-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FqOOWtSVLYwB5tTyRmcRY8n3+pIUISp93iEcVv8azC6gDTGVNQp23N/+x/M7U2Rg U+wqm5IHbSRQq0omdLvrCg== 0000906903-97-000029.txt : 19971229 0000906903-97-000029.hdr.sgml : 19971229 ACCESSION NUMBER: 0000906903-97-000029 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971212 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971224 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STREAMLOGIC CORP CENTRAL INDEX KEY: 0000718865 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 953093858 STATE OF INCORPORATION: DE FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-12046 FILM NUMBER: 97744491 BUSINESS ADDRESS: STREET 1: 7015 GATEWAY BOULEVARD CITY: NEWARK STATE: CA ZIP: 94060 BUSINESS PHONE: 5106084000 MAIL ADDRESS: STREET 1: 7015 GATEWAY BOULEVARD CITY: NEWARK STATE: CA ZIP: 94060 FORMER COMPANY: FORMER CONFORMED NAME: MICROPOLIS CORP DATE OF NAME CHANGE: 19920703 8-K 1 8-K ================================================================= SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 12, 1997 STREAMLOGIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3093858 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) COMMISSION FILE NUMBER: 0-12046 8450 CENTRAL AVENUE NEWARK, CALIFORNIA 94560 (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 608-4000 ================================================================= 1 ITEM 5. OTHER EVENTS. On December 12, 1997, StreamLogic Corporation (the "Company") filed a plan of reorganization and disclosure statement in the United States Bankruptcy Court for the Northern District of California, San Francisco Division ("Bankruptcy Court"). The plan of reorganization and the disclosure statement are subject to approval by the Bankruptcy Court and, consequently may change substantially from the attached exhibits. Schedules and exhibits to the plan of reorganization and disclosure statement will be furnished upon request to the Company. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. EXHIBITS 99.1 Proposed Plan of Reorganization (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. 99.2 Proposed Disclosure Statement (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. STREAMLOGIC CORPORATION (Registrant) Date: December 24, 1997 By /s/ Chapman Stranahan ___________________________ Chapman Stranahan President 3 EXHIBIT INDEX 99.1 Proposed Plan of Reorganization (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. 99.2 Proposed Disclosure Statement (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. 4 EXHIBIT 99.1 Proposed Plan of Reorganization (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. EXHIBIT 99.2 Proposed Disclosure Statement (without schedules or exhibits), as filed with the United States Bankruptcy Court for the Northern District of California, San Francisco Division on December 12, 1997. EX-99 2 EX 99.1 DEBTOR'S PLAN OF REORGANIZATION GOLDBERG, STINNETT, MEYERS & DAVIS A Professional Corporation MERLE C. MEYERS, ESQ. #66849 KATHERINE D. RAY, ESQ. #121002 KENNETH G. DEJARNETTE, ESQ. #168074 44 Montgomery Street, Suite 2900 San Francisco, California 94104 Telephone: (415) 362-5045 Counsel for Debtor-In-Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION In re ) Case No. 97-32984 DM ) STREAMLOGIC CORPORATION, ) Under Chapter 11 a Delaware corporation, ) formerly known as ) Micropolis Corporation, ) ) Debtor. ) ) Tax Id. No. 95-3093858 ) ______________________________) DEBTOR'S PLAN OF REORGANIZATION (Dated December 10, 1997) TABLE OF CONTENTS Page ARTICLE I DEFINITION AND CONSTRUCTION OF TERMS.....................................1 1.1. Definitions.....................................................1 1.2. Other Terms.....................................................1 1.3. Construction of Certain Terms...................................1 1.4. Plan Controls...................................................2 ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS; IMPAIRMENT.......................2 2.1. Classification..................................................2 2.1.1. Class A (Priority Claims).....................3 2.1.2. Class B (Secured Claims)......................3 2.1.3. Class C (Convenience Claims)..................3 2.1.4. Class D (General Unsecured Claims)............3 2.1.5. Class E (Interests)...........................3 2.2. Impairment......................................................3 ARTICLE III TREATMENT OF NONCLASSIFIED PRIORITY CLAIMS...............................3 3.1. Generally.......................................................3 3.2. Administrative Bar Date.........................................4 3.3. Penalties and Interest..........................................5 3.4. Payment.........................................................5 3.4.1. Generally.....................................5 3.4.2. Certain Ordinary Course Expenses..............6 ARTICLE IV TREATMENT OF UNIMPAIRED CLASSES..........................................6 4.1. Class A (Priority Claims).......................................6 4.2. Class B (Secured Claims)........................................7 4.2.1. Reinstatement.................................8 4.2.2. Full Satisfaction.............................8 4.2.3. Abandonment, Foreclosure and Deficiency.......9 ARTICLE V TREATMENT OF IMPAIRED CLASSES............................................9 5.1. Class C (Convenience Claims)....................................9 5.1.1. Opt-Out Election..............................10 5.1.2. Opt-In Election...............................10 5.2. Class D (General Unsecured Claims)..............................10 5.2.1. Cash Distributions............................10 5.2.1.1. Payments Commenced...................11 5.2.1.2. Payments Ceased......................11 5.2.2. Pro-Rata Calculations.........................11 5.2.3. Pari Passu Treatment..........................12 5.2.4. Stock Distribution............................13 5.2.4.1. Pro Rata.............................13 5.2.4.2. Value................................13 5.2.4.3. Fractional and Remainder Shares...............................13 5.2.5. Subordination.................................14 5.2.6. Provisions Affecting Public Debt Securities.............................................14 5.2.6.1. Record Date..........................15 5.2.6.2. Manner of Distributions; Surrender of Public Debt Securities...........................15 5.2.6.3. Compensation of Indenture Trustees.............................17 5.2.6.3.1. From Estate..............17 5.2.6.3.2. From Distribution........18 5.2.6.4. Unclaimed Distributions..............19 5.3. Class E (Interests).............................................19 5.3.1. No Distributions..............................19 5.3.2. Cancellation..................................19 ARTICLE VI EXECUTORY CONTRACTS......................................................20 6.1. Generally.......................................................20 6.2. Assumption and Rejection........................................20 6.2.1. Schedule......................................20 6.2.2. Rejection.....................................20 6.2.3. Assumption....................................21 6.3. Cure Amounts....................................................21 6.4. Payment of Cure.................................................22 6.4.1. Payment by Reorganized Debtor.................22 6.4.2. Payment by Distribution Agent.................22 6.4.3. Timing of Payment.............................22 6.5. Approval of Assumption or Rejection.............................23 6.6. Bar Date for Rejection Claims...................................23 ARTICLE VII MEANS FOR EXECUTION OF THE PLAN..........................................24 7.1. Plan Effectiveness..............................................24 7.2. Vesting of Estate Property......................................24 7.2.1. Vesting in Reorganized Debtor.................24 7.2.2. Vesting in Distribution Estate................25 7.2.3. Preletz Group Withdrawal......................25 7.3. Hammer and Non-Hammer Assets....................................26 7.3.1. Hammer Assets.................................26 7.3.2. Non-Hammer Assets.............................28 7.4. Effective Date Actions..........................................29 7.4.1. Revesting of Hammer Assets....................30 7.4.2. Retention of Non-Hammer Assets................30 7.4.3. Preletz Group Contribution....................30 7.4.4. Participating Creditors' Contribution.........31 7.4.5. Cancellation and Issuance of Stock............31 7.4.6. Modification of Articles and By-Laws..........31 7.4.7. Payments by Reorganized Debtor................31 7.4.8. Payments by Distribution Agent................31 7.4.9. Other Releases of Liens and Instruments.......32 7.4.10. Distribution Estate Accounts..................32 7.4.11. Other Documents...............................32 7.5. Other Actions...................................................33 7.6. Preservation and Vesting of Causes of Action....................33 7.6.1. Vesting in Reorganized Debtor.................33 7.6.2. Vesting in Distribution Estate................33 7.7. Distribution Agent..............................................34 7.7.1. Selection.....................................34 7.7.2. Responsibility and Fidelity...................34 7.7.3. Tenure and Replacement........................35 7.8. Distribution Estate.............................................35 7.8.1. Accounts......................................35 7.8.2. Distribution Agent's Duty.....................35 7.8.3. Administration................................36 7.8.3.1. Smaller Sales........................36 7.8.3.2. Other Dispositions...................37 7.8.4. Deposits......................................37 7.8.5. Disbursements.................................37 7.8.6. Periodic Distributions........................38 7.8.7. [INTENTIONALLY OMITTED].......................38 7.8.8. Unclaimed Payments to Claimants...............38 7.9. Committee.......................................................39 7.9.1. Membership....................................39 7.9.2. Retention of Professionals....................39 7.10. Postconfirmation Fees and Expenses.....................40 7.10.1. Court Approval................................40 7.10.2. Payment of Fees...............................41 7.10.3. Reporting to the United States Trustee........41 7.11. Objections to Claims...................................42 7.12. Term of Injunctions and Stays..........................42 ARTICLE VIII CAPITALIZATION AND GOVERNANCE OF REORGANIZED DEBTOR......................42 8.1. Capitalization of Reorganized Debtor............................42 8.1.1. Estate's Shares...............................43 8.1.2. Participating Creditors' Shares...............43 8.1.3. Preletz Group Shares..........................43 8.1.4. Stock Option Shares...........................43 8.1.4.1. Employee Stock Options...............44 8.1.4.2. To Management........................44 8.1.4.3. To Others............................44 8.1.5. Additional Shares.............................44 8.1.5.1. New Capital..........................45 8.1.5.2. Preletz Group Options................45 8.1.5.3. Additional Employee Options..........46 8.2. Creditors' Rights Offering......................................46 8.2.1. Subscription..................................46 8.2.2. Interim Claim.................................47 8.2.3. Subscription Exercise.........................47 8.2.4. Standby Commitment............................48 8.2.5. Notification and Deposit......................48 8.2.6. Segregated Account............................49 8.2.7. Determination by Committee....................49 8.2.8. Untimely Contributions........................50 8.2.9. Distributions.................................50 8.2.10. Special Considerations........................50 8.3. Corporate Governance of Reorganized Debtor......................50 8.3.1. Operational Control...........................51 8.3.2. Board of Directors............................51 8.3.3. Formalized Provisions.........................51 8.3.4. Extraordinary Actions.........................51 8.3.5. Relocation and Rent...........................52 8.3.6. Free Services.................................52 8.3.7. Public Market.................................53 8.3.8. Prohibition...................................53 ARTICLE IX ASSUMPTION, DISCHARGE AND EXCULPATION....................................53 9.1. Reorganized Debtor's Assumption of Liabilities..................53 9.2. Discharge.......................................................54 9.3. Exculpation of Certain Persons..................................55 9.4. Immunity........................................................56 ARTICLE X RETENTION OF JURISDICTION................................................56 10.1. Generally..............................................56 ARTICLE XI MISCELLANEOUS PROVISIONS.................................................58 11.1. Exemption from Transfer Taxes..........................48 11.2. Exemption from Registration............................48 11.3. Binding Effect.........................................59 11.4. Ratification...........................................59 11.5. Notices................................................59 11.6. Governing Law..........................................61 11.7. Headings...............................................62 11.8. Exhibits...............................................62 11.9. Closing Case...........................................62 11.10. Expenses...............................................62 11.11. Modification and Enforcement...........................63 11.11.1. Modification..................................63 11.11.2. Enforcement...................................63 EXHIBITS TO PLAN OF REORGANIZATION EXHIBIT "A" SCHEDULE OF DEFINITIONS.......................A-1 STREAMLOGIC CORPORATION, a Delaware corporation formerly known as Micropolis Corporation and the debtor-in- possession herein (the "Debtor"), hereby proposes this Debtor's Plan Of Reorganization (Dated December 10, 1997) (as it may be altered, amended or modified from time to time, the "Plan") in the within chapter 11 case, for the reorganization of the Debtor's financial affairs, pursuant to the provisions of Section 1121(a) of title 11 of the United States Code: ARTICLE I DEFINITION AND CONSTRUCTION OF TERMS 1.1. DEFINITIONS. As used herein, capitalized terms shall have the meanings set forth in the schedule of definitions attached hereto and incorporated herein as EXHIBIT "A." 1.2. OTHER TERMS. Any term used in the Plan that is not defined herein or in Exhibit "A" shall have the meaning ascribed to that term, if any, in the Bankruptcy Code. A term used in this Plan and not defined herein or in the Bankruptcy Code, but which is defined in the Bankruptcy Rules, shall have the meaning assigned to the term in the Bankruptcy Rules. 1.3. CONSTRUCTION OF CERTAIN TERMS. In addition to the foregoing, the following shall apply: A. The words "herein," "hereof," "hereto," "hereunder," and others of similar import refer to the Plan as a whole and not to any particular section, subsection, or clause contained in the Plan. B. Wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. 1.4. PLAN CONTROLS. To the extent of any inconsistencies between the Plan and the Disclosure Statement, the provisions of this Plan shall control and prevail. ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS; IMPAIRMENT 2.1. Classification. The following is a designation of the Classes of Claims and Interests in the Plan. Administrative Expense Claims and Priority Tax Claims (that is, the Nonclassified Priority Claims) have not been classified and are excluded from the following Classes, in accordance with the provisions of Section 1123(a)(1) of the Bankruptcy Code. The treatment accorded Administrative Expense Claims and Priority Tax Claims is set forth in Article III herein. Consistent with the provisions of Section 1122 of the Bankruptcy Code, a Claim or Interest shall be deemed classified by the Plan in a particular Class only to the extent that the Claim or Interest qualifies within the description of that Class, and shall be deemed classified in a different Class to the extent that the Claim or Interest qualifies within the description of that different Class. A Claim or Interest is in a particular Class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that Class, as the case may be. 2.1.1. CLASS A (PRIORITY CLAIMS) consists of all Priority Claims, if any, other than Nonclassified Priority Claims. 2.1.2. CLASS B (SECURED CLAIMS) consists of all Secured Claims, if any, each of which shall be within a separate subclass, Subclasses B1, B2, B3 and so forth (with each subclass to be deemed a separate class for all purposes under applicable provisions of the Bankruptcy Code). 2.1.3. CLASS C (CONVENIENCE CLAIMS) consists of all Convenience Claims. 2.1.4. CLASS D (GENERAL UNSECURED CLAIMS) consists of all Unsecured Claims (including Claims arising from guarantee obligations and Claims arising from the rejection of executory contracts) other than Nonclassified Priority Claims and any Claims within Classes A, C, E or F herein. 2.1.5. CLASS E (INTERESTS) consists of all Interests, including Rescission Claims. 2.2. IMPAIRMENT. Under the terms of the Plan, Allowed Claims within Classes A and B will not be impaired. Allowed Claims and Interests within Classes C, D and E will be impaired. ARTICLE III TREATMENT OF NONCLASSIFIED PRIORITY CLAIMS 3.1. GENERALLY. Subject to the provisions of all other sections of this Article III, each holder of an Allowed Nonclassified Priority Claim shall receive on account of such Claim, Cash equal to the allowed amount of such Claim, unless the Distribution Agent or the Reorganized Debtor (whichever party is the obligor as set forth in Section 3.4 hereinbelow) and such holder shall have agreed upon other treatment of such Claim. 3.2. ADMINISTRATIVE BAR DATE. No Administrative Expense Claim, including without limitation Professional Fees, arising on or before the Effective Date, other than Ordinary Course Expenses, shall become an Allowed Claim unless (a) an application, request or proof therefor has been filed with the Bankruptcy Court and served upon the Distribution Agent, the Reorganized Debtor and the United States Trustee within thirty (30) days following the Effective Date (the "Administrative Bar Date") or by such earlier deadline as may apply to such claim pursuant to an earlier order of the Bankruptcy Court, or (b) such claim has been approved and allowed by the Bankruptcy Court pursuant to an order entered prior to the Administrative Bar Date. The Distribution Agent, the Reorganized Debtor, the United States Trustee and any other party in interest may object and request a hearing or hearings with respect to all such applications, requests and proofs as to which any disputes exist or as to which Bankruptcy Court approval is required by the Bankruptcy Rules and Local Rules, and shall provide notice of such hearings and any objections to the requesting claimants, the Reorganized Debtor, the Distribution Agent and the United States Trustee. 3.3. PENALTIES AND INTEREST. Except as may be expressly set forth in the Plan or by an order of the Bankruptcy Court, no holder of a Priority Tax Claim shall be entitled to payment on account of any postpetition interest or penalties arising with respect to such Claim. 3.4. PAYMENT. Payment of Allowed Nonclassified Priority Claims shall occur as follows: 3.4.1. GENERALLY. Except as set forth in the provisions of Section 3.4.2 hereinbelow, all payments on account of Allowed Nonclassified Priority Claims shall be made by the Distribution Agent, in Cash on the latest of the following dates, and the Reorganized Debtor shall have no responsibility, obligation or liability therefor: (a) on, or as soon as practicable after, the Administrative Bar Date, or on such later date as to which the holder of such Claim may have consented; (b) on the date when such Claim becomes due according to contractual, statutory or other terms applicable thereto; or (c) as soon as practicable after the order allowing such Claim becomes a Final Order, if the Claim is disputed or if applicable provisions of the Bankruptcy Code otherwise require Bankruptcy Court approval, provided that if such Claim is disputed in part, then the undisputed portion thereof shall be paid in accordance with subparts (a) and (b) hereof (or upon Bankruptcy Court approval if required by applicable provisions of the Bankruptcy Code) and the balance of the Claim shall be paid to the extent and when allowed by a Final Order of the Bankruptcy Court determining the amount of such Claim. 3.4.2. CERTAIN ORDINARY COURSE EXPENSES. The Reorganized Debtor shall pay such portions of Allowed Nonclassified Priority Claims that are Ordinary Course Expenses, as defined in Exhibit "A" attached hereto, when and to the extent that such Claims become due according to contractual, statutory or other terms applicable thereto after the Effective Date, except for the following: (a) any rent and real property lease obligations, except to the extent provided by Section 8.3.5 hereinbelow; (b) any Professional Fees; and (c) any warranty, return, product defect or refund obligations other than the Hammer Contingent Claims. Without limiting the generality of the foregoing, the Reorganized Debtor shall pay such portions of Allowed Nonclassified Priority Claims as constitute Hammer Contingent Claims. The Distribution Estate shall have no responsibility, obligation or liability for any Ordinary Course Expenses. ARTICLE IV TREATMENT OF UNIMPAIRED CLASSES Classes of unimpaired Claims shall be treated as follows: 4.1. CLASS A (PRIORITY CLAIMS). Each holder of an Allowed Claim within Class A shall receive on account of such Claim Cash equal to the allowed amount of such Claim, unless such holder shall have agreed to a less favorable treatment of such Claim. Payment or payments on account of such Claims shall be made by the Distribution Agent on or before the latest of the following dates: (a) on, or as soon as practicable after, the Effective Date, or on such later date as to which such holder has consented; (b) on the date that such Claim becomes due pursuant to contractual, statutory or other terms applicable thereto; or (c) as to Disputed Claims, as soon as practicable after the order allowing the Claim has become a Final Order. 4.2. CLASS B (SECURED CLAIMS). Each holder of an Allowed Claim within Class B, unless such holder shall have agreed with the Reorganized Debtor or the Distribution Agent, as the case may be, to other treatment of such Claim, shall be treated in one of the following alternative manners set forth in Subsections 4.2.1 through 4.2.3 hereinbelow. Selection of the treatment of each such Claim secured by Non-Hammer Assets shall be determined by the Debtor, as evidenced in a Schedule 4.2(A) (the "Schedule 4.2(A)") to be filed with the Bankruptcy Court, and served upon such holder, the Preletz Group, the Committee and the United States Trustee, at or prior to the commencement of the Confirmation Hearing. Selection of the treatment of each such Claim secured by Hammer Assets shall be determined by the Preletz Group, as evidenced in a Schedule 4.2(B) (the "Schedule 4.2(B)") to be filed with the Bankruptcy Court, and served upon such holder, the Debtor, the Committee and the United States Trustee, at or prior to the commencement of the Confirmation Hearing. The treatment of any Allowed Claim within Class B that is not identified in said Schedules 4.2(A) or 4.2(B) shall be in the manner set forth in Section 4.2.3 hereinbelow. The alternative manners of treatment of such Claims are as follows: 4.2.1. REINSTATEMENT. Any and all defaults shall be Cured, and any and all damages compensated, by the Reorganized Debtor (as to Claims secured by Hammer Assets) or by the Distribution Agent (as to Claims secured by Non- Hammer Assets), to the extent and in the manner required by the provisions of Section 1124(2) of the Bankruptcy Code, as soon as practicable after such defaults and damages, if any, have been determined by agreement among such holder and such curing party, or by Final Order if no such agreement is reached; the maturity and terms of such Claim, or such other terms as have been agreed upon between such holder and such curing party, shall be reinstated pursuant to the provisions of Section 1124(2) of the Bankruptcy Code and shall be the obligation of only the Reorganized Debtor as to Claims secured by Hammer Assets, or the Distribution Agent as to Claims secured by Non-Hammer Assets. 4.2.2. FULL SATISFACTION. Such Allowed Secured Claim shall be paid in full by the Reorganized Debtor (as to Claims secured by Hammer Assets) or by the Distribution Agent (as to Claims secured by Non-Hammer Assets), or in such lesser amount as may be agreed upon by the holder of such Claim, as soon as practicable after such Claim becomes an Allowed Secured Claim, in exchange for which the holder of such Claim shall execute and deliver to the Reorganized Debtor or the Distribution Agent, as the case may be, all appropriate documentation reasonably necessary to evidence and effectuate a full release and discharge of all liens, security interests and obligations arising from such Claim. Notwithstanding anything to the contrary hereinabove, the Distribution Agent shall have no responsibility, obligation or liability pursuant to this Section 4.2.2 for the payment of any Claim secured by Hammer Assets, and the Reorganized Debtor shall have no responsibility, obligation or liability pursuant to this Section 4.2.2 for the payment of any Claim secured by Non-Hammer Assets. 