiliate and Parent relating to the subject matter hereof and thereof. (g) Attorneys' Fees. In the event of any legal actions or proceeding to enforce or interpret the provisions
hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final
judgment. (h) Further Assurances. Affiliate shall execute and/or cause to be delivered to Parent such instruments and
other documents and shall take such other actions as Parent may reasonably request to effectuate the intent and purposes of this
Agreement. (i) Third Party Reliance. Counsel to and independent auditors for Parent and the Company shall be entitled to
rely upon this Affiliate Agreement. (j) Survival. The representations, warranties, covenants and other provisions contained in this Agreement
shall survive the Merger. (k) Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to
be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-
recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at
the following address (or at such other address for a party as shall be specified by like notice): If to Parent: Komag, Incorporated 17170 Automation Parkway San Jose, California Attention: Chief Financial Officer Facsimile: (408) 944-9255 With a copies to: Wilson Sonsini Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304 Attention: Alan K. Austin, Esq. Facsimile: (650) 461-5375 -4- and to: Wilson Sonsini Goodrich & Rosati, Professional Corporation One Market Street Spear Street Tower, Suite 1600 San Francisco, California 94105 Attention: Steve L. Camahort, Esq. Facsimile: (415) 947-2099 If to Affiliate: To the address for notice set forth on the signature page hereof. (l) Counterparts. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the
same instrument. -5- IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be duly executed on the day and year
first above written. KOMAG, INCORPORATED AFFILIATE By: By: Name: Affiliate's Address for Notice: Title: Shares beneficially owned: _______ shares of the Company Common Stock _______ shares of the Company Common Stock issuable upon exercise of outstanding options and warrants _______ shares of Parent Common Stock [SIGNATURE PAGE TO COMPANY AFFILIATE AGREEMENT] EXHIBIT 23.1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders Our audits of the consolidated financial statements referred to in our report dated April 14, 2000, except for
note 13, which is as of April 26, 2000, appearing on page 33 of this Form 10-K also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP San Jose, California EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8
( File No.333-51767) and on Form S-3 as amended (File No. 333-24385) of HMT Technology
Corporation of our report dated April 14, 2000 except for Note 13, which is as of April 26, 2000
relating to the financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report dated April 14, 2000 relating to the financial statement schedules, which
appears in this Form 10-K. PricewaterhouseCoopers LLP
Outstanding Options
--------------------------------------------------
Weighted
Available Number Aggregate Average
for of Exercise Exercise
Grant Options Per Share Price Price
------------ ----------- ---------------- ------------ --------
Balances, March 31, 1997.. 2,797,136 3,304,949 $0.03 - $18.50 8,365,789 $2.53
Granted................... (1,701,000) 1,701,000 $10.00 - $14.50 19,523,015 $11.48
Cancellations............. 237,478 (237,478) (1,433,675) $6.03
Exercised................. (742,186) $0.03 - $14.88 (314,585) $0.42
------------ ----------- ------------
Balances, March 31, 1998.. 1,333,614 4,026,285 $0.03 - $18.50 26,140,544 $6.50
Authorized................ 2,500,000
Granted................... (1,188,650) 1,188,650 $7.67 $7.94 9,267,191 $7.80
Cancellations............. 671,894 (671,894) (7,722,078) $11.49
Exercised................. (791,185) $0.03 $11.06 (447,811) $0.57
------------ ----------- ------------
Balances, March 31, 1999.. 3,316,858 3,751,856 $0.03 $18.50 27,237,846 $7.26
Granted................... (1,441,740) 1,441,740 $2.50 $3.88 4,297,108 $2.98
Cancellations............. 720,803 (720,803) (6,150,245) $8.53
Exercised................. (666,519) $0.03 $2.81 (85,787) $0.13
------------ ----------- ------------
Balances, March 31, 2000.. 2,595,921 3,806,274 25,298,922 $6.62
============ =========== ================ ============ ========
Years Ended March 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net income (loss) -- as reported........ ($51,649) ($21,002) $69,928
Net income (loss) -- pro forma.......... ($55,112) ($24,379) $65,605
Earnings (loss) per share -- as reported
Basic................................. ($1.14) ($0.48) $1.66
Diluted............................... ($1.14) ($0.48) $1.40
Earnings (loss) per share -- pro forma
Basic................................. ($1.21) ($0.56) $1.55
Diluted............................... ($1.21) ($0.56) $1.32
2000 1999 1998
------------- -------------- --------------