4.2.3. ABANDONMENT, FORECLOSURE AND DEFICIENCY. Such holder shall be permitted to remove, at its own cost and peril, and at a time mutually convenient to such holder and the Reorganized Debtor (as to Hammer Assets) or the Distribution Agent (as to Non-Hammer Assets), and foreclose upon, such property as to which it holds a perfected security interest in conformity with applicable provisions of the Uniform Commercial Code or other applicable law. ARTICLE V TREATMENT OF IMPAIRED CLASSES Classes of impaired Claims and Interests shall be treated as follows: 5.1. CLASS C (CONVENIENCE CLAIMS). In lieu of treatment under Section 5.2 of the Plan, and in full satisfaction and discharge of all Allowed Claims within Class C, each holder of an Allowed Convenience Claim who does not make the election described in Section 5.1.1 hereinbelow, shall receive from the Distribution Agent, on or before sixty (60) days after the Effective Date, or such later date as such Claim becomes an Allowed Claim, Cash equal to ten percent (10%) of the amount of such Allowed Convenience Claim, provided: 5.1.1. OPT-OUT ELECTION. Any holder of a Convenience Claim may, by written election served upon, and actually received by, the Debtor's general bankruptcy counsel on or prior to the deadline for submission of Ballots, elect to be treated within Class D. 5.1.2. OPT-IN ELECTION. A holder of a Claim in excess of $3,000.00 may, by written election actually received by the Debtor's general bankruptcy counsel on or prior to the deadline for submission of Ballots, reduce such Claim to $3,000.00, in which case such Claim shall be treated as a Convenience Claim. In the event of such election, the Claim amount in excess of $3,000.00 shall be deemed fully released, waived and discharged. 5.2. CLASS D (GENERAL UNSECURED CLAIMS). All Allowed Claims within Class D shall be deemed fully satisfied and discharged by the distributions of Cash and Reorganized Shares pursuant to the provisions of Sections 5.2.1 and 5.2.4, respectively, as follows: 5.2.1. CASH DISTRIBUTIONS. Subject to each of the provisions of Section 5.2 herein, each holder of an Allowed Claim within Class D shall receive pro-rata Cash payments from the Distribution Estate on account of such Claim, as follows: 5.2.1.1. PAYMENTS COMMENCED. No later than June 30, 1998 as directed by the Committee, and thereafter in accordance with the provisions of Section 7.8.6 hereinbelow, the Distribution Agent shall make Cash payments from the Distribution Estate upon all Allowed Claims within Class D, to the extent of available funds and based upon the calculations described in Section 5.2.2 hereinbelow. 5.2.1.2. PAYMENTS CEASED. Such Cash payments shall cease once all funds reasonably anticipated to be received into the Distribution Estate, have been exhausted. 5.2.2. PRO-RATA CALCULATIONS. Cash payments and stock distributions made pursuant to Sections 5.2.1 and 5.2.4, respectively, shall be made on a pro-rata basis to holders of all such Allowed Claims (with reserves for Disputed Claims). The aggregate of all such Cash payments made by the Distribution Agent at any one time shall be equal to all of the available Cash in the Distribution Estate, (i) less the amount of Cash reserves which the Distribution Agent determines may be required in order to satisfy the Distribution Agent's other obligations under the terms of the Plan, including full distributions upon Allowed Nonclassified Priority Claims pursuant to Section 3.4.1 hereinabove, distributions upon Allowed Claims within Classes A, B and C pursuant to Sections 4.1, 4.2.1, 4.2.2 and 5.1 hereinabove, Cures with respect to executory contracts pursuant to Section 6.4.2 hereinbelow, and future anticipated expenses, such as postconfirmation administrative fees and costs and quarterly fees owing to the United States Trustee, pursuant to Section 7.10 hereinbelow; and (ii) less a reserve for Disputed Claims, equal to the aggregate amount of pro-rata distributions that would be made on Disputed Claims, if Allowed in full, or such lesser amounts as may be established by the Bankruptcy Court following notice and an opportunity for hearing; provided, however, that if the Distribution Agent determines that the amount of funds available for distribution, net of such reserves, is too small to be efficiently distributed, relative to the costs of distribution, such distribution may be deferred until the next distribution due. 5.2.3. PARI PASSU TREATMENT. Notwithstanding anything to the contrary elsewhere in the Plan, all Claims arising from the Public Debt Securities (i.e., the Notes and the Debentures) shall be treated as Claims, to the extent Allowed, within Class D, and shall be treated on a pari passu basis, without subordination between them. Any claims between holders of Notes and holders of Debentures, including without limitation any issues of subordination with respect to the obligations of the Debtor in connection with the Public Debt Securities, shall be deemed compromised and settled in accordance with the provisions of this Plan, which, among other things, shall be deemed to constitute sufficient consideration for the pari passu treatment of such Claims. 5.2.4. STOCK DISTRIBUTION. Subject to each of the provisions of this Section 5.2, the Distribution Agent shall distribute all Reorganized Shares received by the Distribution Estate pursuant to Section 8.1.1 hereinbelow as follows: 5.2.4.1. PRO RATA. Such Reorganized Shares shall be distributed on account of all Allowed Claims within Class D, based upon the pro-rata calculations described in Section 5.2.2 hereinabove. 5.2.4.2. VALUE. Each such Reorganized Share, when distributed, shall be deemed to have a value of $0.325 for purposes of calculating distributions upon, and satisfaction of, Allowed Claims within Class D. 5.2.4.3. FRACTIONAL AND REMAINDER SHARES. Notwithstanding the pro-rata calculation provided for in Section 5.2.2, only whole numbers of Reorganized Shares shall be distributed in accordance with Section 5.2 of this Plan. Whenever the Pro-Rata calculation provided for in said Section 5.2.2 would otherwise entitle a holder of an Allowed Class D Claim to a distribution of a number of Reorganized Shares that is not a whole number, the actual number of Reorganized Shares to be distributed to such holder shall be rounded to the next higher or lower whole number as follows: (i) fractions of 4/5 or greater shall be rounded to the next higher whole number; and (ii) fractions of less than 4/5 shall be rounded to the next lower whole number. No consideration shall be provided in lieu of fractional shares that are rounded down. In the event that any Reorganized Shares remain in the Distribution Estate after the distribution in accordance with the terms of Section 5.2.4 hereof, the Distribution Agent shall dispose of such remaining Reorganized Shares as an asset of the Distribution Estate in accordance with the terms of Section 7.8.3 of this Plan. 5.2.5. SUBORDINATION. Except as expressly provided in Section 5.2.3 hereinabove, no provision of the Plan shall be construed to impair, prohibit or prejudice the right of any party, including without limitation the Distribution Agent, to seek the subordination of distributions upon any Allowed Claim within Class D, in whole or in part, to distributions upon some or all other Allowed Claims within Class D, whether pursuant to the provisions of Section 510(a) or (c) of the Bankruptcy Code or otherwise. 5.2.6. PROVISIONS AFFECTING PUBLIC DEBT SECURITIES. The following provisions shall affect each of the Indentures and all distributions made under the Plan on account of Claims arising from Public Debt Securities: 5.2.6.1. RECORD DATE. The Bankruptcy Court, in the order approving the Disclosure Statement, shall designate a record date for the holders of Public Debt Securities (the "Record Date"). As of the Record Date, the transfer registers (the "Registers") in respect of each issue of Public Debt Securities shall be closed for purposes of determining the holders of such Public Debt Securities which are entitled to vote and receive distributions under the Plan, and neither the Indenture Trustees nor the Distribution Agent shall be under any obligation to recognize the transfer of any Public Debt Securities occurring after the Record Date for purposes of voting or distributions. The Distribution Agent and each Indenture Trustee shall recognize and deal for all purposes under the Plan and each respective Indenture only with holders of record of the Public Debt Securities as of the close of business on the Record Date. 5.2.6.2. MANNER OF DISTRIBUTIONS; SURRENDER OF PUBLIC DEBT SECURITIES. All distributions provided for under the Plan to holders of Public Debt Securities shall be distributed to the appropriate Indenture Trustee for application pursuant to the provisions of its respective Indenture, including, without limitation, those provisions which govern the priority of distribution and the rights, duties, indemnification and compensation of such Indenture Trustee (subject to all other provisions of this Section 5.2.6). As of the Effective Date, all outstanding Public Debt Securities shall be deemed cancelled and exchanged for the right to receive distributions pursuant to the terms of the Plan, and the rights of holders of such Public Debt Securities shall thereafter be governed solely by the terms of the Plan and, subject to the provisions of Section 5.2.6.3 of the Plan, by applicable provisions of the Indentures. As a condition to receiving distributions provided for by the Plan in respect of Public Debt Securities, the holder of a Public Debt Security as of the Record Date must (a) surrender or cause to be surrendered to the appropriate Indenture Trustee the original Note or Debenture held by it, or (b) unless waived by the Indenture Trustee in writing, in the event that such holder is unable to surrender his original Note or Debenture because the same has been lost, destroyed, stolen or mutilated, furnish such Indenture Trustee with (i) an executed affidavit of loss and indemnity with respect thereto in a form customarily utilized for such purpose that is reasonably acceptable to the Indenture Trustee, or (ii) a bond in such amount and in form as such Indenture Trustee shall reasonably direct, sufficient to indemnify such Indenture Trustee against any claim made against the Indenture Trustee on account of such alleged loss, destruction, theft or mutilation or the distribution of property hereunder. All Public Debt Securities surrendered to the appropriate Indenture Trustee shall be marked "Compromised and Settled only as provided in the Debtor's Plan of Reorganization" and surrendered to the Reorganized Debtor. 5.2.6.3. COMPENSATION OF INDENTURE TRUSTEES. The Indenture Trustees, the Debtor, the Distribution Agent, holders of Public Debt Securities, other Claimants and all of their respective successors-in-interest shall be deemed to reserve all rights, claims and defenses with respect to any claims for compensation, reimbursement or indemnification which either Indenture Trustee may assert (whether or not pursuant to Section 503(b)(5) of the Bankruptcy Code), subject to the following: 5.2.6.3.1. FROM ESTATE. To the extent that either Indenture Trustee may seek, from time to time, payment of Claims for compensation, reimbursement or indemnification from the Distribution Estate, whether as Nonclassified Priority Claims or as Class D Claims, such Claims must be filed in accordance with applicable deadlines established by Section 3.2 hereinabove, other provisions of the Plan or orders of the Bankruptcy Court, and the Distribution Agent and all other parties in interest shall be entitled to object thereto in accordance with applicable provisions of the Plan. 5.2.6.3.2. FROM DISTRIBUTION. To the extent that either Indenture Trustee may seek, from time to time, payment of compensation, reimbursement or indemnification as a deduction from, or lien against, funds held or received by such Indenture Trustee for distribution upon Claims arising from the Public Debt Securities, in accordance with the terms of the respective Indenture, such payment shall be made only upon notice and opportunity for hearing given to all holders of such Claims. In the event that any such holder objects and requests a hearing thereon in writing within twenty (20) days following receipt of such notice, such payment shall not be made without an order of the Bankruptcy Court (or, if the Bankruptcy Court is determined to lack proper jurisdiction therefor, then a court with competent jurisdiction) approving or awarding such payment (upon such standards as such court determines proper). Nothing set forth herein shall in any manner prejudice any rights of holders of Public Debt Securities or the Distribution Agent to challenge the right of either Indenture Trustee to receive any compensation, reimbursement or indemnification whatsoever, or to assert a lien or right of deduction therefor. 5.2.6.4. UNCLAIMED DISTRIBUTIONS. If any holder of a Public Debt Security as of the Record Date cannot be located or fails to satisfy the conditions precedent to receipt of a distribution under the Plan within one year after the Effective Date, then the distributions in respect of such holder, or the proceeds thereof and interest thereon, shall be returned to the Distribution Agent for distribution in accordance with this Section 5.2. 5.3. CLASS E (INTERESTS). All Interests within Class E, including without limitation Rescission Claims, shall be treated as follows: 5.3.1. NO DISTRIBUTIONS. All such Interests shall be deemed fully and finally released and discharged as of the Effective Date, and no distributions whatsoever shall be made upon such Interests from the Distribution Estate or by the Reorganized Debtor. 5.3.2. CANCELLATION. As of the Effective Date, all shares of stock, regardless of class or preference rights, and all options, warrants and other rights affecting stock, giving rise to any Interests shall be deemed fully and finally cancelled, annulled and extinguished and of no further force or effect whatsoever. ARTICLE VI EXECUTORY CONTRACTS 6.1. GENERALLY. Unexpired executory contracts, including without limitation unexpired leases, to which the Debtor is a party as of the Effective Date, entered into by the Debtor prior to the Petition Date, shall be treated in the manner set forth in this Article VI. 6.2. ASSUMPTION AND REJECTION. The assumption and rejection of executory contracts shall be determined as follows: 6.2.1. SCHEDULE. No less than ten (10) days prior to the commencement of the Confirmation Hearing, the Debtor shall file with the Bankruptcy Court, and serve upon the United States Trustee, the Committee and each party to a contract identified therein, a schedule (the "Schedule 6.2.1") identifying the following: (a) each executory contract to be assumed by the Reorganized Debtor as of the Effective Date; (b) each executory contract to be assumed by the Distribution Estate as of the Effective Date; and (c) the amount of any monetary default that must be Cured in order to assume each such contract under the provisions of Section 365(b)(1) of the Bankruptcy Code. 6.2.2. REJECTION. Except as otherwise provided elsewhere in the Plan or by the terms of the Confirmation Order, as of the Effective Date, all executory contracts, including without limitation all employment contracts and employee compensation or benefit plans or programs, shall be deemed rejected as of the Effective Date, except for any executory contract (i) which is listed on Schedule 6.2.1 to be assumed, or (ii) which has been assumed by the Debtor pursuant to an order of the Bankruptcy Court entered prior to the Effective Date. 6.2.3. ASSUMPTION. As of the Effective Date: (a) all executory contracts that are assumed pursuant to the provisions of Section 6.2.1(a) hereinabove shall be deemed assumed by the Reorganized Debtor; (b) all executory contracts that are assumed pursuant to the provisions of Section 6.2.1(b) hereinabove shall be deemed assumed by the Distribution Estate; and (c) all executory contracts that are assumed pursuant to the provisions of Section 6.2.2(ii) hereinabove shall be deemed assumed by the Distribution Estate. 6.3. CURE AMOUNTS. Within five (5) Business Days following the Confirmation Date, the Committee, the United States Trustee and any party to an executory contract listed therein may file, and serve upon the Debtor, the Committee, the United States Trustee and such contract party, an objection to Schedule 6.2.1 to the extent that it disputes the Cure amount stated for a particular contract. The amounts set forth in Schedule 6.2.1 shall be conclusively presumed to be the amounts of Cure, if any, for each contract identified therein, unless, and except to the extent, that an objection is timely filed and served in accordance with the provisions of this Section 6.3. Any amount of Cure in excess of those set forth in the Schedule 6.2.1 or such timely filed objections shall be fully discharged and barred, and shall not be a liability of the Reorganized Debtor or the Distribution Estate to any extent. 6.4. PAYMENT OF CURE. Any and all cash payments necessary to Cure defaults existing under the executory contracts assumed pursuant to the provisions of Section 6.2 herein shall be paid as follows: 6.4.1. PAYMENT BY REORGANIZED DEBTOR. Such Cure amounts shall be paid by the Reorganized Debtor from its own funds with respect to any executory contract identified for assumption in Schedule 6.2.1 pursuant to the provisions of Section 6.2.1(a) hereinabove, and the Distribution Agent shall have no responsibility or liability therefor whatsoever. 6.4.2. PAYMENT BY DISTRIBUTION AGENT. Such Cure amounts shall be paid by the Distribution Agent from funds of the Distribution Estate with respect to any executory contract to be assumed other than those identified for assumption in Schedule 6.2.1 pursuant to the provisions of Section 6.2.1(a) hereinabove, and the Reorganized Debtor shall have no responsibility or liability therefor whatsoever. 6.4.3. TIMING OF PAYMENT. All such payments of Cure amounts shall be paid by the later of the following dates: (a) on the Effective Date, or on such later date as to which the holder of the right to such Cure may have consented; or (b) on the date when such Cure of defaults becomes due according to contractual, statutory or other terms applicable thereto, provided that if an objection timely filed and served pursuant to the provisions of Section 6.3 hereinabove identifies a larger amount for the Cure of a contract, the undisputed portion shall be paid in accordance with the foregoing sentence and the difference in amounts shall be paid to the extent and when allowed by a Final Order of the Bankruptcy Court determining the amount of such Cure. 6.5. APPROVAL OF ASSUMPTION OR REJECTION. Entry of the Confirmation Order shall constitute (i) the approval, pursuant to the provisions of Section 365(a) of the Bankruptcy Code, of the assumption of the executory contracts assumed pursuant to the provisions of Section 6.2 hereinabove; (ii) the extension of time pursuant to the provisions of Section 365(d)(4) of the Bankruptcy Code within which the Debtor may assume or reject the executory contracts specified in Section 6.2 hereinabove through the Effective Date; and (iii) the approval, pursuant to the provisions of Section 365(a) of the Bankruptcy Code, of the rejection of the executory contracts rejected pursuant to the provisions of Section 6.2 hereinabove. 6.6. BAR DATE FOR REJECTION CLAIMS. Except to the extent that the Bankruptcy Court, the Bankruptcy Code or the Bankruptcy Rules may establish an earlier deadline with regard to the rejection of particular executory contracts, any Claims arising out of the rejection of executory contracts pursuant to the provisions of Section 6.2 herein must be filed with the Bankruptcy Court and served upon all parties identified in the Postconfirmation List no later than thirty (30) days after the Effective Date. Any Claims not filed within such time will be forever barred from assertion against the Distribution Estate, and will not receive any distributions therefrom. Any Claims arising from the rejection of executory contracts (a) may be asserted only as Claims against the Distribution Estate; (b) may be asserted only to the extent permitted by Section 365(g) of the Bankruptcy Code; (c) shall be classified and treated within the treatment of Classes C or D, as the case may be; and (d) shall not be claims against the Reorganized Debtor to any extent. ARTICLE VII MEANS FOR EXECUTION OF THE PLAN 7.1. PLAN EFFECTIVENESS. The Plan shall become fully effective and binding upon all parties on the Effective Date. 7.2. VESTING OF ESTATE PROPERTY. As of the Effective Date, pursuant to the provisions of Section 1123(b) of the Bankruptcy Code and otherwise, the assets of the Debtor's estate shall vest as follows: 7.2.1. VESTING IN REORGANIZED DEBTOR. Subject to the provisions of Section 7.2.3 hereinbelow, all title, ownership and interests of the Debtor's estate in all Hammer Assets, shall be deemed preserved and re-vested in, and fully owned and possessed by, the Reorganized Debtor, free and clear of all claims, liens, security interests and obligations other than those that are expressly created or preserved by the provisions of this Plan or the Confirmation Order. 7.2.2. VESTING IN DISTRIBUTION ESTATE. All title, ownership and interests of the Debtor's estate in all Non- Hammer Assets shall be deemed preserved and retained in, and fully owned and possessed by, the Distribution Estate, free and clear of all claims, liens, security interests and obligations other than those that are expressly created or preserved by the provisions of this Plan or the Confirmation Order. 7.2.3. PRELETZ GROUP WITHDRAWAL. In the event that the Preletz Group timely and properly withdraws its support and commitment to the Plan, following ten (10) days' written notice to the Debtor and to the Committee and prior to the Effective Date, due to a material adverse change in the operations of the Debtor's Hammer Product Line business prior to the Effective Date, then (a) the provisions of Section 7.2.1 hereinabove shall be inoperative, and as of the Effective Date all title, ownership and interests of the Debtor's estate in all Hammer Assets shall be deemed preserved and retained in, and fully owned and possessed by, the Distribution Estate, and (b) all such Hammer Assets shall thereafter be treated as Non-Hammer Assets for all purposes of the Plan. 7.3. HAMMER AND NON-HAMMER ASSETS. The terms "Hammer Assets" and "Non-Hammer Assets" shall have the following respective meanings: 7.3.1. HAMMER ASSETS. Subject to the provisions of Section 7.2.3 hereinabove, the "Hammer Assets" shall consist of each of the following assets, to the extent that such assets are property of the Debtor's estate immediately preceding the Effective Date: 7.3.1.1. All patents, trademarks and other intellectual property owned by the Debtor and relating to the Hammer Product Line, including without limitation the license of Raidion patents received from Farrington pursuant to the provisions of Section 2.3.2 of the Patent Sale Agreement, but without any representations or warranties on behalf of the Debtor or its estate as to the enforceability, validity or status of such intellectual property rights or that such rights are sufficient to operate the Reorganized Debtor's business; 7.3.1.2. All inventory of components, subassemblies and other material used to develop, assemble or manufacture any products or units within the Hammer Product Line; 7.3.1.3. The right to hire specified current employees of the Debtor, subject to agreement between the Reorganized Debtor and individual employees as to the particular terms and conditions of ongoing employment, but without such agreements constituting conditions to the effectiveness of the Plan; 7.3.1.4. All goodwill, name, customer lists and other general intangibles supporting or related to the Hammer Product Line; 7.3.1.5. All executory contracts, including equipment leases, vendor contracts and license agreements, which are identified in Schedule 6.2.1 pursuant to the provisions of Section 6.2.1(a) of the Plan; 7.3.1.6. All cash and cash equivalents (excluding restricted accounts), other than the net proceeds of bulk sales of Non-Hammer Assets, owned or held by the Debtor immediately preceding the Effective Date; 7.3.1.7. All accounts and accounts receivable arising from sales by the Debtor within the Hammer Product Line, to the extent owned or held by the Debtor immediately preceding the Effective Date; 7.3.1.8. Specific units of equipment owned or leased by the Debtor, subject to the following: (a) if such equipment is unencumbered, it must be identified in writing by the Preletz Group to the Debtor and to the Committee at least ten (10) days prior to the Effective Date; (b) if such equipment is leased by the Debtor, it must be pursuant to an executory contract identified in Schedule 6.2.1 pursuant to the provisions of Section 6.2.1(a) of the Plan; and (c) to the extent that such equipment is encumbered by a lien, it must be identified in Schedule 4.2(B) pursuant to the provisions of Section 4.2 of the Plan; and 7.3.1.9. All causes of action owned by the Debtor immediately preceding the Effective Date other than those constituting Non-Hammer Assets pursuant to the provisions of Section 7.3.2.7 hereinbelow. 7.3.2. NON-HAMMER ASSETS. Subject to the provisions of Section 7.2.3 hereinabove, the "Non-Hammer Assets" shall consist of all assets of the Debtor immediately preceding the Effective Date other than the Hammer Assets, and shall include without limitation the following: 7.3.2.1. All inventory within the Raidion Product Line and owned by the Debtor immediately preceding the Effective Date; 7.3.2.2. All accounts receivable arising from sales by the Debtor within the Raidion Product Line and existing immediately preceding the Effective Date; 7.3.2.3. All cash and cash equivalents constituting net proceeds of any bulk sales of assets within the Raidion Product Line and approved by the Bankruptcy Court pursuant to Section 363(b) of the Bankruptcy Code, including without limitation the net proceeds of the patent sale to Farrington and the net proceeds of the bulk sale to PTG; 7.3.2.4. All real property and improvements owned by the Debtor and located in Chatsworth, California; 7.3.2.5. The unsecured promissory note issued by Titanium Memory Systems, Inc. or an affiliate in the original principal amount of $500,000, and all related rights thereunder; 7.3.2.6. All shares of stock of Concentric Network Corporation, and any and all net proceeds from the sale thereof, owned by the Debtor immediately preceding the Effective Date; and 7.3.2.7. All causes of action arising from the avoidance powers set forth in Sections 544, 545, 546, 547, 548, 549, 550, 551, 552 and 553 of the Bankruptcy Code, and all other causes of action owned by the Debtor immediately preceding the Effective Date other than causes of action arising from, or necessary to the enforcement or benefit of, Hammer Assets. 7.4. EFFECTIVE DATE ACTIONS. As of the Effective Date, the Debtor, the Committee, the Preletz Group, the Distribution Agent and others shall take the following actions, and execute and deliver the following documents; provided that if any such party fails to so act, the Reorganized Debtor or the Distribution Agent shall be authorized to so act on such party's behalf, pursuant to an order of the Bankruptcy Court issued on no less than five (5) Business Days' notice under the provisions of Section 1142(b) of the Bankruptcy Code; provided further that if Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, then none of the provisions of Sections 7.4.1, 7.4.3, 7.4.4, 7.4.5(b), 7.4.6 or 7.4.7 hereinbelow shall become effective; and provided finally that as to all payments and other actions required of the Distribution Agent on the Effective Date by the terms of this Section 7.4, the Distribution Agent may rely fully upon specific directions provided jointly by the Debtor and the Committee: 7.4.1. REVESTING OF HAMMER ASSETS. As of the Effective Date, in exchange, among other things, for the issuance of Reorganized Shares to the Distribution Estate pursuant to Section 8.1.1 hereinbelow and the opportunity of creditors to acquire additional shares pursuant to Section 8.2 hereinbelow, all of the Hammer Assets shall revest in the Reorganized Debtor, free and clear of all liens, Claims, charges, interests and other encumbrances other than those expressly created or preserved by the terms of the Plan. 7.4.2. RETENTION OF NON-HAMMER ASSETS. As of the Effective Date, all of the Non-Hammer Assets shall be retained by the Distribution Estate, free and clear of all liens, Claims, charges, interests and other encumbrances other than those expressly created or preserved by the terms of the Plan. 7.4.3. PRELETZ GROUP CONTRIBUTION. On the Effective Date, the Preletz Group shall contribute Cash to the Reorganized Debtor, in exchange for Reorganized Shares, as set forth in Section 8.1.3 hereinbelow. 7.4.4. PARTICIPATING CREDITORS' CONTRIBUTION. On the Effective Date, the Participating Creditors shall contribute Cash to the Reorganized Debtor, in exchange for Reorganized Shares, as set forth in Section 8.1.2 hereinbelow. 7.4.5. CANCELLATION AND ISSUANCE OF STOCK. On the Effective Date, (a) all Interests, including without limitation shares of stock of the Debtor and all warrants and options therefor, shall be deemed fully cancelled, terminated and of no further force or effect whatsoever, pursuant to the provisions of Section 5.3.2 hereinabove; and (b) the Reorganized Debtor shall then and thereafter issue the Reorganized Shares as set forth in Section 8.1 of the Plan. 7.4.6. MODIFICATION OF ARTICLES AND BY-LAWS. As of the Effective Date, the Reorganized Debtor shall be deemed to have modified its charter, articles of incorporation and by-laws in accordance with the provisions of Section 8.3 hereinbelow. 7.4.7. PAYMENTS BY REORGANIZED DEBTOR. On and after the Effective Date, the Reorganized Debtor shall make payments as and when required of it by the provisions of Sections 3.4.2, 4.2.1, 4.2.2, 6.4.1 and 7.13 of the Plan. 7.4.8. PAYMENTS BY DISTRIBUTION AGENT. The Distribution Agent shall (a) pay such amounts to the holders of Allowed Priority Claims and Allowed Secured Claims as required by the provisions of Sections 4.1, 4.2.1 and 4.2.2 hereinabove, respectively; and (b) pay such Cure amounts as required by the provisions of Section 6.4.2 hereinabove. 7.4.9. OTHER RELEASES OF LIENS AND INSTRUMENTS. Holders of Secured Claims shall execute such documents as reasonably presented by the Reorganized Debtor or the Distribution Agent, as the case may be, in order to effectuate the release of liens and instruments contemplated by the provisions of Section 4.2.2 hereinabove, to the extent identified in Schedules 4.2(A) or 4.2(B) for treatment in accordance with the terms of Section 4.2.2 hereinabove. In addition, without limiting the generality of the foregoing, on and after the Effective Date, each holder of an instrument evidencing a Claim shall surrender such instrument to the Reorganized Debtor or the Distribution Agent, as the case may be, upon request. No distribution under the terms of the Plan shall be made to or on behalf of any holder of a lien or instrument unless and until the same has been surrendered, and the lien has been released pursuant to a document in recordable, acceptable form, as requested by the Reorganized Debtor or the Distribution Agent, as the case may be. 7.4.10. DISTRIBUTION ESTATE ACCOUNTS. The Distribution Agent shall establish one or more bank accounts for the maintenance of funds on behalf of the Distribution Estate, and shall deliver to the Bankruptcy Court evidence of the issuance of a fidelity bond, consistent with the requirements of Sections 7.8.1 and 7.7.2, respectively, of the Plan. 7.4.11. OTHER DOCUMENTS. The Reorganized Debtor and the Distribution Agent, as appropriate, shall execute and deliver such documents, and take such actions, as reasonably necessary to complete and evidence the disposition of assets, vested in either the Reorganized Debtor or the Distribution Estate, as contemplated by the terms of the Plan. 7.5. OTHER ACTIONS. The Debtor, the Committee, the Preletz Group, the Distribution Agent and all Claimants and other parties in interest shall take such other actions, and execute such other documents, as are reasonably necessary to consummate the transactions described in this Plan, and the Reorganized Debtor shall be free to operate its business and financial affairs, and to use the Hammer Assets as its own, as it deems appropriate at all times following the Effective Date, subject only to the express terms of the Plan. 7.6. PRESERVATION AND VESTING OF CAUSES OF ACTION. As of the Effective Date, each right, claim, avoiding power or cause of action arising under Sections 502, 506, 510, 541, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552 and 553 of the Bankruptcy Code in favor of the Debtor's estate shall be deemed fully preserved. All such rights, claims, avoiding powers and causes of action shall vest as follows: 7.6.1. VESTING IN REORGANIZED DEBTOR. As of the Effective Date, any such rights, claims and causes of action, but no such avoiding powers, that are Hammer Assets shall vest in the Reorganized Debtor; and 7.6.2. VESTING IN DISTRIBUTION ESTATE. As of the Effective Date, the Distribution Estate shall be vested with all such avoiding powers, and all other such rights, claims and causes of action that are not Hammer Assets. 7.7. DISTRIBUTION AGENT. The Distribution Agent shall be selected, and shall serve, as follows: 7.7.1. SELECTION. As soon as practicable following the Confirmation Date, the Committee shall select the Distribution Agent, on compensation terms acceptable to the Distribution Agent, effective as of the Effective Date, and shall file with the Bankruptcy Court a notice of such selection. 7.7.2. RESPONSIBILITY AND FIDELITY. At all times on and after the Effective Date, the Distribution Agent shall have sole responsibility for maintaining the Distribution Estate and in making disbursements thereof and disbursements therefrom in accordance with the terms of the Plan, pursuant to the provisions of Section 7.8 hereinbelow, and preserving, enforcing and otherwise disposing of the Distribution Estate's rights, entitlements, property and claims. Upon the Distribution Agent's employment, unless the Debtor and the Committee agree otherwise, the Distribution Agent shall furnish to the Bankruptcy Court and to the Debtor, the Committee and the United States Trustee evidence of the issuance of a fidelity bond covering all of the Distribution Agent's services under the Plan, in an amount agreed upon by the Debtor and the Committee, or else as established by the Bankruptcy Court, which amount may be adjusted from time to time after the Effective Date by the Bankruptcy Court on motion by a party in interest served upon all parties listed in the Postconfirmation List. 7.7.3. TENURE AND REPLACEMENT. The Distribution Agent shall serve at all times at the pleasure and direction of the Committee. The Committee may terminate the Distribution Agent's appointment at any time, with or without cause, in which case such termination shall become effective, and the Distribution Agent shall turn over all of his/her records, upon the Committee's appointment of a replacement Distribution Agent upon terms acceptable to the Committee and such replacement agent. 7.8. DISTRIBUTION ESTATE. The Distribution Agent shall administer the Distribution Estate, subject to each of the following provisions: 7.8.1. ACCOUNTS. Immediately upon the Effective Date, the Distribution Agent shall establish one or more deposit accounts with financial institutions approved by the Office of the United States Trustee or the Bankruptcy Court or otherwise qualified pursuant to the provisions of Section 345 of the Bankruptcy Code, for the maintenance of funds of the Distribution Estate. Whenever possible and practical, the Distribution Agent shall arrange for the accrual and earning of interest upon funds held within the Distribution Estate. 7.8.2. DISTRIBUTION AGENT'S DUTY. It shall be the duty of the Distribution Agent to liquidate all of the assets of the Distribution Estate, and to resolve all Claims thereagainst, in a manner reasonably intended and designed to maximize recoveries by recipients of distributions from such estate, consistent with sound and prudent principles of cash and asset management, subject to all applicable terms and conditions of Section 7.8.3 hereinbelow and upon instruction of the Committee. The Distribution Agent shall report regularly and in detail to the Committee, as frequently as events dictate or the Committee directs, as to the status of the administration of the Distribution Estate. 7.8.3. ADMINISTRATION. In disposing of the assets of the Distribution Estate, and in resolving Claims and other issues affecting the Distribution Estate, the Distribution Agent may dispose of assets, compromise controversies and otherwise administer the Distribution Estate in a manner determined by the Distribution Agent to be in the best interests of the Distribution Estate, subject to each of the following terms and conditions: 7.8.3.1. SMALLER SALES. The Distribution Agent may sell any asset or set of assets of the Distribution Estate in a single sale or a related set of sales, with the express, written approval of the Committee but without the notice procedure as set forth in Section 7.8.3.2 hereinbelow, provided that the gross purchase price to be received by the Distribution Estate for such asset or set of assets does not exceed the sum of $50,000.00. 7.8.3.2. OTHER DISPOSITIONS. All dispositions of assets of the Distribution Estate, including without limitation sales of assets and compromises of disputes, other than those sales described in Section 7.8.3.1 hereinabove may be made by the Distribution Agent only: (a) with the express, written approval of the Committee; and (b) either (i) in the absence of a timely written objection received by the Distribution Agent within five (5) Business Days following written notice given to those parties listed in the Postconfirmation List, or (ii) in the event of such timely written notice, upon approval by the Bankruptcy Court on no less than five (5) Business Days' notice of a hearing thereon. 7.8.4. DEPOSITS. All funds received by the Distribution Agent on behalf of the Distribution Estate on the Effective Date or thereafter, including all funds that constitute Non-Hammer Assets and all proceeds of other Non- Hammer Assets as sold, shall be deposited into the Distribution Estate. 7.8.5. DISBURSEMENTS. Disbursements shall be made from the Distribution Estate only for the following purposes: (a) payment of reasonable fees and expenses of the Distribution Agent, his or her professionals, and the Committee's professionals, the Committee's members' reasonable out-of-pocket expenses (excluding members' professionals' fees and expenses), and quarterly fees of the United States Trustee, to the extent required by the provisions of Section 7.10 hereinbelow; (b) payment of all distributions to the extent required by the provisions of Sections 3.4.1 (Nonclassified Priority Claims), 4.1 (Priority Claims), 4.2.1 and 4.2.2 (Secured Claims), 5.1 (Convenience Claims) and 6.4.2 (Executory contract Cures); and (c) periodic distributions upon Allowed Claims within Class D as required by the provisions of Section 5.2 hereinabove, to the extent of available funds; provided that no payments need be made upon Claims, other than within Class C (Convenience Claims), under the amount of $10.00 (a "De Minimis Amount"). A De Minimis Amount due such Claimant may be retained by the Distribution Agent and disbursed to such Claimant only if and when the Claimant has accrued the right to a distribution of $10.00 or more. The Distribution Agent may also round off, up or down, on disbursement amounts. 7.8.6. PERIODIC DISTRIBUTIONS. Beginning on or before June 30, 1998 and thereafter only as and when directed by the Committee, until the Distribution Estate has been exhausted and terminated, the Distribution Agent shall make distributions upon Allowed Claims within Class D as required by Section 5.2 hereinabove. 7.8.7. [INTENTIONALLY OMITTED]. 7.8.8. UNCLAIMED PAYMENTS TO CLAIMANTS. Distributions made by the Distribution Agent that are unclaimed for six (6) months following attempted distribution, including without limitation distributions of Cash or Reorganized Shares, shall be reinvested into the Distribution Estate, to be redistributed consistent with the terms of the Plan. 7.9. COMMITTEE. The Committee shall continue to serve and function following the Effective Date, with all of the duties, obligations, defenses and immunities provided by the Plan or applicable provisions of the Bankruptcy Code, for the purpose of directing and monitoring the administration and distribution of the Distribution Estate, subject to the following: 7.9.1. MEMBERSHIP. In the event that any member of the Committee assigns, releases, transfers or otherwise ceases to hold all or substantially all of its Allowed Claim within Class D, such assignment, release, transfer or other disposition shall be deemed to constitute such member's resignation from the Committee. In the event that any member of the Committee resigns, is removed or otherwise becomes ineligible to serve as a member of the Committee, a replacement may be selected by the remaining Committee members from the holders of Allowed Claims within Class D. 7.9.2. RETENTION OF PROFESSIONALS. The Committee shall be entitled to retain, employ and compensate professionals, in order to assist with its obligations and rights under the terms of the Plan, subject to the requirements of Section 327 of the Bankruptcy Code regarding Bankruptcy Court approval, provided that entry of the Confirmation Order shall be deemed to constitute the Bankruptcy Court's approval of the Committee's continued retention of the law firm of Murray & Murray, A Professional Corporation, counsel for the Committee prior to the Effective Date, as the Committee's counsel on and after the Effective Date, to the extent that the Distribution Agent wishes to so retain such firm, without the necessity of formal application therefor. 7.10. POSTCONFIRMATION FEES AND EXPENSES. The Distribution Agent shall be entitled, subject to the approval of the Committee, to retain, employ and compensate professionals, in order to assist with his or her obligations and rights under the terms of the Plan, and shall be entitled to receive compensation, subject to the following: 7.10.1. COURT APPROVAL. The requirements of Section 327 of the Bankruptcy Code regarding Bankruptcy Court approval of the retention of professionals shall pertain to professionals retained by the Distribution Agent, subject to the following: Entry of the Confirmation Order shall be deemed to constitute the Bankruptcy Court's approval of the Distribution Agent's retention of the law firms of Goldberg, Stinnett, Meyers & Davis, A Professional Corporation, and Murray & Murray, A Professional Corporation, counsel for the Debtor and the Committee, respectively, prior to the Effective Date, as the Distribution Agent's counsel on and after the Effective Date, to the extent that the Distribution Agent wishes to so retain such firms, without the necessity of formal application therefor. 7.10.2. PAYMENT OF FEES. All (a) fees and expenses of the Distribution Agent, his or her professionals, and the Committee's professionals, and out-of-pocket expenses of the Committee's members, earned or accrued on or after the Effective Date, and (b) quarterly fees owing to the United States Trustee and accruing for any period that includes any days occurring on or after the Effective Date, shall be payable from the Distribution Estate. All fees and expenses described in subpart (a) hereinabove shall be deemed allowed and approved, and shall be paid by the Distribution Agent from the Distribution Estate, upon ten (10) Business Days' notice to all parties listed in the Postconfirmation List, absent written objections within that period by a party in interest, or upon approval by the Bankruptcy Court in the event of such timely written objections. 7.10.3. REPORTING TO THE UNITED STATES TRUSTEE. At all times on and after the Effective Date, the Distribution Agent shall comply with all applicable reporting and administrative regulations, including the payment of fees, if any, to the United States Trustee pursuant to the provisions of Section 1930 of Title 28 of the United States Code. Any such fees owing to the United States Trustee shall be measured solely by distributions or payments of Cash from the Distribution Estate, and not by any distributions, payments, transfers or other dispositions of funds or assets by the Reorganized Debtor on or after the Effective Date. 7.11. OBJECTIONS TO CLAIMS. On and after the Effective Date, the Distribution Agent and any other party in interest may file and serve timely objections or requests for subordination as to any claim, except as otherwise provided in the Plan, provided that such objections or requests are filed with the Bankruptcy Court, and served upon the Distribution Agent (unless the Distribution Agent is the objecting party), the Committee and the holder of such claim, within ninety (90) days following the Effective Date (or within ninety (90) days following the filing of such claim, if later). 7.12. TERM OF INJUNCTIONS AND STAYS. Unless otherwise provided herein or by an order of the Bankruptcy Court, any injunctions or stays issued or effective as of the Confirmation Date in the Chapter 11 Case, whether under the provisions of Sections 105 or 362 of the Bankruptcy Code or otherwise, shall remain in full force and effect until the Effective Date. ARTICLE VIII CAPITALIZATION AND GOVERNANCE OF REORGANIZED DEBTOR 8.1. CAPITALIZATION OF REORGANIZED DEBTOR. On and after the Effective Date, unless Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, the Reorganized Debtor shall be authorized to issue up to 20,000,000 shares of common stock, the Reorganized Shares, provided that of such amount, (a) 5,000,000 shares may be issued at any time at the discretion of the Reorganized Debtor's board of directors in its business judgment, in return for new capital investments by the Preletz Group or by one or more third parties, at a per-share price that is not less than the greater of (i) $1.00 and (ii) current market value, to the extent that such market value can be reasonably ascertained; and (b) the other 15,000,000 shares may be issued only upon the following terms: 8.1.1. ESTATE'S SHARES. On the Effective Date, the Reorganized Debtor shall issue 3,500,000 Reorganized Shares to the Distribution Estate, in exchange for, among other things, the revesting of the Hammer Assets in the Reorganized Debtor. 8.1.2. PARTICIPATING CREDITORS' SHARES. On the Effective Date, the Reorganized Debtor shall issue the Subscription Reorganized Shares (2,000,000 Reorganized Shares) to Participating Creditors, in exchange for their aggregate contribution of Cash of $650,000.00, pursuant to the provisions of Section 8.2 hereinbelow. 8.1.3. PRELETZ GROUP SHARES. On the Effective Date, the Reorganized Debtor shall issue 2,000,000 Reorganized Shares to the Preletz Group, or its nominees, in exchange for its contribution of Cash of $650,000.00, pursuant to the provisions of Section 7.4.3 hereinabove. 8.1.4. STOCK OPTION SHARES. At any time on and after the Effective Date, the Reorganized Debtor, at its management's discretion, may issue up to 2,500,000 Reorganized Shares pursuant to "Employee Stock Options," as defined hereinbelow, subject to the following terms and conditions: 8.1.4.1. EMPLOYEE STOCK OPTIONS. The term "Employee Stock Options" is defined as options granted by the Reorganized Debtor to employees (management and/or nonmanagement), directors and/or officers as incentive compensation, which options, to the extent issued to nonmanagement employees, shall not vest unless the grantee remains with the Reorganized Debtor (unless terminated without cause) for at least one year from the date of the option grant (or longer, if vesting in increments), and which options shall carry such other terms and conditions as are customary or as the Reorganized Debtor's management determines appropriate; 8.1.4.2. TO MANAGEMENT. Not more than 1,000,000 such shares may be issued, without further conditions, to the Reorganized Debtor's management or to employees as determined by such management in its sole discretion; and 8.1.4.3. TO OTHERS. Not less than 1,500,000 such shares shall be available to be issued to nonmanagement employees staged over time pursuant to Employee Stock Options approved by a majority of the board of directors of the Reorganized Debtor. 8.1.5. ADDITIONAL SHARES. In addition to the foregoing, the Reorganized Debtor may issue up to an additional 5,000,000 Reorganized Shares at any time, at the discretion of the Reorganized Debtor's management in its business judgment, for any or all of the following purposes (allocated among such purposes as the Reorganized Debtor's management chooses): 8.1.5.1. NEW CAPITAL. In return for new capital investments by the Preletz Group or by one or more third parties, at a per-share price that is not less than the greater of (a) $1.00 and (b) current market value, to the extent that such market value can be reasonably ascertained; 8.1.5.2. PRELETZ GROUP OPTIONS. To grant options to the Preletz Group or their nominees exercisable upon the achievement of any of the following events, in the indicated share amounts: 8.1.5.2.1. Up to 2,000,000 Reorganized Shares in the event that the Reorganized Debtor remains operating, is generally paying its debts as they come due, and is not the subject of an order for relief under the provisions of the Bankruptcy Code, or an order for general receivership, as of the first anniversary of the Effective Date; 8.1.5.2.2. Up to 1,500,000 Reorganized Shares in the event that the Reorganized Debtor achieves a Market Value of at least $20,000,000; and 8.1.5.2.3. Up to 1,500,000 Reorganized Shares in the event that the Reorganized Debtor achieves a Market Value of at least $40,000,000; or 8.1.5.3. ADDITIONAL EMPLOYEE OPTIONS. To grant additional Employee Stock Options to nonmanagement employees of the Reorganized Debtor. 8.2. CREDITORS' RIGHTS OFFERING. As of the Effective Date, unless Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, 2,000,000 Reorganized Shares shall be issued in accordance with the provisions of Section 8.1.2 hereinabove to creditors participating in the following Creditors' Rights Offering, which offering shall be available to all Claimants (the "Eligible Claimants") asserting Claims which, if Allowed, will be treated within Class D herein, upon the following terms: 8.2.1. SUBSCRIPTION RIGHTS. Each Eligible Claimant shall be deemed to have been issued a number of nontransferable rights (the "Subscription Rights"), each such right representing the right to subscribe for and purchase one of the 2,000,000 Reorganized Shares to be issued pursuant to Section 8.1.2 hereinabove (the "Subscription Reorganized Shares") for the Cash purchase price of $0.325 ($650,000 in the aggregate for all Subscription Rights to purchase all Subscription Reorganized Shares). Each Eligible Claimant will be deemed to have been issued a number of Subscription Rights (rounded up to the nearest whole number) which is equal to the product obtained by multiplying (i) .06666 by (ii) the Eligible Claimant's Interim Claim (as defined hereinbelow). Each Eligible Claimant will be required to exercise all of its Subscription Rights if it wishes to exercise any of its Subscription Rights at all; partial exercises will not be permitted. 