Risk-free interest rate ....... 5.03% - 6.57% 4.18% - 5.63% 5.72% - 6.74%
Expected life ................. 2-5 Years 2-5 Years 2-5 years
Expected volatility ........... 0.98 0.81 0.69
Expected dividend ............. $ -- $ -- $ --
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- ----------- ----------- ----------
$0.03 - $2.81 1,187,832 7.97 $1.91 745,802 $1.36
$3.21 - $7.563 1,267,435 8.80 $6.07 571,990 $6.50
$8.06 - $11.063 1,128,309 7.14 $10.87 591,666 $10.84
$11.375- $18.50 222,698 7.00 $13.69 166,344 $13.82
----------- -----------
$0.03 - $18.50 3,806,274 7.95 $6.62 2,075,802 $6.48
=========== ===========
Years Ended March 31,
-----------------------------------
2000 1999 1998
----------- ---------- ----------
(dollars in thousands)
Current:
Federal............................. ($12,478) ($11,235) $19,756
State............................... -- -- 268
Deferred:
Federal............................. (14,203) 2,694 13,218
State............................... 4,546 (460) (3,273)
----------- ---------- ----------
($22,135) ($9,001) $29,969
=========== ========== ==========
Years Ended March 31,
-----------------------------------
2000 1999 1998
----------- ---------- ----------
Income tax provision (benefit) at
statutory rate...................... (35.00%) (35.00%) 35.00%
Benefit of foreign sales corporation.. -- -- (3.10%)
State income taxes.................... (1.28%) (1.40%) 3.20%
Credits............................... (3.47%) (5.10%) (5.20%)
Other................................. 9.75% 11.50% 0.10%
----------- ---------- ----------
Effective tax rate.................. (30.00%) (30.00%) 30.00%
=========== ========== ==========
March 31,
----------------------
2000 1999
---------- ----------
(dollars in thousands)
Deferred tax assets:
Accrued vacation................................. $513 $551
Credits.......................................... 16,670 15,265
Inventory reserve................................ 1,178 1,778
Allowances and other accrued liabilities......... 2,277 5,977
Net operating loss carryforward.................. 26,344 3,402
---------- ----------
Total deferred tax assets................ 46,982 26,973
---------- ----------
Deferred tax liabilities:
Depreciation..................................... (46,822) (35,966)
---------- ----------
Total deferred tax liabilities (46,822) (35,966)
---------- ----------
Net deferred tax assets (liabilities).... $160 ($8,993)
========== ==========
Years Ended March 31,
--------------------------------
2000 1999 1998
--------- --------- ----------
(in thousands except for
share amounts)
Basic:
Weighted average shares outstanding......... 45,411 43,720 42,196
Shares used in computing per share amounts.. 45,411 43,720 42,196
Net income (loss)........................... ($51,649) ($21,002) $69,928
Net income (loss) per share................. ($1.14) ($0.48) $1.66
========= ========= ==========
Diluted:
Weighted average shares outstanding......... 45,411 43,720 42,196
Net effect of dilutive stock
options - based on the treasury stock
method using average market price ........ -- -- 2,662
Assumed conversion of 5 3/4% convertible
subordinated notes........................ -- -- 9,684
--------- --------- ----------
Shares used in computing per share amounts.. 45,411 43,720 54,542
========= ========= ==========
Net income (loss)........................... ($51,649) ($21,002) $69,928
Add 5 3/4% convertable subordinated note
interest, net of interest capitalized
and income tax effect...................... -- -- 6,580
--------- --------- ----------
Net income (loss)........................... ($51,649) ($21,002) $76,508
========= ========= ==========
Net income (loss) per share................. ($1.14) ($0.48) $1.40
========= ========= ==========
Fiscal Fiscal Fiscal
2000 1999 1998
--------- --------- ---------
(dollars in thousands)
Singapore.................... $138,418 $143,872 $165,776
Malaysia..................... 27,411 41,118 102,847
Korea........................ 14,011 42,544 57,084
Other Foriegn Countries...... 5,858 -- 256
United States................ 2,004 4,236 3,619
--------- --------- ---------
Net Revenue.................. $187,702 $231,770 $329,582
========= ========= =========
Year Ended March 31, 2000
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
Net sales........................... $44,899 $44,791 $59,608 $43,464
Gross(loss)......................... (20,297) (11,027) (1,191) (11,510)
Operating (loss)................... (24,900) (15,839) (5,896) (16,256)
Net (loss).......................... (19,342) (13,034) (6,019) (13,253)
Net (loss) available for
common stockholders............... (19,342) (13,034) (6,019) (13,253)
Net (loss) available for
common stockholders per share
Basic............................. ($0.43) ($0.29) ($0.13) ($0.29)
Diluted........................... ($0.43) ($0.29) ($0.13) ($0.29)
Shares used in computing net