8.2.2. INTERIM CLAIM. For purposes of calculations and distributions pursuant to the Creditors' Rights Offering solely, an Eligible Claimant's "Interim Claim" shall be the lesser of (a) the amount of the Eligible Claimant's timely filed Claim or the amount, if any, shown as undisputed, liquidated and noncontingent in the Schedules if no timely Claim has been filed; and (b) the estimated amount of the Claim, if such estimation has been made by the Bankruptcy Court pursuant to the provisions of Section 502(c) of the Bankruptcy Code prior to the Confirmation Date. The Debtor, the Committee or any other party in interest may seek such estimation of a Claim upon five (5) Business Days' notice and opportunity for a hearing provided to the Eligible Claimant holding such Claim. 8.2.3. SUBSCRIPTION EXERCISE. Subscription Rights must be exercised by duly completing, signing and dating the portion of the Ballot marked "Subscription Rights," and submitting such Ballot in a timely manner as stated on the Ballot. If the Subscription Rights portion of the Ballot is otherwise completed by an Eligible Claimant but states an amount of Subscription Rights different from the amount to which such Eligible Claimant is entitled, such Ballot shall be deemed corrected to state the correct amount of Subscription Rights, as determined by the Committee. If the Subscription Rights portion of the Ballot is otherwise incomplete or incorrectly stated, it may be deemed to be corrected or void, as determined by the Committee. 8.2.4. STANDBY COMMITMENT. United Equities, which is an Eligible Claimant, shall exercise the Subscription Rights which will be deemed to have been issued to it, based upon an Interim Claim of approximately $2,500,000. In addition, United Equities shall purchase any and all Subscription Reorganized Shares which are not purchased by any other Eligible Claimant pursuant to the exercise of Subscription Rights. 8.2.5. NOTIFICATION AND DEPOSIT. As soon as practicable following the calculation of exercised Subscription Rights pursuant to the foregoing provisions, the Committee shall notify each Eligible Claimant which has exercised its Subscription Rights (a "Participating Creditor"), including United Equities as to its standby commitment amount, of the number of Subscription Reorganized Shares that such Eligible Claimant shall purchase and the amount of the Cash purchase price (the "Subscription Payment") therefor. Upon receipt of such notification, each such Participating Creditor shall tender its Subscription Payment in Cash to the Committee's counsel by the deadline set forth in the notification (which deadline shall be no earlier than seven (7) days following the date of mailing of such notification. 8.2.6. SEGREGATED ACCOUNT. The Committee's counsel shall hold all Subscription Payments in a segregated account (using the Debtor's tax identification number), in trust for the Participating Creditors, and shall not disburse such funds for any purposes other than the following: (a) on the Effective Date, unless Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, all such funds (including any interest that may have been earned thereon) shall be disbursed to the Reorganized Debtor in exchange for the issuance of the Subscription Reorganized Shares pursuant to Section 8.1.2 hereinabove; or (b) if the Effective Date does not occur or Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, all such funds (including any interest that may have been earned thereon) shall be returned to those Participating Creditors who tendered such funds, proportionate to the amounts of such tenders. 8.2.7. DETERMINATIONS BY COMMITTEE. All determinations made by the Committee as to the Creditors' Rights Offering, including without limitation calculations of proper amounts of Subscription Rights, Subscription Reorganized Shares, Interim Claims and Subscription Payments, and determinations of the timeliness of exercises of Subscription Rights and the adequacy and completeness of information provided in the Subscription Rights portion of the Ballots, shall be in the Committee's sole discretion and judgment and shall be final and conclusive for all purposes, without an opportunity for challenge, appeal or dispute. 8.2.8. UNTIMELY CONTRIBUTIONS. In the event of untimely receipts, or lack of receipts, of Subscription Payments, the subscriptions to which they relate shall be automatically deemed void and such Subscription Rights shall be deemed reassigned to, and exercised by, United Equities, which shall deposit with the Committee's counsel such additional Subscription Payments immediately upon notification. 8.2.9. DISTRIBUTIONS. Prior to the Effective Date, the Committee shall provide directions to the Debtor as to the final Subscription Payment, and amount of Subscription Reorganized Shares of each Participating Creditor in accordance with the foregoing provisions, and on the Effective Date, the Reorganized Debtor shall issue the 2,000,000 Subscription Reorganized Shares pursuant to such directions of the Committee. 8.2.10. SPECIAL CONSIDERATIONS. A purchase of the Subscription Reorganized Shares will involve a high degree of risk, and may result in the loss of the purchaser's entire investment. 8.3. CORPORATE GOVERNANCE OF REORGANIZED DEBTOR. As of the Effective Date, unless Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, the Reorganized Debtor's corporate governance and operative parameters shall include the following, including modifications of its charter, articles of incorporation and by- laws to the extent appropriate: 8.3.1. OPERATIONAL CONTROL. The Preletz Group shall maintain all operational control of the Reorganized Debtor, including the appointment, compensation, employment and retention of the Reorganized Debtor's senior management, for at least three years following the Effective Date. 8.3.2. BOARD OF DIRECTORS. The Reorganized Debtor's board of directors shall consist of five (5) directors, and the Preletz Group shall be entitled to select, remove and replace three (3) of those five directors at all times during the first three years following the Effective Date. 8.3.3. FORMALIZED PROVISIONS. The control provisions set forth in Sections 8.3.1 and 8.3.2 hereinabove shall be formalized by contractual provisions of shareholder agreements that shall be deemed adopted and accepted by all shareholders as of the Effective Date, and by modification of the Reorganized Debtor's articles of incorporation and bylaws. 8.3.4. EXTRAORDINARY ACTIONS. Consent of the holders of a majority of issued and vested Reorganized Shares shall be required for certain extraordinary nonoperational actions, including but not limited to merger or consolidation with another entity, sale of a substantial portion (at least twenty percent (20%)) of the Reorganized Debtor's assets, commencement of a case under the Bankruptcy Code or consent to the appointment of a general receiver of the Reorganized Debtor's assets. 8.3.5. RELOCATION AND RENT. Prior to the Effective Date, the Debtor shall relocate its operations and remaining assets and employees to new facilities, and shall vacate the premises occupied as of the Petition Date. On and after the Effective Date and until October 1, 1998, the Distribution Agent may use a portion of the new facilities rent-free for storage, and the Reorganized Debtor shall be solely responsible for all rent obligations arising from the occupancy of either the Distribution Agent or the Reorganized Debtor with respect to such facilities. 8.3.6. FREE SERVICES. Following the Effective Date until the first anniversary of the Effective Date, the Reorganized Debtor shall provide to the Distribution Agent, free of charge, the full-time services of Michael O. Preletz, and the services of other officers of the Reorganized Debtor on a part-time (20%) basis, in order to assist in the liquidation of the Raidion Product Line, as well as to review Claims based upon the Raidion Product Line. Notwithstanding the foregoing, the Distribution Agent shall not be required to retain Mr. Preletz or other officers of the Reorganized Debtor for any such services, and may release such individuals from continuation of such services at any time, at the Distribution Agent's sole discretion. 8.3.7. PUBLIC MARKET. The Reorganized Debtor shall use its best reasonable efforts to obtain or maintain registration and public listing of its shares at the earliest possible time, consistent with applicable securities laws, sound business judgment and prudent expenditures of funds, to permit holders of Reorganized Shares access to public markets to dispose of such shares if they so desire. 8.3.8. PROHIBITION. To the extent required by the provisions of Section 1123(a)(6) of the Bankruptcy Code, the Reorganized Debtor's charter shall be deemed amended as of the Effective Date so as to prohibit the issuance of nonvoting equity securities, and to provide, to the extent that more than one class of securities may exist, such distributions of voting power as are required by the provisions of said Section 1123(a)(6). ARTICLE IX ASSUMPTION, DISCHARGE AND EXCULPATION 9.1. REORGANIZED DEBTOR'S ASSUMPTION OF LIABILITIES. As of the Effective Date, the Reorganized Debtor shall be deemed to have assumed each of the following Claims and liabilities, and the Distribution Estate shall have no liability, responsibility or obligation with respect thereto: (a) the Ordinary Course Expenses to the extent required by the provisions of Section 3.4.2 hereinabove; (b) any and all Hammer Contingent Claims; (c) rent obligations under the terms of the real property lease of the Debtor's new facilities, to the extent provided in Section 8.3.5 hereinabove; (d) obligations identified by the Preletz Group in Schedule 4.2(B) pursuant to the provisions of Section 4.2 hereinabove, to the extent of reinstatement costs, reinstated obligations and full satisfaction costs; and (e) Cure payments and ongoing obligations with respect to those executory contracts identified in Schedule 6.2.1 pursuant to the provisions of Section 6.2.1(a) hereinabove. 9.2. DISCHARGE. The rights afforded herein, and the treatment of all Claims and Interests set forth herein, shall be in full exchange for, and in complete satisfaction, discharge and release of, all Claims and Interests of any kind or nature whatsoever, whether known or unknown, matured or contingent, liquidated or unliquidated, existing, arising or accruing, whether or not yet due, prior to the Effective Date, including without limitation any Claims, or interest on Claims, accruing on or after the Petition Date, against the Debtor or its estate, or any assets or property thereof. Except as, and to the extent, expressly provided in the Plan or the Confirmation Order, at all times on and after the Effective Date, unless Section 7.2.3 hereinabove becomes operative due to a timely and proper withdrawal by the Preletz Group, (a) all such Claims against, and Interests in, the Debtor or its estate shall be deemed fully and finally satisfied, discharged and released; (b) all persons shall be fully and finally barred, enjoined and precluded from asserting against the Reorganized Debtor, the Distribution Estate, or any of their respective successors or assets, any Claims or Interests based upon any act or omission, transaction, agreement, right, privilege, duty, entitlement, obligation or other event or activity of any kind or nature whatsoever that occurred prior to the Effective Date; and (c) all Claims and Interests shall be fully and finally discharged and deemed satisfied to the fullest extent permitted by the provisions of Section 1141 of the Bankruptcy Code. 9.3. EXCULPATION OF CERTAIN PERSONS. As of the Effective Date, the Plan shall be deemed to satisfy, waive and release in full any and all claims of the Debtor or its estate against the Debtor, the Preletz Group, the Committee, the members of the Committee and each of their present officers, directors, agents, advisors, attorneys or accountants from any claim arising out of or in connection with any act or failure to act in connection with their rights and duties arising under or related to the Chapter 11 Case from the Petition Date to and including the Effective Date, except any claims expressly created or preserved under the terms of the Plan or any documents executed, or to be executed, in connection with the Plan. Except as expressly provided in the Plan or any other document executed or to be executed in connection with the Plan, neither the Debtor, nor the Preletz Group, nor the Committee, nor its members, nor any of their respective present officers, directors, agents, advisors, attorneys or accountants, shall have any liability to the Debtor, the Distribution Agent, the Distribution Estate or the Reorganized Debtor for actions taken or omitted to be taken under or in connection with the Plan or the Chapter 11 Case. 9.4 IMMUNITY. All actions taken by the Distribution Agent, the Committee or any of their respective agents, representatives, attorneys, advisors or accountants, as contemplated under the terms of the Plan, shall be conclusively deemed to be actions within the scope of Sections 1103 and 1107 of the Bankruptcy Code. Except for willful misconduct, neither the Distribution Agent, the Committee, their respective professionals, the Committee's members nor United Equities shall be determined liable to any person or party for any action or omission taken or made in connection with the Plan or its effectuation, and such parties may in good faith exercise or refrain from exercising any right, duty or obligation contemplated hereunder without challenge or recourse. ARTICLE X RETENTION OF JURISDICTION 10.1. GENERALLY. Until the Chapter 11 Case has been closed, and thereafter upon a motion to reopen the case, the Bankruptcy Court shall have exclusive jurisdiction of all matters concerning the allowance of Claims and Interests, and the interpretation and implementation of the Plan, pursuant to, and for the purposes of, Sections 105(a) and 1142 of the Bankruptcy Code, including without limitation the following purposes: (a) to hear and determine applications for the assumption or rejection of executory contracts or unexpired leases, if any are pending on the Effective Date, and the allowance of Claims resulting therefrom; (b) to determine any and all claims, causes of action, adversary proceedings, applications and contested matters which are pending on the Effective Date or which are thereafter commenced by or related to the Distribution Estate; (c) to hear and determine any objection to Administrative Expense Claims or to Claims; (d) to enter and implement such orders as may be appropriate in the event that the Confirmation Order is for any reason stayed, revoked, modified, or vacated; (e) to issue such orders in aid of execution of the Plan, to the extent authorized by the provisions of Section 1142 of the Bankruptcy Code; (f) to consider any modifications of the Plan, to cure any defect or omission, or reconcile any inconsistency in any order of the Bankruptcy Court, including, without limitation, the Confirmation Order; (g) to hear and determine all applications for Professional Fees accrued through the Effective Date, and for Professional Fees accrued thereafter in the event of a timely objection; (h) to hear and determine disputes arising in connection with the interpretation, implementation or enforcement of the Plan; (j) to hear and determine matters concerning state, local and federal taxes in accordance with Sections 346, 505, and 1146 of the Bankruptcy Code; and (k) to enter a final decree closing the Chapter 11 Case, and orders reopening the Chapter 11 Case as appropriate. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1. EXEMPTION FROM TRANSFER TAXES. Pursuant to the provisions of Section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of notes or equity securities under the Plan, the creation of any mortgage, deed of trust or other security interest, the making or assignment of any lease or sublease, the sale or other transfer of any assets by the Distribution Agent to a third party, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with the Plan, including any deeds, bills of sale or assignments executed in connection with any of the transactions contemplated under the Plan, shall not be subject to any stamp, real estate transfer, mortgage recording, sales or other similar tax. 11.2. EXEMPTION FROM REGISTRATION. Pursuant to the provisions of Section 1145(a) of the Bankruptcy Code, and except with respect to underwriters as defined in Section 1145(b) of the Bankruptcy Code, the offer, sale, issuance and distribution of shares of stock of the Reorganized Debtor under the terms of this Plan, and in particular the issuance and distribution of Reorganized Shares pursuant to any of the provisions of Section 8.1 of the Plan, are, and shall be deemed, fully exempt from, and unaffected by, any of the provisions of Section 5 of the Securities Act of 1933 and any State or local law requiring registration for offer or sale of a security or registration or licensing of an issuer of, underwriter of, or broker or dealer in, a security. 11.3. BINDING EFFECT. The Plan shall be binding upon and inure to the benefit of the Reorganized Debtor, the Preletz Group, the Committee, the Distribution Estate, the Distribution Agent and all holders of Claims (including without limitation all holders of Debentures or Notes) and Interests and their respective successors and assigns, whether or not they have accepted the Plan. 11.4. RATIFICATION. Subject to all of the terms of this Plan, the Confirmation Order shall be deemed to ratify all transactions effectuated by the Debtor during the pendency of its chapter 11 case to the extent either in the ordinary course of business or pursuant to an order of the Bankruptcy Court. 11.5. NOTICES. Any notice required or permitted to be provided under the terms of the Plan shall be in writing and shall be served by the quickest practical available method of delivery (which shall be conclusively presumed to be (a) by hand delivery or (b) by facsimile with hard copy to follow by overnight courier, as to the Debtor, the Committee, the Reorganized Debtor, the Preletz Group and the Distribution Agent). All notices to the Debtor, the Committee, the Reorganized Debtor, the Preletz Group or the Distribution Agent shall be delivered as follows (or as otherwise directed by such party by notice given pursuant hereto): If to the Debtor (prior to the Effective Date), to: StreamLogic Corporation 8450 Central Avenue Newark, California 94560 Attn: Michael O. Preletz, C.E.O. Telephone: (510) 608-4075 Telecopier: (510) 608-4012 With a copy to: Goldberg, Stinnett, Meyers & Davis A Professional Corporation 44 Montgomery Street, Suite 2900 San Francisco, California 94104 Attn: Merle C. Meyers, Esq. Telephone: (415) 362-5045 Telecopier: (415) 362-2392 If to the Reorganized Debtor (on and after the Effective Date), to: StreamLogic Corporation 8450 Central Avenue Newark, California 94560 Attn: Michael O. Preletz, C.E.O. Telephone: (510) 608-4075 Telecopier: (510) 608-4012 With a copy to: Manatt, Phelps & Phillips, LLP 11355 West Olympic Boulevard Los Angeles, CA 90064-1614 Attn: T. Hale Boggs, Esq. Telephone: (310) 312-4000 Telecopier: (310) 312-4224 If to the Committee (prior to the Effective Date), to: Murray & Murray A Professional Corporation 3030 Hansen Way, Suite 200 Palo Alto, California 94304 Attn: Patrick M. Costello, Esq. Telephone: (415) 852-9000 Telecopier: (415) 852-9244 If to the Preletz Group, to: MBI Group 1334 Parkview Avenue, Suite 245 Manhattan Beach, CA 90266 Attn: Michael O. Preletz Telephone: (310) 545-3504 Telecopier: (310) 546-4206 With a copy to: Graven Perry Block Brody & Qualls 523 West Sixth Street, Suite 1130 Los Angeles, CA 90014 Attn: Kriston D. Qualls, Esq. Telephone: (213) 680-9770 Telecopier: (213) 489-1332 If to the Distribution Agent: As directed by notice provided by or on behalf of the Distribution Agent on or as soon as practicable after the Effective Date, with copies to: Goldberg, Stinnett, Meyers & Davis A Professional Corporation 44 Montgomery Street, Suite 2900 San Francisco, California 94104 Attn: Merle C. Meyers, Esq. Telephone: (415) 362-5045 Telecopier: (415) 362-2392 and Murray & Murray A Professional Corporation 3030 Hansen Way, Suite 200 Palo Alto, California 94304 Attn: Patrick M. Costello, Esq. Telephone: (415) 852-9000 Telecopier: (415) 852-9244 11.6. GOVERNING LAW. Except to the extent that the Bankruptcy Code or Bankruptcy Rules are applicable, the rights and obligations arising under the Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without giving effect to the conflict of laws provisions thereof. 11.7. HEADINGS. Headings are used in the Plan for convenience and reference only, and shall not constitute a part of the Plan for any other purpose. 11.8. EXHIBITS. Any and all exhibits to the Plan are incorporated into and are a part of the Plan as if set forth in full herein. 11.9. CLOSING CASE. At such point as the Court determines, upon a motion of the Distribution Agent, and following ten (10) Business Days' notice and an opportunity for hearing to all parties listed in the Postconfirmation List, that all pending claims objections, contested matters and adversary proceedings have been resolved, or that the Chapter 11 Case need remain open no longer despite the pendency of such objections, matters or proceedings, the Chapter 11 Case may be closed by the terms of a final decree of the Bankruptcy Court, provided that such case will be reopened thereafter if necessary in order to facilitate any of the actions contemplated by the terms of Section 10.1 hereinabove. 11.10. EXPENSES. In the event that any action, motion, contested matter, complaint, answer, counterclaim, cross-claim or other action is filed or taken by the Distribution Agent or the Reorganized Debtor after the Effective Date either in the Bankruptcy Court or otherwise, in order to enforce or interpret any terms of the Plan or the Confirmation Order, or any order or agreement made in implementation of the Plan, the prevailing party in such matter (as determined by a court of competent jurisdiction) shall be entitled to recover from any opposing party its expenses, including reasonable attorneys' fees and costs, incurred in such matter. 11.11. MODIFICATION AND ENFORCEMENT. The following shall pertain, in addition to applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, to the modification or enforcement of the Plan: 11.11.1. MODIFICATION. Following the Effective Date, the Reorganized Debtor or the Distribution Agent may jointly or separately institute a proceeding or motion in the Bankruptcy Court in order to remedy any defects or omissions, or to reconcile any inconsistencies, in the Plan, the Disclosure Statement or the Confirmation Order, upon no less than ten (10) Business Days' notice of such proceedings or motion shall be served on all parties listed in the Postconfirmation List, or upon such parties as authorized by the Bankruptcy Court. 