loss per share
Basic............................. 44,758 45,124 45,664 46,092
Diluted........................... 44,758 45,124 45,664 46,092
Year Ended March 31, 1999
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
Net sales........................... $56,765 $56,999 $69,792 $55,974
Gross profit (loss)................. 9,326 8,046 7,210 (6,546)
Operating income (loss)............. 4,227 3,450 (14,876) (11,810)
Net income (loss)................... 1,092 505 (12,354) (10,245)
Net income (loss) available for
common stockholders............... 1,092 505 (12,354) (10,245)
Net income (loss) available for
common stockholders per share
Basic............................. $0.03 $0.01 ($0.28) ($0.23)
Diluted........................... $0.03 $0.01 ($0.28) ($0.23)
Shares used in computing net income
(loss) per share
Basic............................. 43,415 43,570 43,822 44,138
Diluted........................... 43,415 43,570 43,822 44,138
San Jose, Califonia
April 14, 2000
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
Description of Year Expenses Accounts Deductions of Year
- ---------------------------------- ---------- ----------- ----------- ---------- ----------
Year ended March 31, 1998:
Provision for loss on inventory.. $5,320 1,844 -- -- $7,164
Allowance for doubtful accounts
receivable.................... $1,055 $272 -- -- $1,327
Year ended March 31, 1999:
Provision for loss on inventory.. $7,164 -- 1,928 (4,437) $4,655
Allowance for doubtful accounts
receivable.................... $1,327 $260 -- $1,467 $3,054
Year ended March 31, 2000:
Provision for loss on inventory.. $4,655 -- -- (1,553) $3,102
Allowance for doubtful accounts
receivable.................... $3,054 $360 -- ($2,470) $944
Exhibit
Number Description of Document
2.1 Agreement and Plan of Reorganization by and Among Komag, Incorporated,
KHM Incorporated, and HMT Technology Corporation
3.2 Restated Certificate of Incorporation, dated March 27, 1997.(3)
3.3 Bylaws of the Registrant.(1)
4.1 Reference is made to Exhibits 3.2 through 3.3.(1)
4.2 Specimen stock certificate.(1)
4.3 Form of Restricted Global Convertible Subordinated Note due 2004. (2)
4.4 Form of Unrestricted Global Convertible Subordinated Note due 2004. (2
4.5 Form of Certificated Convertible Subordinated Note due 2004. (2)
4.6 Indenture, dated as of January 15, 1997, between the Company and
State Street Bank and Trust Company of California, N.A., as
Trustee.(2)
10.1 Credit Suisse First Boston and Fleet National Bank Credit Agreement
dated November 2, 1998. (4)
10.1.1 First Amendment to Fleet Revolving Credit Agreement, dated August 16,
1999, between the Company and Fleet Mational Bank and Credit Suisse
First Boston. (5)
10.1.2 first Amendment to Fleet Security Agreement, dated August 16, 1999,
between the Company and Fleet National Bank and Credit Suisse First
Boston (5)
10.2 Lease Agreement between the Company and Sun Life Assurance Company
of Canada, dated January 5, 1989, as amended.(1)
10.3 Form of Indemnity Agreement entered into between the Registrant and
its directors and executive officers.(1)
10.4 Registrant's 1995 Stock Option Plan (the "1995 Plan").(1)
10.5 Form of Incentive Stock Option under the 1995 Plan.(1)
10.6 Form of Early Exercise Agreement under the 1995 Plan.(1)
10.7 Registrant's 1995 Management Stock Option Plan (the "Management
Plan").(1)
10.8 Form of Incentive Stock Option under the Management Plan.(1)
10.9 Form of Early Exercise Agreement under the Management Plan.(1)
10.10 Registrant's 401(k) Profit Sharing Plan.(1)
10.11 Master Lease Agreement by and between the Company and Comdisco,
dated November 30, 1995.(1)
10.12 Investor Rights Agreement by and among the Company, certain of the
Company's officers, and the Investors listed on Exhibit A of the
Recapitalization Agreement, dated November 30, 1995.(1)
10.13 Registrant's 1996 Equity Incentive Plan (the "Incentive Plan").(1)
10.14 Form of Incentive Stock Option under the Incentive Plan.(1)
10.15 Form of Non-statutory Stock Option under the Incentive Plan.(1)
10.16 Registrant's Employee Stock Purchase Plan.(1)
10.17 Registrant's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan").(1)
10.18 Form of Non-Statutory Stock Option under the Directors' Plan.(1)
10.19 Registrant's Executive Severance Plan.(1)
10.20 Fifth Amendment dated November 10, 1998 of Lease Agreement between
the Company and Sun Life of Canada, dated January 5, 1989, as
amended.(6)
10.21 Lease Agreement between the Company and CalWest Industrial
Properties, LLC , dated April 22, 1999.(6)
10.22 Lease Agreement between the Company and Third Street Services, Inc.,
dated June 9, 1998.(6)
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.(1)
23.1 Report of Independant Accountants on Financial Statement Schedule.
23.2 Consent of Independent Accountants.
27.1 Financial Data Schedule.
HMT Technology Corporation:
June 9, 2000
San Jose, California
June 9, 2000