11.11.2. ENFORCEMENT. The Reorganized Debtor or the Distribution Agent may jointly or separately take such actions, including the initiation of proceedings or the prosecution of a motion, as may be reasonably necessary in order to interpret or enforce the purposes and intent of the Plan. DATED: December 10, 1997 STREAMLOGIC CORPORATION, a Delaware corporation By: ______________________________ Michael O. Preletz Chief Executive Officer Submitted By: GOLDBERG, STINNETT, MEYERS & DAVIS A Professional Corporation By: __________________________________ Merle C. Meyers, Esq. Attorneys for Debtor-in-Possession EXHIBIT "A" SCHEDULE OF DEFINITIONS As used herein or in the Plan, the following terms have the meanings specified below, unless the context otherwise requires: A. ADMINISTRATIVE EXPENSE CLAIM means any Claim arising before the Effective Date under Sections 503(b) and 507(a)(1) of the Bankruptcy Code, including, without limitation, any actual and necessary expenses of preserving the Debtor's estate, any actual and necessary expenses of operating the business of the Debtor, all compensation or reimbursement of expenses allowed by the Bankruptcy Court under the provisions of Sections 330, 331 or 503 of the Bankruptcy Code, any fees or charges assessed against the Debtor's estate under the provisions of Section 1930 of chapter 123 of title 28 of the United States Code, and all Claims arising from employment with the Debtor on or after the Petition Date, except for Claims that are also Secured Claims. B. ALLOWED means: 1. With respect to a Claim, any Claim that is neither a Disputed Claim nor a Disallowed Claim, and proof of which was timely and properly filed or, if no proof of claim was filed, which has been or hereafter is listed by the Debtor on its Schedules as liquidated in amount and not disputed or contingent. "Allowed Administrative Expense Claim" or "Allowed Claim" shall not include interest on such Administrative Expense Claim or Claim from and after the Petition Date except as expressly specified in the Plan; 2. With respect to an Interest, any Interest as of the Effective Date, as defined elsewhere in this Exhibit "A." C. ALLOWED . . . CLAIM means an Allowed Claim within the particular Class or category identified. D. BALLOT means each of the voting forms to be distributed with the Plan and the Disclosure Statement to holders of Claims or Interests in Classes that are impaired under the terms of the Plan and are entitled to vote in connection with the solicitation of acceptances of the Plan. E. BANKRUPTCY CODE means title 11 of the United States Code, as amended from time to time, as applicable to the Chapter 11 Case. F. BANKRUPTCY COURT means the United States Bankruptcy Court for the Northern District of California, San Francisco Division, or such other court having competent jurisdiction over the Chapter 11 Case. G. BANKRUPTCY RULES means the Federal Rules of Bankruptcy Procedure, as amended from time to time, as applicable to the Chapter 11 Case, including the Local Rules of the Bankruptcy Court. H. BUSINESS DAY means any day on which commercial banks are generally open for business in San Francisco, California, other than a Saturday, Sunday or legal holiday in the State of California. I. CASH means the legal tender of the United States of America. J. CHAPTER 11 CASE means the case under chapter 11 of the Bankruptcy Code commenced by the Debtor, styled as IN RE STREAMLOGIC CORPORATION, A DELAWARE CORPORATION, FORMERLY KNOWN AS MICROPOLIS CORPORATION, Case No. 97-32984 DM, currently pending in the Bankruptcy Court. K. CLAIM means (a) any right to payment from the Debtor, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured, (b) any right to an equitable remedy for breach of performance if such breach gives rise to a right to payment from the Debtor, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured, or (c) any claim as defined by the provisions of Section 101(5) of the Bankruptcy Code. L. CLAIMANT means a person asserting a Claim against the Debtor or the Debtor's estate. M. CLASS means a category of holders of Claims or Interests as established by the terms of Article II of the Plan. N. COMMITTEE means the Official Committee of Unsecured Creditors appointed in the Chapter 11 Case, as it may be constituted from time to time. O. CONFIRMATION DATE means the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order. P. CONFIRMATION HEARING means the hearing before the Bankruptcy Court for the purpose of determining whether the Plan will be confirmed by the Bankruptcy Court pursuant to the provisions of Section 1129 of the Bankruptcy Code. Q. CONFIRMATION ORDER means the order of the Bankruptcy Court confirming the Plan pursuant to the provisions of Section 1129 of the Bankruptcy Code. R. CONVENIENCE CLAIMS means any Allowed Unsecured Claim (other than a Subordinated Claim or Rescission Claim) of $3,000.00 or less, and all Allowed Unsecured Claims (other than Subordinated Claims and Rescission Claims) in excess of $3,000.00 whose holders exercise the "opt-in" election set forth in Section 5.1.1 of the Plan, but excluding Claims whose holders exercise the "opt-out" election set forth in Section 5.1.2 of the Plan. S. CREDITOR means any person that has a Claim against the Debtor that arose on or before the Petition Date, or a claim against the Debtor of any kind specified in sections 502(f), 502(g), 502(h) or 502(i) of the Bankruptcy Code. T. CREDITORS' RIGHTS OFFERING means the offering of Reorganized Shares to Claimants as set forth in Section 8.2 of the Plan. U. CURE means the distribution of Cash as and to the extent required for the cure and assumption of an unexpired executory contract pursuant to the provisions of Section 365(b) of the Bankruptcy Code, or for the cure and reinstatement of a secured obligation pursuant to the provisions of Section 1124(2) of the Bankruptcy Code. V. DEBENTURES means the 6% Convertible Subordinated Debentures due 2012 and issued pursuant to the Indenture dated as of March 15, 1987 between the Debtor and Harris Trust and Savings Bank, as successor indenture trustee. W. DEBTOR means StreamLogic Corporation, a Delaware corporation formerly doing business as Micropolis Corporation, the debtor-in-possession in the Chapter 11 Case and the proponent of the Plan. X. DEBTOR-IN-POSSESSION means the Debtor, as debtor-in- possession in the Chapter 11 Case. Y. DISALLOWED CLAIM means: 1. Any Claim, proof of which was not timely and properly filed and, in the case of a Claim other than an Administrative Expense Claim, which is listed in the Schedules as unliquidated, disputed or contingent, or is not listed in the Schedules; and 2. Any Claim that has not been allowed by an earlier order of the Bankruptcy Court or by the terms of the Plan and as to which the Debtor, the Reorganized Debtor or any other party with authority to file objections to Claims, has filed an objection or request for estimation within ninety (90) days following the Effective Date (or within ninety (90) days following the filing of such Claim, if later) or such other applicable limitation period fixed by the Plan, the Bankruptcy Code, the Bankruptcy Rules or the Bankruptcy Court, to the extent that such Claim is disallowed by a Final Order. Z. DISCLOSURE STATEMENT means the disclosure statement relating to the Plan, as approved by the Bankruptcy Court pursuant to the provisions of Section 1125 of the Bankruptcy Code. AA. DISPUTED CLAIM means any Claim that has not been allowed by an earlier order of the Bankruptcy Court or by the terms of the Plan and as to which the Debtor, the Reorganized Debtor, the Distribution Agent or any other party with authority to file objections to Claims, has filed an objection or request for estimation within ninety (90) days following the Effective Date (or within ninety (90) days following the filing of such Claim, if later) or such other applicable limitation period fixed by the Plan, the Bankruptcy Code, the Bankruptcy Rules or the Bankruptcy Court, except to the extent that such objection or request for estimation has been withdrawn or determined by a Final Order. AB. DISTRIBUTION AGENT means the individual, in his or her official capacity, selected to manage the Distribution Estate pursuant to the provisions of Section 7.7 of the Plan. AC. DISTRIBUTION ESTATE means the remaining estate on and after the Effective Date maintained by the Distribution Agent for the benefit of holders of Allowed Claims and Allowed Interests, pursuant to the provisions of Section 7.8 of the Plan. AD. EFFECTIVE DATE means the effective date of the Plan, which shall be a date designated by the Debtor, the Committee and the Preletz Group, but which date shall be no less than 11 days, and no more than 30 days, following the Confirmation Date (or such later date as may be agreed upon by the Debtor and the Preletz Group, each in their sole and absolute discretion, in the event that effectuation of the Plan is enjoined or stayed by a court of competent jurisdiction for any period of time, provided that such later date is not later than 30 days following expiration of such stay or injunction). AE. ELIGIBLE CLAIMANT shall have the meaning identified in Section 8.2 of the Plan. AF. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all regulations issued pursuant thereto. AG. FARRINGTON means Farrington Investments, Ltd., a Cayman Islands corporation with offices at P.O. Box 1092, Fort Street, Grand Cayman, Cayman Islands. AH. FILING DATE means the Petition Date. AI. FINAL ORDER means an order of a court of competent jurisdiction as to which the time to appeal, petition for certiorari, or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari, or other proceedings for reargument or rehearing shall then be pending or as to which any right to appeal, petition for certiorari, reargument or rehearing shall have been waived, or, in the event that an appeal, writ of certiorari, reargument or rehearing thereof has been sought, such order shall have been determined by the highest court to which such order was appealed, or certiorari, reargument or rehearing shall have been denied and the time to take any further appeal, petition for certiorari or move for reargument or rehearing shall have expired. AJ. HAMMER ASSETS shall have the meaning identified in Section 7.3.1 of the Plan. AK. HAMMER CONTINGENT CLAIMS means any Claim arising from the sale by the Debtor of products within the Hammer Product Line, including without limitation any and all Claims for refund, return, reimbursement, breach of warranty or product defects. AL. HAMMER PRODUCT LINE means the Debtor's business and product line based upon the "Hammer" products, together with all related products of the Debtor and all intellectual property rights owned by the Debtor immediately preceding the Effective Date. AM. INDENTURE means, with respect to the Debentures, the Indenture dated as of March 15, 1987 between the Debtor and Harris Trust and Savings Bank, as successor indenture trustee, and, with respect to the Notes, the Indenture dated as of November 29, 1996 between the Debtor and Norwest Bank Minnesota, N.A., as indenture trustee. AN. INDENTURE TRUSTEE means Harris Trust and Savings Bank with respect to the Debentures and Norwest Bank Minnesota, N.A., with respect to the Notes, or its respective successor. AO. INTEREST means (a) any equity interest in the Debtor, and any option, warrant or other agreement requiring the issuance of any such equity interest to the extent fully exercised in accordance with applicable terms, that is a matter of the records of the Debtor's stock transfer agent as of the Effective Date; and (b) any Rescission Claim. AP. INTERIM CLAIM shall have the meaning identified in Section 8.2.1 of the Plan. AQ. MARKET VALUE means the total value of the Reorganized Debtor's issued and outstanding shares, as measured by pricing in a public market if the Reorganized Shares are publicly traded; or by an arm's-length purchase of all or substantially all of its assets, less liabilities, to a purchaser with whom the Preletz Group has no past, present or contemplated economic relationship; or by a sale by the Reorganized Debtor of no less than 1,000,000 Reorganized Shares to one or more parties that are not Affiliates (as defined within Section 101(2) of the Bankruptcy Code) of the Preletz Group or the Reorganized Debtor's management. AR. NONCLASSIFIED PRIORITY CLAIM means a Priority Claim that is either a Priority Tax Claim or an Administrative Expense Claim. AS. NON-HAMMER ASSETS shall have the meaning identified in Section 7.3.2 of the Plan. AT. NOTES means the Increasing Rate Unsecured Promissory Notes due November 29, 1998 and issued pursuant to the Indenture dated as of November 29, 1996 between the Debtor and Norwest Bank Minnesota, N.A., as indenture trustee. AU. ORDINARY COURSE EXPENSES means a liability incurred by the Debtor on or after the Petition Date in the ordinary course of its business, specifically excluding income tax liabilities, tort liabilities, environmental cleanup or indemnity claims, liabilities arising under ERISA, and other items not customarily incurred by the Debtor in the ordinary operation of its business. AV. PARTICIPATING CREDITOR shall have the meaning identified in Section 8.2.5 of the Plan. AW. PATENT SALE AGREEMENT means the Agreement For The Sale Of Patents entered into as of September 2, 1997 between the Debtor and Farrington, for the sale of certain patents and other intellectual property rights, which sale was completed as of October 14, 1997. AX. PETITION means the voluntary petition filed by the Debtor with the Bankruptcy Court in order to commence the Chapter 11 Case on June 26, 1997. AY. PETITION DATE means June 26, 1997, the date on which the Petition was filed with the Bankruptcy Court, commencing the Chapter 11 Case. AZ. PLAN means this Debtor's Plan Of Reorganization (Dated December 10, 1997) (including all exhibits and schedules annexed hereto or filed separately), either in its present form or as it may be legally altered, amended, or modified from time to time. BA. POSTCONFIRMATION LIST means the United States Trustee, the Reorganized Debtor and its counsel, the Distribution Agent and his/her counsel, the Committee and its members and counsel, and those parties who, subsequent to the Confirmation Date, file with the Bankruptcy Court and serve upon the parties and counsel named above written requests for special notice as provided by the terms of the Plan, provided, that any such requesting party may be eliminated from such list from time to time by consent of such party or by order of the Bankruptcy Court on notice to the then-constituted Postconfirmation List, upon a showing that such party no longer holds material interests or claims in the Chapter 11 Case. BB. PRELETZ GROUP means Michael O. Preletz, and other investors as may be designated by Mr. Preletz, agreeing to invest in the Reorganized Debtor, conditioned upon the occurrence of the Effective Date according to the terms of the Plan. BC. PRIORITY CLAIM means a Claim entitled to priority treatment under the provisions of Section 507(a) of the Bankruptcy Code. BD. PRIORITY TAX CLAIM means a Priority Claim of a governmental unit entitled to priority treatment pursuant to the provisions of Sections 502(i) and 507(a)(8) of the Bankruptcy Code, other than Secured Claims. BE. PRO RATA means: 1. Regarding Claims, the ratio of the amount of an Allowed Claim in a particular Class to the aggregate amount of all Allowed Claims in such Class; and 2. Regarding Interests, the ratio of the amount of the Allowed Interest in a particular Class to the aggregate amount of all Allowed Interests in such Class. BF. PROFESSIONAL FEES means a Claim for compensation or reimbursement of expenses of a professional retained in the Chapter 11 Case in accordance with the provisions of Sections 327 et seq. of the Bankruptcy Code. BG. PTG means Peripheral Technology Group, Inc., a Minnesota corporation. BH. PUBLIC DEBT SECURITIES means the Notes and the Debentures. BI. RAIDION PRODUCT LINE means the business and products formerly supported by the Debtor with respect to "Raidion" products, all of the patents and patent applications which have been transferred to Farrington pursuant to the Patent Sale Agreement. BJ. REORGANIZED DEBTOR means the Debtor as reorganized pursuant to the terms of the Plan, on and after the Effective Date. BK. REORGANIZED SHARES means all shares of common stock issued by the Reorganized Debtor on and after the Effective Date pursuant to the provisions of Section 8.1 of the Plan. BL. RESCISSION CLAIM means a Claim arising from the rescission of a purchase or sale of common stock of the Debtor or an affiliate of the Debtor, for damages arising from the purchase or sale of such stock, or for reimbursement or contribution allowed under Section 502 of the Bankruptcy Code on account of such a Claim. BM. SCHEDULE 4.2(A) means the schedule described and defined as such in Section 4.2 of the Plan. BN. SCHEDULE 4.2(B) means the schedule described and defined as such in Section 4.2 of the Plan. BO. SCHEDULE 6.2.1 means the schedule to be filed and served pursuant to the provisions of Section 6.2.1 of the Plan. BP. SCHEDULES means the schedules of assets and liabilities and the statement of financial affairs filed by the Debtor in the Chapter 11 Case as required by the provisions of Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007, and all amendments or modifications filed with respect thereto. BQ. SECURED CLAIM means an Allowed Claim held by any entity to the extent of the value, as set forth in the Plan, as determined by a Final Order of the Bankruptcy Court pursuant to Section 506(a) of the Bankruptcy Code or as agreed upon by such entity, on the one hand, and the Reorganized Debtor (as to Claims secured by Hammer Assets) or the Distribution Agent (as to Claims secured by Non-Hammer Assets), on the other hand, of any duly perfected interest in property of the Debtor's estate validly and enforceably securing such Allowed Claim. BR. SECURED CREDITOR means the holder of a Secured Claim. BS. SUBSCRIPTION PAYMENT shall have the meaning identified in Section 8.2.5 of the Plan. BT. SUBSCRIPTION REORGANIZED SHARES shall have the meaning identified in Section 8.2.1 of the Plan. BU. SUBSCRIPTION RIGHTS shall have the meaning identified in Section 8.2.1 of the Plan. BV. UNITED EQUITIES means United Equities Company, a company holding Unsecured Claims of approximately $2,500,000 arising from the Debentures. BW. UNSECURED CLAIM means any Claim that is not a Secured Claim or Priority Claim. Such Unsecured Claims include, without limitation, all Claims arising from the rejection of leases and other executory contracts, guarantee claims, all Claims held by the Debtor's trade vendors and suppliers. EX-99 3 EX 99.2 DEBTOR'S DISCLOSURE STATEMENT GOLDBERG, STINNETT, MEYERS & DAVIS A Professional Corporation MERLE C. MEYERS, ESQ. #066849 KATHERINE D. RAY, ESQ. #121002 KENNETH G. DEJARNETTE, ESQ. #168074 44 Montgomery Street, Suite 2900 San Francisco, California 94104 Telephone: (415) 362-5045 Attorneys for Debtor-in-Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION In re ) Case No. 97-32984 DM ) STREAMLOGIC CORPORATION, ) Chapter 11 a Delaware corporation ) formerly known as ) Micropolis Corporation, ) ) Debtor. ) ) Tax I.D. No. 95-3093858 ) ________________________________________) DEBTOR'S DISCLOSURE STATEMENT (DATED DECEMBER 10, 1997) THIS DISCLOSURE STATEMENT, AND ITS DISTRIBUTION TO CREDITORS AND OTHER PARTIES IN INTEREST, HAS BEEN APPROVED BY THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA AS CONTAINING ADEQUATE INFORMATION AS REQUIRED BY THE BANKRUPTCY CODE FOR SOLICITATION OF ACCEPTANCES OF THE PLAN OF REORGANIZATION DESCRIBED HEREIN. THE COURT HAS MADE NO INDEPENDENT INVESTIGATION OR DETERMINATION OF ANY FACTUAL STATEMENT OR DOLLAR VALUE SET FORTH IN THE PLAN OR IN THIS DISCLOSURE STATEMENT. TABLE OF CONTENTS PAGE I. INTRODUCTION.......................................................1 A. Generally.................................................1 B. Right to Vote on the Plan.................................4 II. OVERVIEW OF THE PLAN...............................................6 III. PREPETITION BACKGROUND.............................................9 A. History of Business.......................................9 1. Generally........................................9 2. Sale to Micropolis...............................10 3. Purchase from FWB................................11 B. Industry Segment and Market...............................12 C. Products..................................................13 D. Discontinued Operations...................................14 1. Video Servers....................................14 2. Video Disk Recorder Technology...................15 3. Raidion Product Line.............................16 E. International Operations and Foreign Subsidiaries.........16 F. Competition...............................................17 G. Patents and Know-How......................................18 H. Employees.................................................19 I. Real Property.............................................19 J. Investments...............................................20 1. Concentric Network Stock.........................20 2. Note from Titanium Memory Systems................21 K. Debentures and Notes......................................22 1. Convertible Debentures...........................22 2. 1996 Exchange Offer; Increasing Rate Notes.......23 3. Remaining Debentures and Litigation..............24 L. Relocation and Consolidation..............................24 M. Change in Management......................................26 N. Debt Repayment Plans......................................27 O. Events Preceding Chapter 11 Case Commencement.............28 IV. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE......................29 A. Continuation of Business; Stay of Litigation..............29 1 B. Appointment of the Creditors' Committee...................30 C. Representation of the Debtor and the Committee............32 D. Development and Implementation of Strategic Plan..........32 E. Bar Date for Filing Proofs of Claim.......................34 F. Asset Sales Relating to Raidion Product Line..............34 G. Dispute with Newark Landlord..............................35 H. Remaining Assets..........................................37 V. THE PLAN OF REORGANIZATION.........................................38 A. Classification and Treatment of Claims and Interests.................................................38 1. Nonclassified Claims.............................38 2. Class A -- Other Priority Claims.................43 3. Class B -- Secured Claims........................44 4. Class C -- Convenience Claims....................46 5. Class D -- General Unsecured Claims..............47 6. Class E -- Stock Interests.......................49 B. Recapitalization of the Debtor............................50 1. Revesting of Assets..............................51 2. Reorganized Shares...............................52 3. Creditors' Rights Offering.......................52 4. Corporate Governance.............................54 C. Distribution Estate.......................................55 D. Discharge and Exculpation.................................56 E. Executory Contracts.......................................58 F. Other Provisions..........................................59 VI. CONFIRMATION PROCEDURE.............................................60 A. Solicitation of Votes.....................................60 B. The Confirmation Hearing..................................61 C. Confirmation..............................................62 1. Acceptance.......................................62 2. Nonconsensual Confirmation.......................63 a. Unsecured Creditors.....................63 b. Equity Interests........................63 3. Feasibility......................................63 4. Best Interests Test..............................64 D. Consummation..............................................65 VII. MANAGEMENT OF THE REORGANIZED DEBTOR...............................65 A. Composition of the Board of Directors.....................65 2 B. Identity of Officers......................................66 C. Compensation of Executive Officers........................67 D. Compensation of Directors.................................68 VIII. APPLICABILITY OF CERTAIN FEDERAL AND OTHER SECURITIES LAWS TO THE REORGANIZED SHARES DISTRIBUTED UNDER THE PLAN...........................................68 A. Generally.................................................68 B. Resale Considerations.....................................69 C. Hart-Scott-Rodino Act Requirements........................73 IX. CERTAIN RISK FACTORS TO BE CONSIDERED..............................73 A. Overall Risks to Recovery Upon Claims.....................73 B. Projected Financial Information...........................74 C. Dividend Policy...........................................74 X. PROJECTIONS AND LIQUIDATION ALTERNATIVES...........................75 A. Projected Performance.....................................75 B. Liquidation Alternative...................................77 C. Projected Recoveries......................................81 XI. CONCLUSION AND RECOMMENDATION......................................81 3 EXHIBITS Exhibit A -- Statement of Support of Debtor's Plan Exhibit B -- Debtor's Monthly Operating Report for the Month of October 1997 Exhibit C -- Proforma Financial Summary Exhibit D -- Liquidation Analysis of Non-Hammer Assets Exhibit E -- Liquidation Analysis of Hammer Assets Exhibit F -- Projected Distributions in Class D 4 I. INTRODUCTION A. GENERALLY. STREAMLOGIC CORPORATION, a Delaware corporation formerly known as Micropolis Corporation ("StreamLogic" or the "Debtor"),1 commenced this chapter 11 reorganization case on June 26, 1997, in the United States Bankruptcy Court for the Northern District of California, San Francisco Division, by the filing of a voluntary petition on that date. This Debtor's Disclosure Statement (Dated December 10, 1997) (as hereafter amended, modified or supplemented, the "Disclosure Statement") has been prepared by the Debtor for distribution to creditors, equity interest holders and other parties in interest for the purpose of soliciting acceptances of the Debtor's Plan of Reorganization (Dated December 10, 1997) (as hereafter amended, modified or supplemented, the "Plan") proposed and served concurrently herewith by the Debtor. The Disclosure Statement is being provided to parties in interest in order to provide adequate information to enable such parties to make informed judgments about the Plan before exercising their rights to vote for acceptance or rejection of the Plan. This Disclosure Statement has been approved as containing adequate information by an order of the Bankruptcy Court, and its distribution to parties in interest has been authorized and directed by the Bankruptcy Court in that order. NONETHELESS, THE DEBTOR IS UNABLE TO WARRANT OR REPRESENT THAT ALL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT OR IN EXHIBITS ATTACHED HERETO IS WITHOUT ERROR, ALTHOUGH ALL REASONABLE EFFORTS UNDER THE CIRCUMSTANCES HAVE BEEN MADE TO BE ACCURATE. IN PARTICULAR, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE DEBTOR NOTES THAT THE ASSUMPTIONS AND PROJECTIONS OF FUTURE PERFORMANCE AND ALTERNATIVE SCENARIOS ARE ONLY PREDICTIONS OF FUTURE OR HYPOTHETICAL EVENTS, MOST OF WHICH ARE BEYOND THE DEBTOR'S CONTROL, AND THEREFORE THERE CAN BE NO ASSURANCES THAT THE ASSUMPTIONS WILL IN FACT MATERIALIZE OR THAT THE PROJECTIONS WILL IN FACT BE MET. IN ADDITION, THE DEBTOR NOTES: - -------- 1 Unless otherwise expressly defined herein, or unless the context requires otherwise, all capitalized terms used in this Disclosure Statement shall have the meanings assigned to them in the Plan, including the Schedule of Definitions that is attached to the Plan as Exhibit "A." 1 - -- ANY DESCRIPTION OF THE TERMS OF THE PLAN CONTAINED HEREIN IS A SUMMARY ONLY, AND YOU ARE CAUTIONED TO REVIEW CAREFULLY THE TERMS OF THE PLAN ITSELF FOR SIGNIFICANT DETAILS. ALL CLAIMANTS AND EQUITY INTEREST HOLDERS ARE ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY. PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN, OTHER EXHIBITS ANNEXED HERETO AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE BANKRUPTCY COURT PRIOR TO OR CONCURRENT WITH THE FILING OF THIS DISCLOSURE STATEMENT. - -- THERE CAN BE NO ASSURANCE: (A) THAT THE INFORMATION AND REPRESENTATIONS CONTAINED HEREIN ARE MATERIALLY ACCURATE; OR (B) THAT THIS DISCLOSURE STATEMENT CONTAINS ALL MATERIAL INFORMATION. FURTHER, ALL CLAIMANTS AND EQUITY INTEREST HOLDERS SHOULD READ CAREFULLY AND CONSIDER FULLY THE "RISK FACTORS" SECTION HEREINBELOW BEFORE VOTING FOR OR AGAINST THE PLAN. - -- THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND RULE 3016(c) OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE AND NOT IN ACCORDANCE WITH ANY FEDERAL OR STATE SECURITIES LAWS OR OTHER APPLICABLE NONBANKRUPTCY LAW. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING OR TRANSFERRING SECURITIES OF THE DEBTOR SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE FOR WHICH THEY WERE PREPARED. - -- THIS DISCLOSURE STATEMENT HAS BEEN NEITHER APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF ANY OF THE STATEMENTS CONTAINED HEREIN. - -- AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION OR WAIVER, BUT RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. - -- THIS DISCLOSURE STATEMENT SHALL NOT BE CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES OR OTHER LEGAL EFFECTS OF THE DEBTOR'S REORGANIZATION AS TO HOLDERS OF CLAIMS AGAINST, OR EQUITY INTERESTS IN, THE DEBTOR. - -- THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ACCEPTING OR REJECTING THE PLAN. NO REPRESENTATION CONCERNING THE DEBTOR, ITS BUSINESS OPERATIONS, THE VALUE OF ITS ASSETS OR THE VALUE OF ANY SECURITIES TO BE ISSUED OR BENEFITS OFFERED PURSUANT TO THE PLAN ARE AUTHORIZED BY THE BANKRUPTCY COURT, EXCEPT AS 2 EXPLICITLY SET FORTH IN THIS DISCLOSURE STATEMENT OR IN ANY OTHER DOCUMENT APPROVED FOR DISTRIBUTION BY THE BANKRUPTCY COURT. Attached as exhibits to this Disclosure Statement are copies of the following, as referenced elsewhere herein: -- A Support Statement evidencing the support of the Official Committee of Unsecured Creditors and of Michael O. Preletz for confirmation of the Plan (Exhibit "A"); -- The Debtor's Monthly Operating Report for the Month of October 1997 (Exhibit "B"); -- Proforma Financial Summary (Exhibit "C"); -- Liquidation Analysis of Non-Hammer Assets (Exhibit "D"); -- Liquidation Analysis of Hammer Assets (Exhibit "E"); and -- Projected Distribution Results (Exhibit "F"). In addition, the Plan, a ballot for the acceptance or rejection of the Plan (the "Ballot") and other pertinent documents are enclosed with the Disclosure Statement submitted herewith. Further, copies of the most recent annual and quarterly reports filed by the Debtor with the Securities and Exchange Commission, up to the quarter ending December 31, 1996, are available upon written request to the Debtor or from the Securities and Exchange Commission pursuant to customary procedures of such agency. B. RIGHT TO VOTE ON THE PLAN Pursuant to the provisions of the Bankruptcy Code, only holders of allowed claims or equity interests in classes of claims or equity interests that are impaired under the terms and provisions of the Plan are entitled to vote to accept or reject the Plan. Holders of allowed claims in classes of claims that are unimpaired under the terms and provisions of the Plan are conclusively presumed to have accepted the Plan and therefore are not entitled to vote on the Plan. Further, holders of allowed claims or equity interests in classes which will receive nothing under the terms and provisions of the Plan are conclusively presumed to have rejected the Plan and therefore are not entitled to vote on the Plan. The Debtor believes that Classes A and B of the Plan are unimpaired, are conclusively presumed to have accepted the Plan, and therefore do not have the right to vote on the Plan. Holders 3 of Claims in Classes C and D are impaired and therefore are entitled to vote to accept or reject the Plan. Holders of Interests in Class E will receive nothing under the terms of the Plan, are conclusively presumed to have rejected the Plan, and therefore do not have the right to vote on the Plan. The Bankruptcy Code defines "acceptance" of a plan by a class of claims as acceptance by creditors in that class that hold at least two-thirds in dollar amount, and more than one-half in number, of claims that cast ballots for acceptance or rejection of the plan. The Bankruptcy Code defines "acceptance" of a plan by a class of equity interests as acceptance by equity interest holders in that class that hold at least two-thirds in amount of the allowed interests that cast ballots for acceptance or rejection of the plan. If a Class of Claims or Interests rejects the Plan or is deemed to reject the Plan, the Debtor has the right, and does intend, to request confirmation of the Plan pursuant to Section 1129(b) of the Bankruptcy Code. Section 1129(b) permits the confirmation of a plan notwithstanding the nonacceptance of such plan by one or more impaired classes of claims or equity interests if the proponent thereof complies with the provisions of that section. Under that section, a plan may be confirmed by a bankruptcy court if it does not discriminate unfairly and is fair and equitable with respect to each nonaccepting class. The Debtor believes that through the Plan, creditors will obtain a greater recovery from the estate of the Debtor than the recovery which would be available if the assets of the Debtor were liquidated under the provisions of chapter 7 of the Bankruptcy Code. THE DEBTOR BELIEVES THAT ACCEPTANCE OF THE PLAN IS IN THE BEST INTERESTS OF THE DEBTOR AND ITS CREDITORS AND EQUITY INTEREST HOLDERS. AS EVIDENCED IN THE SUPPORT STATEMENT ATTACHED HERETO AS EXHIBIT "A," THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS (THE "COMMITTEE") APPOINTED HEREIN TO REPRESENT THE INTERESTS OF UNSECURED CREDITORS GENERALLY, HAS STATED THAT IT TOO SUPPORTS CONFIRMATION OF THE PLAN AS BEING IN THE BEST INTERESTS OF THE DEBTOR'S UNSECURED CREDITORS. ACCORDINGLY, THE DEBTOR URGES ALL PARTIES IN INTEREST, TO THE EXTENT ENTITLED TO VOTE, TO VOTE TO ACCEPT THE PLAN. An acceptance or rejection of the Plan may be voted by completing the Ballot which accompanies the Plan and this Disclosure Statement and mailing it to Merle C. Meyers, Esq. of Goldberg, Stinnett, Meyers & Davis, A Professional Corporation, 44 Montgomery Street, Suite 2900, San Francisco, California 94104, in the enclosed envelope, for actual receipt on or before the date set forth as the deadline in the Ballot or in other documents accompanying the Plan and the Disclosure Statement. 4 II. OVERVIEW OF THE PLAN The Plan is the product of extensive negotiations over the course of several months among the Debtor, the Committee and the Preletz Group (Michael O. Preletz and affiliated investors) to design a plan which maximizes the recoveries to creditors and other parties in interest and creates a sound capital structure for the reorganized entity. Under the Plan, the reorganized Debtor will emerge from bankruptcy recapitalized and prepared to implement a business plan that, if fulfilled, will result in increased value and profitability, to the benefit of both its new investors and the estate herein. Under the terms of the Plan, the reorganized Debtor will retain certain core assets of its Hammer business, the Hammer Assets, and the remaining estate will retain and sell all other assets, the Non-Hammer Assets. The assets of the remaining estate, including the Non-Hammer Assets and a block of 3,500,000 shares of stock of the reorganized Debtor, will be managed by a bonded Distribution Agent and sold for the benefit of creditors. Former shareholders, consistent with the priority scheme set forth in the Bankruptcy Code and the present lack of equity in the Debtor, will receive nothing under the terms of the Plan. All existing shares of stock of the Debtor will be cancelled on the Plan's Effective Date, and the reorganized Debtor will issue new shares in favor of the estate, the company's new investors and others. In particular, the remaining estate will receive 3,500,000 shares; the Preletz Group will receive 2,000,000 shares in exchange for a cash investment of $650,000; 2,000,000 shares will be distributed to creditors in exchange for cash investments of $650,000 in the aggregate, pursuant to a creditors' rights offering, as explained below; and 2,500,000 shares will be available for distribution pursuant to stock options granted to management and nonmanagement employees. Thereafter, an additional 10,000,000 shares may be issued by the reorganized Debtor for various stock options or sales, within limitations described in the Plan. The Plan designates various classes of Claims and Interests and provides for distribution rights for each such class, in a manner consistent with the priority system of the Bankruptcy Code. In essence, the net proceeds of sale of all assets in the Distribution Estate, after costs and full payment of priority expenses and claims, will be distributed on a pro-rata basis to holders of Allowed Claims, until all funds of the Distribution Estate have been exhausted. The Preletz Group, which will be a new investor in the reorganized Debtor, includes Michael O. Preletz and Chapman A. Stranahan, who presently serve as the Debtor's senior management. Those same individuals will continue in their senior management 5 positions in the reorganized Debtor, and will receive valuable consideration in exchange for their investments in, and management of, the reorganized Debtor. Because of the Preletz Group's role in the matter, the Debtor has engaged the Committee in direct negotiations with respect to the terms of the Plan, and as a result, the terms of the Plan, particularly as they affect the Preletz Group and present management of the Debtor, are the product of extensive and good faith negotiations among the Preletz Group, the Debtor and the Committee. It is on the basis of those negotiations that both the Debtor and the Committee have concluded that the Plan is in the best interests of the estate herein, and in the view of the Debtor, the recoveries that will occur pursuant to the Plan are better than the likely recovery under any alternative reorganization or liquidation. As stated, the Plan is supported by the Committee and by the Preletz Group. That support is evidenced by the statement of support that is attached hereto as Exhibit "A." III. PREPETITION BACKGROUND A. HISTORY OF BUSINESS 1. GENERALLY. The Debtor is a developer and manufacturer of information storage products and systems. StreamLogic sells its products and systems directly to original equipment manufacturers, or OEMs, and system integrators, and through independent distributors and valued-added resellers, or VARs, for resale to end users. The Debtor is headquartered in Newark, California and presently employs approximately 33 employees. The Debtor was initially incorporated in California in December 1976 under the name Micropolis Corporation, and was reincorporated in Delaware in April 1987. In April 1996, the Debtor changed its name from Micropolis Corporation to StreamLogic Corporation. Prior to April 1996, the Debtor's business was substantially larger than it is presently, with a large percentage of the company's business devoted to the design, manufacture and sale of disk drives. However, as a result of the sale of the disk drive business in early 1996, as described below, the Debtor's business became significantly smaller, with the number of employees decreasing from approximately 2,000 immediately prior to the sale to approximately 150 persons shortly after the sale. The company's stock was publicly traded on the NASDAQ National Market System, or NASDAQ, until it was de-listed on June 25, 1997, the day preceding the chapter 11 filing. 2. SALE TO MICROPOLIS. On January 24, 1996, the Debtor entered into an agreement with ST Chatsworth Pte. Ltd., a Singapore corporation which was later renamed "Micropolis (S) 6 Pte. Ltd." ("Micropolis"), a wholly owned subsidiary of Singapore Technologies, to sell substantially all of the Debtor's assets (other than cash and accounts receivable) related to the Debtor's disk drive business, and the sale was consummated on March 29, 1996, following approval by the Debtor's shareholders. The transferred assets included the name "Micropolis" and the capital stock of Micropolis Thailand, the Debtor's manufacturing subsidiary in Thailand, a newly constructed manufacturing facility in Singapore, and five of the Debtor's European and Asian sales and marketing subsidiaries. In exchange for those assets, Micropolis paid the Debtor approximately $54 million in cash and assumed certain limited liabilities of the Debtor relating to the disk drive business. As a result of the sale of the disk drive business, the Debtor's revenues and ongoing expenses shrank considerably. As of June 28, 1996, for example, the book value of the Debtor's property, plant and equipment totalled approximately $6 million, as compared to approximately $47 million for the same period in 1995, and net sales decreased 84% to $11.2 million in the quarter ending June 30, 1996, as compared to sales of $70.1 million for the same quarter in 1995. 3. PURCHASE FROM FWB. Subsequent to the divestiture of its disk drive business, the Debtor acquired a new business: Effective as of July 1, 1996, the Debtor acquired all of the assets and liabilities relating to the hardware business of FWB Software, Inc., a California corporation doing business as FWB, Inc. ("FWB"), a developer of performance computer storage products, including the "Hammer" line of products. In connection with the FWB hardware business acquisition, one of the Debtor's subsidiaries made an 11% equity investment in FWB Software, LLC, a limited liability company newly formed by FWB and the Debtor to operate the software business retained by FWB. In consideration for FWB's hardware business assets and the minority equity investment in the software business, the Debtor paid FWB cash in the approximate amount of $5.75 million and issued 1,256,123 shares of its common stock. Pursuant to the agreement between FWB and the Debtor, that number of shares was to be adjusted, by the Debtor's issuance of additional shares or FWB's return of delivered shares, to the extent necessary to provide FWB with a market value of stock equal to $7.5 million as of October 29, 1996. However, because of a drop in the Debtor's average stock prices, that adjustment would have required the issuance of over 3 million additional shares to FWB and would have contravened other terms of the parties' agreement and certain NASDAQ rules. Accordingly, the parties agreed on November 1, 1996 that instead, the Debtor would issue 1,380,000 additional shares to FWB, together with a $1,250,000 promissory note and cash of $500,000. The transaction was then completed, with the note being issued by StreamLogic Software, Inc. ("SLC 7 Software"), one of the Debtor's wholly owned subsidiaries, and secured by SLC Software's equity interest (reduced from 11% to 7.5%) in FWB Software LLC. The note is guaranteed by the Debtor. The aggregate consideration paid for the net assets related to the hardware business of FWB and investment in FWB Software LLC, including costs of acquisition, was approximately $7,900,000 and $3,400,000, respectively. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values. Approximately $1,400,000 of the total purchase price represented the value of in-process research and development that had not yet reached technological feasibility and was charged to the Debtor's operations. B. INDUSTRY SEGMENT AND MARKET The Debtor operates within the data storage technology industry and competes in the external storage market for high-end desktop PCs and workstations (host). An external storage subsystem will consist of one or more disk drives in an external enclosure that is attached to the host system via cables. The disk drives are configured for use by the host system through special software and hardware to meet the needs of the specific application being run on the host. External storage subsystems are popular choices for high-end desktop PCs and workstations to meet capacity, performance, or reliability needs not available in the host systems. The market for this technology can be further segmented into categories for the specific application being run on the host and the operating systems employed by the end user. The Debtor is currently focused in two application market segments: professional desktop publishing known as "Prepress" and digital media creation or multimedia creation. Examples of digital media creation are digital video, two- or three- dimensional modeling, computer-aided design, animation, virtual reality and graphics. C. PRODUCTS The Debtor's development efforts are currently focused around the Hammer product line, historically used primarily with the Apple Macintosh ("MAC") operating system. The Debtor also offers limited products for use with the Silicon Graphics Irix and Microsoft Windows NT operating systems. The Debtor plans to continue developing its products for all three operating system marketing segments to broaden its market, especially the multimedia applications. The Debtor's products are sold in a wide variety of configurations of hardware and software addressing specific applications. A basic Hammer storage subsystem consists of three 8 components: software, hardware controller, and enclosure with drive(s). The software is operating system-specific and consists of a graphical user interface (GUI), utilities to configure the disk drives, and a driver to facilitate data transfer between the host and storage subsystem. The controller can be either a Jackhammer SCSI controller board for high-performance applications and/or a RAID controller used for high-reliability applications. The enclosures range from the single-drive Pockethammer, to the multi-drive Sledgehammer, to the removable- drive Sledgehammer Pro. (A hardware-based RAID controller is currently available for only the MAC and Windows NT operating systems.) D. DISCONTINUED OPERATIONS In addition to the Debtor's former disk drive business, other discontinued operations and product lines of the Debtor include the following: 1. VIDEO SERVERS. Video servers are used to play back video material that has been previously digitally encoded and compressed. Video servers, which can replace video-cassette recorder systems, use hard disk drives to store and retrieve audio and full motion video signals. The Debtor previously marketed its line of video server products to hospitality, multimedia and cable television markets. Video server applications in the hospitality and related markets included displaying digitally encoded and compressed movies to guests in hotels, aircraft and cruise ships. Multimedia applications included corporate training, campus training and video libraries. In 1995, the Debtor entered into a development agreement with Matsushita Avionics System Corporation ("MASC") regarding the development of the Debtor's video server technology for aircraft use and the sale of products using that technology to MASC. However, financial difficulties arose in the implementation of that agreement, and in March 1997, the parties entered into a termination agreement pursuant to which, among other things, the relationship was curtailed and the Debtor transferred various inventory, equipment and other assets to MASC, including a nonexclusive license of its video server technology.2 As a result, the Debtor is not presently developing any of its video server technology. Also, in March 1997 the Debtor entered into an agreement with Sumitomo Corporation or an affiliate ("Sumitomo") pursuant - -------- 2 The Debtor is presently in the process of reviewing its previous transactions with MASC and its 1997 transfers to MASC in order to determine the present status of any claims or rights of either the Debtor or MASC against each other. 9 to which the Debtor sold excess inventory and a license relating to the Debtor's video server products to Sumitomo. The inventory was sold on an "as is" basis for cash consideration in the approximate amount of $300,000. 2. VIDEO DISK RECORDER TECHNOLOGY. Prior to the commencement of the Chapter 11 Case, the Debtor had been developing a line of low cost digital video disk recorders using hard disk drives to store and retrieve audio and full motion video signals. In 1995, the Debtor entered into a development agreement with BTS Broadcast Television Systems GmBH ("BTS") for the joint development design, development and manufacture of a family of video disk recorders. Under the agreement, BTS was to provide funding to the Debtor in the total amount of $1,000,000, payable in specified increments upon the Debtor achieving certain milestones in the development of certain technology and products, and in exchange, BTS was granted certain rights in the technology developed. The Debtor received an aggregate amount of $650,000 from BTS under the agreement, but prior to the commencement of the Chapter 11 Case, disputes arose between the parties regarding the extent and nature of BTS' rights in and to the technology developed. Both parties ceased any further significant activities or payments under the terms of their development agreement, although neither party has given formal notice of termination of the agreement. The Debtor is presently reviewing its legal options with respect to its relationship with BTS. 3. RAIDION PRODUCT LINE. During the last several months, beginning prior to the commencement of the Chapter 11 Case, the Debtor has restructured its operations so as to discontinue its support of its Raidion line of products. The Raidion product line consists of data storage products and systems using the RAID (redundant array of independent disk drives) technology. Since the commencement of the Chapter 11 Case, the Debtor has sold most of the assets that comprised the Raidion product line, consisting primarily of patents, inventory and equipment, as more fully described hereinbelow. E. INTERNATIONAL OPERATIONS AND FOREIGN SUBSIDIARIES The Debtor sells its products into European, as well as domestic, markets. Historically, the Debtor's foreign sales originated primarily from the company's Singapore facility, which was sold to Micropolis as part of the divestiture of the disk drive business. Based on the Debtor's most recent Forms 10-K and 10-Q reportings, export sales (sales originating in the United States to customers in foreign countries) have most recently represented less than ten percent (10%) of total sales for consolidated operations. 10 Following the sale of its disk drive business, the Debtor has served foreign markets primarily through two European operating subsidiaries, located in the United Kingdom (StreamLogic Ltd.) and Germany (StreamLogic GmBH). StreamLogic Ltd. has served as the distribution and repair center for all of the Debtor's European sales. StreamLogic GmBH has served as a sales facility for European markets. In addition, other wholly owned foreign subsidiaries of the Debtor include StreamLogic Pty Ltd. (Australia), Micropolis BV (Netherlands) and StreamLogic (Cayman Islands), each of which is inactive. None of the Debtor's subsidiaries is a debtor under the provisions of the Bankruptcy Code, but StreamLogic Ltd. and StreamLogic GmBH ceased operations following the commencement of the Debtor's Chapter 11 Case. The Debtor believes that it has no material financial obligations owing with respect to the operations or affairs of any of its subsidiaries, and as of June 1997, the Debtor's books and records reflected net intercompany accounts receivable owing to the Debtor. However, the Debtor estimates that intercompany accounts receivable are largely uncollectible. F. COMPETITION The data storage industry is competitive and characterized by price erosion over the life of a product. The Debtor believes that being first to market with new products is a critical element in the achievement of desired gross margins. Being first to market provides initial price advantages to the Debtor and the opportunity to accelerate learning and cost reduction curves due to increased production volumes. In the high-performance market in which the Debtor competes, the principal dimensions of competition are generally data storage capacity, data transfer rate, average access time, form factor, timely delivery in quantity, reliability and price. Some of the Debtor's competitors are much larger in size and have access to greater financial and other resources than the Debtor. The Debtor believes that its future success hinges on its ability to bring cost and feature-competitive products to market on a timely basis. Competitors in the high-performance desktop computers and workstation external storage subsystems market include Megadrive, Micronet and Eurologic. G. PATENTS AND KNOW-HOW The Debtor's management believes that the ability to develop and manufacture products is dependent upon the know-how and special skills within the Debtor. In addition, the Debtor has obtained and presently owns a number of patents, patent applications, and patent and technology licenses. It is the Debtor's policy to enforce its proprietary rights. The Debtor's 11 management believes that the patents and know-how rights currently owned, which are exclusive of patents relating to the Raidion business which were sold during the Chapter 11 Case, are adequate for the conduct of its Hammer business. In the opinion of the Debtor's management, however, no individual patent or license is of critical importance. H. EMPLOYEES As of October 31, 1997, the Debtor employed approximately 33 full-time employees. Of those employees, eight were engaged in manufacturing, seven were engaged in sales and marketing, six were engaged in research and engineering, six were engaged in customer service and operations and the remaining six were administrative and clerical personnel. The Debtor believes that labor relations in the Company are generally satisfactory. I. REAL PROPERTY The Debtor owns real property in the City of Chatsworth, Los Angeles County, California where its operations and corporate headquarters were formerly located. The Chatsworth property, commonly known as 21329 Nordhoff Street, consists of a 75,650 square foot, light manufacturing facility situated on a 2.29-acre site. According to the Debtor's books and records, the land and improvements cost the Debtor approximately $7.6 million. Based on a February 1997 appraisal of the property, the property had a fair market value of $3,500,000 at that time. Since the commencement of this Chapter 11 Case, the Debtor has received an offer to purchase the property for a gross price of $3,000,000. The Debtor is presently in the process of negotiating with prospective purchasers and listing brokers in an effort to sell the property for the highest return possible. The property is not encumbered by any security interests securing any Claims of significant amounts. J. INVESTMENTS 1. CONCENTRIC NETWORK STOCK. In September 1996, the Debtor purchased $2.5 million of shares of preferred stock of Concentric Network Corporation ("Concentric") from Sattel Communications ("Sattel"). Founded in 1991 and headquartered in Cupertino, California, Concentric is a provider of virtual private networks and intranet customized consumer applications. Sattel acquired the Concentric stock pursuant to a Preferred Stock Purchase Agreement dated August 21, 1996 among Concentric, Sattel and others (the "Stock Purchase Agreement"). At the time the Debtor acquired the Concentric stock from Sattel, Concentric was a privately held corporation. 12 On July 30, 1997, Concentric was reincorporated in Delaware and effected a 1-for-15 reverse stock split. On July 31, 1997, Concentric made an initial public offering (the "IPO") of 4,300,000 shares of its common stock at an initial price of $12 per share, and public aftermarket trading began on August 1, 1997 in the Nasdaq National Market stock listings under the symbol "CNCX." As a result of the reincorporation and reverse split and completion of the IPO, the Debtor's 1,838,235 shares of Concentric preferred stock have been exchanged for 128,272 shares of Concentric common stock, and by virtue of the terms of the Stock Purchase Agreement, the Debtor is restricted from selling the shares for a period of 180 days from the date of the IPO. As of December 3, 1997, the Concentric shares were trading at a price of $10.50 per share. The Debtor estimates that the approximate market value of the Concentric shares as being $1,346,856 as of December 3, 1997, subject to the trading restrictions identified above and the effect that those restrictions may have upon value. 2. NOTE FROM TITANIUM MEMORY SYSTEMS. In 1992, the Debtor purchased an equity interest of approximately 27% of the stock of Titanium Memory Systems, Inc., formerly known as Tulip Memory Systems, Inc. ("TMS"), a start-up company formed to develop substrates used in the manufacture of computer disk drives. During 1994, the Debtor increased its ownership to approximately 60%, pending anticipated outside investment. In connection with its original investment, the Debtor agreed to guarantee the obligations of TMS to pay the acquisition cost of equipment. In order to consummate the sale of its disk drive business, the Debtor paid its $1.3 million guaranty obligation under the agreement with TMS. The Debtor discontinued funding of TMS in early 1996. In June 1996, TMS was recapitalized, and in connection therewith the Debtor agreed to accept 1,498,645 shares of preferred stock of TMS, having a book value of approximately $0.14 per share, and a promissory note issued by TMS in the principal amount of $500,000, all in exchange for cancellation of TMS's debt to the Debtor in an aggregate, approximate amount of $10 million. In May 1997, the Debtor sold all of its TMS stock, as follows: Approximately 749,322 shares were repurchased by TMS at a price of $0.20 per share, or $149,864.40, and the remaining 749,322 shares were sold to Titanium Metals Corporation, another investor in TMS, in exchange for cash in the amount of $149,864.40. At the present time, the Debtor holds the $500,000 note issued by TMS, which is payable in ten annual installments of approximately $50,000, beginning in 1998. 13 K. DEBENTURES AND NOTES 1. CONVERTIBLE DEBENTURES. In 1987 the Debtor entered into an Indenture dated as of March 15, 1987 (the "Indenture") between the Company and First Interstate Bank of California, as trustee, later replaced by Harris Trust and Savings Bank, as trustee (the "Trustee"). Pursuant thereto, the Debtor issued debentures in an aggregate principal amount of $75 million, bearing 6 percent interest and due in the year 2012. The debentures were convertible to stock under certain circumstances, were subordinated to certain indebtedness of the Company and carried various other terms, conditions and other features. Subject to adjustments set forth in the Indenture, the conversion price for the Debentures was $48.50 per share. In particular, the Debentures were subordinated in right of payment to certain indebtedness of the Debtor, including indebtedness arising from money borrowed or notes or similar instruments given in connection with the acquisition of businesses, properties or other assets, obligation arising under capital leases and indebtedness arising from the renewals, extensions or refundings of such obligations. In light of the specific wording and terms of the Indenture, the Debtor does not believe that it owes any indebtedness to which the Debentures are presently subordinated. 2. 1996 EXCHANGE OFFER; INCREASING RATE NOTES. In early 1996, the Debtor evaluated several alternatives with respect to a restructuring of the Debentures, and Loomis Sayles & Company, L.P. ("Loomis Sayles"), an entity which advises investors that collectively held approximately 79% of the aggregate principal amount of the outstanding Debentures, indicated to the Debtor its potential interest in reaching an agreement with respect to a restructuring of the Debentures after the sale of the disk drive business had been completed. Therefore, in October 1996, the Debtor commenced a tender offer for the Debentures, pursuant to which the Debentures were to be exchanged for cash, increasing rate unsecured promissory notes, common stock and warrants of the Debtor. Of the $75 million of the Debentures originally issued, holders of approximately 94% of the outstanding Debentures accepted the exchange, representing approximately $70.2 million in aggregate principal amount. The Debtor subsequently exchanged the tendered Debentures for approximately $8.5 million in cash, $8 million in unsecured promissory notes due in 1998, 15.2 million shares of common stock, and warrants to purchase an additional 2.8 million shares of common stock. As a result, among the Debtor's present obligations are approximately $8 million in increasing-rate unsecured promissory notes (the "Notes") issued in exchange for approximately $70.2 14 million in formerly outstanding Debentures, as well as approximately $4.8 million in Debentures that were not tendered in the exchange. 3. REMAINING DEBENTURES AND LITIGATION. Following the exchange, there remained Debentures of approximately $4.8 million in aggregate principal balance that had not been exchanged or extinguished. With respect to those remaining Debentures, issues arose as to whether the Debtor had failed to make interest payments thereon in a timely fashion and whether, as a consequence, the holders of the Debentures had properly and timely declared an acceleration of all amounts owing under the Debentures. As a result of those disputes, litigation ensued in the United States District Court for the Southern District of New York between the Debtor and United Equities Company ("United Equities"), an entity which owns or controls a majority of the outstanding aggregate principal balance of the remaining Debentures. As of the date of commencement of the Chapter 11 Case herein, that litigation, which began in December 1996, remained pending, although neither party to the action is presently pursuing the matter actively. Assuming that the Plan becomes effective, the matter of acceleration of the Debentures will become moot, by virtue of the distribution provisions of the Plan. L. RELOCATION AND CONSOLIDATION In late 1996, the Debtor announced its plans to consolidate and relocate its operations and corporate headquarters from Chatsworth, California to Northern California. In conjunction therewith, on November 7, 1996, the Debtor entered into a long- term lease of commercial real property located at 7015 Gateway Boulevard, Newark, California, consisting of office, manufacturing and warehouse space of approximately 56,000 square feet. Pursuant to the terms of the lease, the Debtor delivered to the landlord an irrevocable standby letter of credit in the amount of $252,288, issued by Wells Fargo Bank, to secure its performance of obligations under the lease, and also provided a deposit of one month's rent of approximately $50,000. In order to provide collateral for the issuance of the letter of credit, the Debtor deposited cash funds with Wells Fargo Bank in exchange for a certificate of deposit in the amount of the letter of credit. Once the lease was executed, tenant improvements were undertaken by the landlord, and those improvements were completed in or about April 1997, at a cost of approximately $963,533, of which the landlord had agreed to pay $839,985. In early 1997, the Debtor proceeded with the closure of its Chatsworth facility and relocated its corporate headquarters and administrative offices to Menlo Park, California on an interim basis, in the offices previously occupied by FWB prior to the Debtor's acquisition of FWB's assets. Thereafter, as planned, 15 the Debtor completed its relocation to the Newark premises, on or about June 30, 1997. Concurrent with its relocation efforts, the Debtor also reduced its staffing and administrative expenses substantially, through the discontinuation of certain of the Debtor's product lines, including the Raidion product line and video server and video disk recorder technologies. That downsizing effort began prior to the commencement of the within Chapter 11 Case and continued thereafter and even to the present time. M. CHANGE IN MANAGEMENT As of the end of 1996, the Debtor's board of directors consisted of five directors, namely J. Larry Smart, Greg Reyes, Jr., Chriss W. Street, Ericson M. Dunstan and Elliott D. James. Executive officers of the company at that time included Mr. Smart, as the Debtor's president and chief executive officer, and Barbara V. Scherer, as the company's senior vice president and chief financial officer. In January 1997, the Debtor's board of directors was expanded from five members to seven members, pursuant to the terms of the November 1996 debenture exchange, and two additional directors, Jack S. Kenney and Mark M. Glickman, were designated by Loomis Sayles. During the first half of 1997, all of the aforementioned directors other than Mr. Glickman resigned from the board, and Michael O. Preletz, a turnaround expert with many years' experience in assisting troubled technology companies, was named to the board. In particular, Mr. Dunstan resigned as of January 22, 1997; Mr. Smart resigned from all positions with the Debtor as of March 23, 1997; and following the remaining directors' appointment of Mr. Preletz as an additional director and as chief executive officer as of March 24, 1997, Messrs. James, Reyes, Street and Kenney resigned as directors, and Ms. Scherer resigned as an officer, in April and May 1997. Mr. Glickman was elected to replace Ms. Scherer as chief financial officer, upon her resignation. Following the commencement of the Debtor's chapter 11 case, and effective as of August 5, 1997, Mr. Glickman resigned as an officer and director of the Debtor, and as a result, Mr. Preletz is presently the sole director and chief executive officer of the Debtor. N. DEBT REPAYMENT PLANS During the three to six months immediately preceding the commencement of the Debtor's chapter 11 case, the Debtor experienced extreme cash flow difficulties and as a result, found itself unable to pay invoices as they became due. In order to maintain essential working relationships with important trade 16 creditors, the Debtor entered into a variety of informal, largely undocumented arrangements with trade creditors to pay past-due amounts and to continue to receive services and products. Those arrangements included extending invoice terms of past-due receivables, paying past-due invoices pursuant to negotiated payment schedules while keeping current invoices paid, and making partial payments on past-due invoices depending on the Debtor's needs and cash flow. Trade creditors with whom the Debtor entered into such payment arrangements included Mountain Gate, Seagate Technology, Inc., Sony Electronics, Wyle Electronics, Elliott Laboratories, Federal Express, Micron Electronics, Andataco, Nakasuji Associates, Q Logic, Bell Microproducts and Rational Technology, Inc. At present, the Debtor is investigating the extent and circumstances of such payments in order to determine whether any such payments may be avoidable under the preference provisions of Section 547 of the Bankruptcy Code. Based upon a preliminary analysis, the Debtor believes that a significant amount of such payments may be recoverable under applicable preference rules. O. EVENTS PRECEDING CHAPTER 11 CASE COMMENCEMENT Operations of the Debtor in 1996 and early 1997 produced operating losses, draining the Company of its operating funds. In addition, after the Debtor's new management was installed, it found the books and records of the Debtor to be in substantial disarray, and determined that ongoing revenues were materially less than had been projected by prior management, resulting in further losses. The Debtor estimated its net losses for the quarter ending March 28, 1997 to be approximately $20.8 million, and for the full year ending March 28, 1997, the Debtor estimated that it lost $16.1 million. As those losses translated themselves into negative cash flow, the Debtor found itself in a substantial cash crisis, causing it to suspend payments on many accounts and to respond to various collection actions initiated and threatened against it. Whereas in the spring of 1997, the Debtor attempted various means to solve its cash crisis, including refinancings, recapitalizations and negotiated settlements and payout schedules with creditors, the Debtor ultimately determined that none of those efforts would avoid the necessity of a full and formal reorganization of its operations and finances, which could not be accomplished without the protections and benefits of chapter 11 of the Bankruptcy Code. Finally, in mid-June 1997, a creditor obtained an attachment order against assets of the Debtor, threatening to paralyze all of the Debtor's operations, and the Debtor was compelled to 17 commence the present Chapter 11 Case in order to remove the lien arising from that attachment order and to preserve the company's ongoing operations. IV. SIGNIFICANT EVENTS DURING THE CHAPTER 11 CASE Since the Debtor commenced its Chapter 11 Case, it has continued to operate as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. The following is a brief description of some of the major events that have occurred during the Chapter 11 Case. A. CONTINUATION OF BUSINESS; STAY OF LITIGATION Following the commencement of its Chapter 11 Case, the Debtor has continued to operate its business and manage its properties as a debtor-in-possession, no trustee having been appointed. The Bankruptcy Court has certain supervisory powers over the Debtor's operations during the Chapter 11 Case, particularly as to proposed transactions outside of the ordinary course of business. In addition, Bankruptcy Court approval is required for certain other transactions, such as the borrowing of money on a secured basis or the employment of attorneys, accountants and other professionals. Most importantly, the Bankruptcy Court must confirm a reorganization plan for the plan to become effective. An immediate effect of the filing of the Chapter 11 Case was the imposition of the automatic stay under the provisions of Section 362(a) of the Bankruptcy Code which, with limited exceptions, enjoins the commencement or continuation of all prepetition litigation against, and efforts to collect funds from, the Debtor. This injunction remains in effect unless modified or lifted by order of the Bankruptcy Court. B. APPOINTMENT OF THE CREDITORS' COMMITTEE On July 18, 1997, the United States Trustee appointed an official committee of unsecured creditors (the "Committee") to represent the collective interests of all unsecured creditors of the Debtor, pursuant to Section 1102 of the Bankruptcy Case. The membership of the Committee has been supplemented twice since then. Since its formation, the Committee has consulted extensively with the Debtor concerning the administration of the Chapter 11 Case, and the Debtor has kept the Committee informed about its operations and has sought the concurrence of the Committee for actions and transactions taken outside of the ordinary course of the Debtor's business, wherever possible. In particular, as described elsewhere, the Committee has participated actively and extensively, together with the Debtor's management and 18 professionals, in reviewing the Debtor's business plan and negotiating a consensual plan of reorganization. The Committee currently consists of seven voting members and two nonvoting members, and includes representatives of each of the principal constituencies of unsecured creditors of the Debtor. The current members of the Committee are as follows: VOTING MEMBERS: CDI CORPORATION Attn: Brian Marricone 100 Penn Center 18th and Market Street, 12th Floor Philadelphia, PA 19103 FWB SOFTWARE, INC. Attn: Steven Gibbs, C.F.O. 2750 El Camino Real Redwood City, CA 94061-3911 MICROPOLIS INC. Attn: Thomas Burns, V.P. Finance 21211 Nordhoff Street Chatsworth, CA 91311 NETWORK STORAGE SOLUTIONS Attn: Joseph Pisula 600 Herndon Parkway Herndon, VA 22070 NORWEST BANK MINNESOTA, N.A. Attn: Mimi Traynor, V.P. 608 Second Avenue, South 12th Floor Minneapolis, MN 55479-0069 SEAGATE TECHNOLOGY Attn: Bill Hayward, Senior Director 920 Disc Drive Scotts Valley, CA 95066 UNITED EQUITIES COMPANY Attn: Philippe D. Katz 160 Broadway New York, NY 10038 Non-Voting Members: LOOMIS, SAYLES & COMPANY, LP Attn: Frederick Vyn, V.P. One Financial Center Boston, MA 02111 19 HARRIS TRUST AND SAVINGS BANK Attn: Kevin Healey, V.P. 311 W. Monroe Street, 12th Floor Chicago, IL 60606 C. REPRESENTATION OF THE DEBTOR AND THE COMMITTEE Since the commencement of the Debtor's Chapter 11 Case, the law firm of Goldberg, Stinnett, Meyers & Davis, A Professional Corporation, whose offices are located at 44 Montgomery Street, Suite 2900, San Francisco, California 94104, has acted as StreamLogic's general bankruptcy counsel, with Bankruptcy Court approval. In addition, the Debtor has retained the following special counsel and advisors with Bankruptcy Court approval: FIRM PURPOSE Manatt, Phelps & Phillips, Special Counsel LLP (Corporate and Securities) Hickey and Hill, Inc. Financial Advisor Oppenheimer, Poms, Smith, Special Counsel Lande & Rose (Intellectual Property Rights) The Committee has retained the law firm of Murray & Murray, located at 3030 Hansen Way, Suite 200, Palo Alto, California 94304-1009 to act as its counsel in the Chapter 11 Case, and the accounting firm of Price Waterhouse LLP to act as its financial advisor, with Bankruptcy Court approval. D. DEVELOPMENT AND IMPLEMENTATION OF STRATEGIC PLAN Since the commencement of the Debtor's Chapter 11 Case, through the auspices and direction of the company's new senior management, the Debtor has continued its efforts to restructure its operations and develop and implement its strategic plan. First, as stated earlier, the Debtor restructured its operations so as to focus on one of its product lines. Until that restructuring, the Debtor supported two distinct lines of products, its Raidion product line and its Hammer product line. The Raidion line consists of data storage products and systems using the RAID (redundant array of independent disk drives) technology, which renders the system fault-tolerant through either hardware or software. The Raidion products are used in applications in which the integrity of large amounts of data is of paramount concern. The Hammer product line, on the other hand, while also a data storage product, is more targeted to uses in which data transfer speed, rather than total capacity, is the 20 primary concern. Typical uses of Hammer products involve desktop digital video and color publishing. During the last several months, the Debtor has restructured its operations so as to discontinue its support of the Raidion product line and focus its efforts on the Hammer product line. In May 1997, the Debtor began outsourcing the production of certain of its Raidion line of products pursuant to an arrangement with JMR Electronics, Inc., a Chatsworth company which had provided assembly services to the Debtor in the past for its Raidion products. As part of its restructuring of operations and discontinuance of parts of those operations, the Debtor has also continued its downsizing in order to reach a level of expenses consistent with its revenue base. As a result of present management's restructuring efforts, the head count has been reduced by approximately 78%, from approximately 150 at the end of the Debtor's fiscal 1996 year (i.e., March 29, 1996) to 33 at present. E. BAR DATE FOR FILING PROOFS OF CLAIM The Bankruptcy Court set November 3, 1997 as the deadline for the filing of proofs of claim, other than claims of governmental entities. Since that deadline passed, the Debtor has begun its review of filed proofs of claim in order to determine whether, and to what extent, objections to disputed claims will be necessary. F. ASSET SALES RELATING TO RAIDION PRODUCT LINE In the process of restructuring its operations, the Debtor has sold most of the assets relating to its Raidion product line, consisting primarily of patents, inventory and tooling. On October 1, 1997, the Court issued its order granting the Debtor's motion and approving a sale of the Raidion patents to Farrington Investments, Ltd. ("Farrington") for the purchase price of $1,020,000, and that sale was consummated on or about October 14, 1997. The proceeds of the sale are maintained by the Debtor in a segregated, interest-bearing account and have not been treated as part of the Debtor's general operating funds. Disbursements from that account, such as for Court-approved professional fees, have been made only upon order of the Bankruptcy Court or consent of the Debtor and the Committee. As of September 25, 1997, the Debtor entered into an agreement to sell most of the rest of its Raidion assets, namely inventory, molding and tooling equipment and certain licenses relating to the Raidion product line, to Peripheral Technology Group, Inc. ("PTG") for the purchase price of $263,000, subject to Court approval and certain contractual adjustments. Two 21 creditors, JMR Electronics, Inc. ("JMR") and A&S Mold And Die Corporation ("A&S"), have asserted liens against the assets sold to PTG, which liens are disputed by the Debtor. On November 21, 1997, the Bankruptcy Court issued orders granting the Debtor's motions seeking approval of sale free and clear of the disputed liens of JMR and A&S, and the sale was consummated on December 2, 1997. At present, the Debtor maintains the net proceeds of sale, in the approximate amount of $135,000, in a separate, segregated account, pending resolution of JMR's and A&S's disputed liens. G. DISPUTE WITH NEWARK LANDLORD As stated above, in late 1996 the Debtor executed a long- term lease for commercial premises in Newark, California and in June 1997, the Debtor moved into the facility. Shortly before the commencement of its Chapter 11 Case, the Debtor reached oral agreements with the landlord, WHLNF Real Estate Limited Partnership ("Lincoln"), and Decibel Instruments, Inc. ("Decibel") to sublet approximately one-half of the premises to Decibel, a start-up company in the business of developing and manufacturing hearing aid and diagnostics products. However, as of the Petition Date, no written agreements had been executed with either Lincoln or Decibel in order to implement the oral sublease agreement. After the Petition Date, on July 25, 1997, with the initial support of Lincoln, Decibel and the Committee, the Debtor filed a motion seeking Bankruptcy Court approval of the assumption of the master lease with Lincoln and execution of the sublease with Decibel. From the Debtor's perspective, the transactions would allow the Debtor to preserve a master lease carrying a rental rate below current market rates, while defraying one-half of the monthly obligation by subleasing unused space. However, once the motion had been filed, Lincoln apparently had a change of heart, indicating its intention to oppose the Debtor's motion and imposing discovery demands upon the Debtor. At the same time, the Committee concluded that assumption of the master lease would be premature until reorganization prospects were better defined, and requested that the Debtor withdraw its motion. Accordingly, the Debtor withdrew its motion and advised Decibel that it would be unable to complete the sublease arrangement. After the motion was withdrawn, the Landlord filed a motion to compel the Debtor to assume or reject the Newark lease on an expedited basis. The Debtor opposed the motion and filed a cross-motion for extension of assumption deadlines, and in a hearing on September 12, 1997, the Bankruptcy Court granted the Debtor's motion on an interim basis and deferred Lincoln's motion. 22 Meanwhile, the Debtor found alternative premises within Newark, approximately two miles from its first premises. The new premises, approximately 8,500 square feet, more closely fit the Debtor's space needs and cost much less (approximately $9,000 per month versus approximately $51,000). Accordingly, in early November 1997, the Debtor rejected its lease with Lincoln, vacated that lease's premises and relocated to its new, smaller Newark premises. As stated, Lincoln holds more than $300,000 of deposits in order to offset any damages arising from the Debtor's rejection of its lease. However, the Debtor believes that the lease's contractual rental rate is significantly below current market rates and that Lincoln will in fact suffer no such damages in any event (and may in fact be benefitted by the Debtor's rejection). Therefore, the outcome of the deposits held by Lincoln, and any claims for damages which it may assert, are undetermined, and the Debtor intends to review the matter closely for the estate's benefit. H. REMAINING ASSETS As of early December 1997, following the sales and dispositions of assets referenced hereinabove, the Debtor owned the following remaining significant assets (excluding assets of nonmaterial or highly speculative value): the building and related real property in Chatsworth, California referred to in Section III(I) hereinabove; the Hammer product line and related technology and inventory; cash proceeds of the sale of Raidion patents, net of Court-approved disbursements for interim professional fees, in the approximate net amount of $800,000; cash proceeds from the sale of Raidion inventory and related assets in the approximate amount of $135,000, subject to disputed lien claims of JMR and A&S; 128,272 shares of common stock of Concentric, as described in Section III(J)(1) hereinabove; a promissory note in the principal amount of $500,000 from Titanium Memory Systems, as described in Section III(J)(2) hereinabove; miscellaneous office furnishings and equipment of undetermined value; possible preference causes of action related to debt repayments prior to the commencement of the Chapter 11 Case, as described in Section III(N) hereinabove; a certificate of deposit maintained with Wells Fargo Bank in the approximate principal amount of $252,000, subject to the bank's lien thereagainst in conjunction with the letter of credit issued to the Debtor's former Newark landlord; restricted funds against which former officers and directors assert interests; a directors' and officers' liability policy; and possible causes of action against third parties with respect to prepetition events and transactions. 23 V. THE PLAN OF REORGANIZATION The following is a limited summary of the terms of the Plan, served concurrently with this Disclosure Statement and the Ballot. The summary is qualified in its entirety, however, by reference to the more detailed provisions set forth in the Plan itself, which control for all purposes. A. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS 1. NONCLASSIFIED CLAIMS. Applicable provisions of the Bankruptcy Code provide that certain claims, namely, administrative expenses incurred during the Chapter 11 Case and priority tax claims incurred before the commencement of the Chapter 11 Case, are not to be classified in a plan, but instead treated in the manner required by the Bankruptcy Code. In particular, all administrative expenses must be paid upon the Plan's effectiveness, and priority tax claims can be paid over a defined period of time. Under the Plan, all such nonclassified claims will be paid in full on the latest of the following dates: (a) on, or as soon as practicable after, the Administrative Bar Date (which is thirty days following the Effective Date), or such later date as to which the claimant may consent; (b) on the date when the claim becomes due, according to applicable contractual, statutory or other terms; or (c) once an order of the Bankruptcy Court allowing the claim becomes final, if the claim is disputed or requires Bankruptcy Court approval (such as is the case with Professional Fees). Proofs of claim for nonclassified expenses which consist of priority tax claims must be filed by the deadline already established by the Bankruptcy Court for governmental claims generally, to wit, December 23, 1997. With respect to nonclassified expenses which consist of administrative expenses (that is, claims incurred by the Debtor after the Petition Date and before the Effective Date), other than certain Ordinary Course Expenses (see the definition of "Ordinary Course Expenses" below), PROOFS OF SUCH CLAIMS, OR REQUESTS FOR PAYMENT, MUST BE FILED WITH THE BANKRUPTCY COURT AND SERVED UPON THE DISTRIBUTION AGENT, THE REORGANIZED DEBTOR AND THE UNITED STATES TRUSTEE BY THE THIRTIETH DAY (THE "ADMINISTRATIVE BAR DATE") FOLLOWING THE EFFECTIVE DATE, ABSENT WHICH SUCH CLAIMS WILL NOT BE ALLOWED AND NO DISTRIBUTION OR PAYMENT WILL BY MADE ON SUCH CLAIMS. As defined and used in the Plan, the term "Ordinary Course Expenses" means liabilities incurred by the Debtor on or after the commencement of the Chapter 11 Case in the ordinary course of its business, specifically excluding income tax liabilities, tort liabilities, environmental cleanup or indemnity claims, liabilities arising under the Employee Retirement Income Security 24 Act of 1974 (as amended), and any other items not customarily incurred by the Debtor in the ordinary operation of its business. The reorganized Debtor will be responsible for paying all allowed Ordinary Course Expenses other than Professional Fees, certain lease obligations and warranty, return, product refund or defect claims relating to products other than Hammer products. The Distribution Agent will be responsible for payment of all other allowed nonclassified claims. The Debtor estimates that Ordinary Course Expenses for which the reorganized Debtor will be responsible will be approximately $270,000, representing approximately one month's general and administrative expenses, plus a variable amount representing costs of goods. Professional Fees, that is, compensation and expense reimbursements earned by attorneys, advisors, accountants and other professionals retained in the Chapter 11 Case by the Debtor or the Committee, are estimated as follows: For services rendered through September 30, 1997, the following fees and expenses have been approved by the Bankruptcy Court, and paid by the Debtor or credited against retainer balances, on an interim basis: PROFESSIONAL: INTERIM AMOUNT: Goldberg, Stinnett, Meyers & Davis $190,254.99 Murray & Murray 47,514.13 Manatt, Phelps & Phillips3 32,978.47 Oppenheimer, Smith, Poms, Lande & Rose 8,871.14 Price Waterhouse LLP 13,872.00 TOTAL: $293,490.73 For services rendered after September 30, 1997 and until the Effective Date, and for remaining unpaid amounts for services rendered up to September 30, 1997, the Debtor estimates that the estate will incur additional fees and expenses (with the caution that it is an estimate only, and subsequent events may cause the estimated amounts to increase or decrease significantly) in the - -------- 3Fees and expenses awarded to the Manatt firm are for services rendered through October 24, 1997. 25 approximate amount of $350,000. In addition to the foregoing, the Debtor estimates that as of the Effective Date, there may be owed approximately $4,000 in unpaid quarterly fees owing, but not yet due, to the United States Trustee, and that there may be owed an undetermined amount in reimbursements of expenses to members of the Committee. Also, Section 503(b) of the Bankruptcy Code provides for payment of compensation to creditors, indenture trustees and other persons making a "substantial contribution" to a reorganization case, and to attorneys for, and other professional advisors to, such persons. Also, certain of the professionals retained by the Debtor or the Committee may request approval and payment of additional bonus or success compensation. The amounts, if any, which may be sought by entities for such compensation are not known by the Debtor at this time. Requests for compensation must be approved by the Bankruptcy Court after a hearing on notice at which the Debtor and other parties in interest may participate and, if appropriate, object to the allowance of any compensation and reimbursement of expenses. Priority tax claims are those claims for taxes entitled to priority in payment under Section 507(a)(8) of the Bankruptcy Code. The aggregate amount of priority tax claims as reflected in proofs of claim filed by taxing authorities, or, in the event that no proof of claim was filed, in the Debtor's Schedules, is approximately $470,000 (excluding duplications). The Debtor estimates that of that amount, approximately $100,000 or less will be allowed, based upon its preliminary analysis of the claims. The difference between the aggregate amount of asserted tax claims and the Debtor's estimate of those claims that will eventually be allowed arises largely from disputes regarding claims filed by the Comptroller for the State of Texas in the amount of $344,848.45 and by the Internal Revenue Service in the amount of $64,800.08. The Debtor believes that both claims should be disallowed or reduced substantially, resulting in the estimated amount of allowable tax claims mentioned above. 2. CLASS A -- OTHER PRIORITY CLAIMS. Priority claims within Class A are certain non-tax claims incurred by the Debtor prior to the commencement of the Chapter 11 Case which are entitled to priority in accordance with Sections 507(a)(2), (3), (4), (5), (6) or (7) of the Bankruptcy Code. Such claims include (i) unsecured claims for accrued employee compensation earned within ninety days prior to commencement of the Chapter 11 Case to the extent of $4,000.00 per employee and (ii) contributions to employee benefit plans arising from services rendered within 180 days prior to the commencement of the Chapter 11 Case, but only for each such plan to the extent of (x) the number of employees 26 covered by such plan multiplied by $4,000.00, less (y) the aggregate amount paid to such employees from the estates for priority wages, salaries and commissions. The Debtor estimates that the allowed amount of Class A priority claims will be approximately $35,000, all arising from employee wage and benefit obligations incurred by the Debtor shortly before the Petition Date. Actual claims filed by creditors asserting priority status are in an aggregate, approximate amount of $150,000, but of that amount, the Debtor believes that at least $100,000 is either overstated or not entitled to priority treatment, resulting in the lesser estimated amount mentioned above. Pursuant to the Plan, allowed Class A priority claims will be paid in full, and are thus unimpaired. As such, the holders of Class A claims are conclusively presumed to have accepted the Plan. Payment of such claims, to the extent allowed, will occur on the latest of the following dates: (a) on, or as soon as practicable after, the Effective Date, or such later date as to which the claimant may consent; (b) on the date when the claim becomes due, according to applicable contractual, statutory or other terms; or (c) once an order of the Bankruptcy Court allowing the claim becomes final, if the claim is disputed. 3. CLASS B -- SECURED CLAIMS. Class B consists of all secured claims, that is, claims secured by valid, perfected and enforceable liens or security interests encumbering assets of the Debtor. To the best of the Debtor's knowledge, the only secured claims, if there are any at all, consist of (a) the claim of Wells Fargo Bank in the approximate principal amount of $252,000, secured by the bank's certificate of deposit issued in conjunction with the Debtor's former Newark real property lease, described hereinabove; and (b) warehouse, mechanics' or other possessory liens asserted by certain of the Debtor's suppliers, vendors or materialmen, including the disputed liens asserted by JMR and A&S. In all, exclusive of claims of equipment lessors, claims have been filed by creditors asserting security interests in an aggregate, approximate amount of $670,000. However, secured creditors are not required to file claims in order to preserve their lien rights, and in particular, Wells Fargo Bank, holding a lien against $252,000 of funds of the Debtor, has not filed a claim. The Debtor estimates that the only secured claims that will be ultimately allowed are those of Wells Fargo Bank in the above-stated amount and the lien claims of JMR and A&S, but only to the extent that those claims survive challenge by the Debtor. By an order of the Bankruptcy Court issued on November 21, 1997 at the Debtor's request, the disputed lien claims of JMR and A&S have been limited to sale proceeds in the aggregate, 27 approximate amount of $135,000, subject to the Debtor's challenges; the Debtor believes that the actual amounts of JMR's and A&S's valid liens may be considerably less, and may in fact be zero. Nonetheless, as a matter of conservative estimation for purposes of this Disclosure Statement, and without waiving any rights with respect thereto, the Debtor estimates aggregate allowed secured claims within Class B to be approximately $390,000, based upon the foregoing. All secured claims within Class B, to the extent allowed, will be unimpaired, in accordance with the provisions of Section 1124 of the Bankruptcy Code, as follows: As to each such claim, the reorganized Debtor or the Distribution Agent (depending upon whether the collateral is a Hammer Asset or a Non-Hammer Asset) will either (a) cure any defaults and reinstate the obligations, going forward on normal contractual terms; (b) pay the claim in full in exchange for a full release of liens; or (c) abandon to the creditor the collateral securing the claim. The particular treatment of each such claim will be set forth in Schedules 4.2(A) and 4.2(B) to be filed and served by the Debtor and the Preletz Group, respectively, at or prior to the commencement of the Confirmation Hearing. Any holder of a Secured Claim that is not reinstated may assert an unsecured deficiency claim, if any, within Class C or D by filing and serving a claim therefor no later than 30 days following the Effective Date, subject to any timely objections that may be asserted by parties in interest. 4. CLASS C -- CONVENIENCE CLAIMS. Class C claims are impaired by the Plan, and therefore are entitled to vote to accept or reject the Plan. Class C claims consist of allowed claims that are equal to, less than, or reduced to, $3,000.00, which the Plan treats separately for administrative convenience. Claimants may elect to be within or without Class C by the following procedure: Claims of $3,000.00 or less will automatically be classified within Class C unless the holder of such claim elects in writing to opt out of the class, in which case such claim will be within Class D; holders of claims greater than $3,000.00 may elect in writing to reduce their claims to the amount of $3,000.00 and be treated within Class C, in which event the claim amount in excess of $3,000.00 will be deemed fully waived. IN EITHER CASE, WRITTEN ELECTIONS MUST BE MADE BY COMPLETING THE APPROPRIATE INFORMATION AND BOX WITHIN THE BALLOT AND RETURNING THE BALLOT IN THE MANNER AND WITHIN THE DEADLINE STATED THEREON. Under the terms of the Plan, each holder of an allowed claim within Class C will receive a payment from the Distribution Estate in an amount equal to ten percent (10%) of the allowed amount of the claim. The payment will be made within 60 days following the Effective Date, or upon final resolution of any 28 disputes as to the claim, whichever is later. The Debtor anticipates that holders of approximately 340 allowed claims, in an aggregate amount of approximately $360,000 (before required reductions), will elect to be within Class C, and that the distributions thereon will be approximately $34,000. Those amounts assume that holders of claims of up to $4,000.00 will elect to reduce their claims to be within Class C. 5. CLASS D -- GENERAL UNSECURED CLAIMS. Class D consists of all allowed claims that are unsecured and not in any other designated class. Such claims include claims of the Debtor's trade vendors and suppliers, claims arising from product warranties and related obligations of the Debtor with respect to the purchase and use of Non-Hammer products, claims arising from the rejection of leases of equipment or other real or personal property and other executory contracts. Class C claims also include claims arising under the Debentures and Notes described above. The Debtor estimates that the aggregate amount of all allowed claims within Class D, including the aforementioned Debentures and Notes, will be approximately $30,000,000 (after elimination of Class C claims), although the amount may be higher or lower once all proofs of claim are filed, reviewed and resolved. The aggregate amount of all claims asserted in Class D, as reflected in proofs of claim filed by creditors, or, in the event no proof of claim was filed, in the Debtor's Schedules, is approximately $40,000,000, excluding claims for which no amounts were specified and otherwise unliquidated claims. The Debtor's estimates of allowed claims is based only upon its preliminary analysis of the claims, and may change as further analysis is made. Claims within Class D will be impaired by the Plan, and thus Class D claimants are entitled to vote to accept or reject the Plan, based upon the following treatment: Holders of Allowed Claims within Class D will receive pro- rata distributions of funds from the Distribution Estate on a periodic basis, as funds become available for such distributions, beginning no later than June 30, 1998. Each distribution will be made from available funds after accounting for reserves for disputed claims, anticipated administrative costs and any other payments not yet made but required by the terms of the Plan. Some of the particular provisions of the Plan affecting those distributions are as follows: -- Notwithstanding certain subordination terms set forth in the Debentures (which the Debtor believes are inoperative), there will be no subordination between claims arising from Notes and claims arising from Debentures, all of which claims will be treated as 29 Class D claims, to the extent allowed, on a pari passu basis. -- A portion of the stock of the reorganized Debtor, the Reorganized Shares as described in Section V(B)(2) hereinbelow, will be distributed among holders of allowed claims within Class D on a pro-rata basis, with each share deemed to have a value of $0.325 for purposes of calculating distributions. No fractional shares will be issued, and the Plan provides for rounding to whole numbers and disposition of any remainder shares held by the Distribution Estate after stock distributions have been completed. -- Some claims within Class D may be subject to subordination to other claims within Class D, either in part or in whole, by order of the Bankruptcy Court. All parties will be deemed to have preserved their right to assert rights to such subordination within Class D, other than subordination between claims under Debentures and Notes as described above. -- Certain specific provisions, set forth in Section 5.2.6 of the Plan, pertain specifically to claims arising from Debentures or Notes, which provisions provide for the cancellation of such securities in exchange for distribution rights under the Plan, a record date for purposes of voting and distributions, and procedures for claims that may be asserted by indenture trustees for compensation, indemnification and reimbursement. The Debtor estimates that distributions upon allowed claims within Class D will be in an aggregate amount that is approximately 17.76 percent of the total amount of such allowed claims, based upon the analysis set forth in EXHIBIT "F" attached hereto. That estimate is of course subject to change based upon events and claims resolutions that cannot be accurately predicted at this time, including the outcome of causes of action against third parties on behalf of the Distribution Estate, resolution of disputes regarding claims asserted against the Distribution Estate, the effect of assumptions or rejections of executory contracts for which claims have not yet been asserted and the like. Also, the Debtor believes that distributions upon such allowed claims will occur over a period of time, spanning at least one to two years, and no attempt has been made to determine the present value of such distributions. 6. CLASS E -- STOCK INTERESTS. Class E consists of all Interests in the Debtor, meaning all shares of the Debtor's common stock and all options, warrants and other rights affecting the Debtor's stock or equity interests. 30 On the Effective Date, all existing shares of the Debtor will be cancelled and all options, warrants and other rights affecting such stock will be terminated. All Interests (including Rescission Claims, which are primarily claims arising from the rescission or breach of contracts for purchase or sale of stock, together with related claims) shall be deemed fully and finally released and discharged entirely. No distributions will be made upon any Interests, either by the Distribution Estate or by the reorganized Debtor. Thus, holders of Interests within Class E are deemed to have rejected the Plan, because they will receive and retain nothing under the Plan's terms. The Plan provides for no distribution to holders of Interests because the Debtor has determined, through review of its assets and liabilities and in consultation with its advisors, that the aggregate value of the Debtor's assets is exceeded, by a large amount, by the sum of allowable claims against the Debtor. As a result, there is no present equity in the Debtor and, in the Debtor's view, all present shares of stock of the Debtor are worthless. B. RECAPITALIZATION OF THE DEBTOR On the effective date of the Plan (which will occur within 30 days following the Plan's confirmation), the Debtor will be reorganized and will emerge from bankruptcy with a new capital structure and working capital which its management believes is sufficient to return the company to profitability, through support of its Hammer product line and related operations. The recapitalization necessary for that reorganization will occur as follows: 1. REVESTING OF ASSETS. On the Plan's effective date, all assets related to the Hammer product line, as defined in detail in Section 7.3.1 of the Plan and known as the "Hammer Assets," will be revested in the reorganized Debtor as the core of its ongoing business. All other assets of the Debtor will vest in the Distribution Estate, as described below. In exchange for the Hammer Assets, the reorganized Debtor will issue a portion of its stock to the Distribution Estate, for distribution to creditors, as described below. As defined within the Plan, "Hammer Assets" include essentially all of the Debtor's intellectual property rights remaining after disposing of the Raidion product line, all inventory and equipment used in the Hammer product line, all cash (other than restricted funds) as of the Plan's effective date, certain executory contracts and secured assets which the reorganized Debtor elects to assume and cure, any and all causes of action necessary to preserve the benefit and protection of 31 other Hammer Assets,4 and other related assets. As used in the Plan, the term "Non-Hammer Assets" refers to all assets of the Debtor immediately preceding the Plan's effective date other than Hammer Assets. 2. REORGANIZED SHARES. On the Plan's effective date, the reorganized Debtor will issue the following new shares of common stock, or "Reorganized Shares": 3,500,000 Reorganized Shares to the Distribution Estate for distribution to creditors; 2,000,000 Reorganized Shares to participating creditors in the Creditors' Rights Offering described below, in exchange for cash contributions of $650,000; and 2,000,000 Reorganized Shares to the Preletz Group in exchange for a cash contribution of $650,000. Also, as set forth in detail in the Plan, the reorganized Debtor may issue additional Reorganized Shares, up to a total of 20,000,000 outstanding Reorganized Shares, for new cash consideration or as employee stock options or incentive bonuses, all within the limitations and restrictions set forth in the Plan. In this manner, existing creditors of the Debtor will collectively own a substantial portion of the equity of the reorganized Debtor, and will have an opportunity to benefit from any appreciation in value of the reorganized Debtor, if it occurs, while the Debtor, as reorganized, will be newly capitalized, with working capital which the Debtor believes will be sufficient to return its operations to profitability. 3. CREDITORS' RIGHTS OFFERING. As set forth in Section 8.2 of the Plan, a portion of the Reorganized Shares will be issued in conjunction with a Creditors' Rights Offering available to all existing creditors of the Debtor. Through the procedures set forth in said Section 8.2, existing creditors will have an opportunity to acquire Reorganized Shares for NEW CASH CONTRIBUTIONS at the same per-share price as the Preletz Group, and on a pro-rata basis among them. United Equities, holding claims of approximately $2.5 million arising from Debentures, has agreed to participate in the offering, by committing to purchase whatever Offering shares are not purchased by other existing creditors. In order to participate in the Creditors' Rights Offering, each creditor must elect to do so in the space provided therefor in the Ballot which accompanies this Disclosure Statement and the Plan and returning the Ballot within the time frame, and in the manner, stated on the face of the Ballot. Each eligible claimant will be entitled to subscribe for an aliquot share of 2,000,000 Reorganized Shares based upon such claimant's entire claim, all as set forth more fully in Section 8.2 of the Plan. All - -------- 4 As of the date of this Disclosure Statement, the Debtor is unaware of any events or actions that would give rise to any such causes of action. 32 determinations of eligibility, aliquot share, timeliness of election and share calculations will be made by the Committee and shall not be subject to challenge. As stated, in order to participate in the offering, eligible creditors must timely elect to do so by completing the appropriate space on the Ballot and returning the Ballot in a timely manner. Thereafter, THOSE PARTICIPATING CLAIMANTS WILL BE REQUIRED TO DEPOSIT THEIR SUBSCRIPTION PAYMENTS IN CASH WITH THE COMMITTEE'S COUNSEL, upon notification of the timing and amount thereof, and such counsel will hold all such deposits in trust in a segregated account pending the effectiveness of the Plan. All creditors who are interested in so subscribing should read the details of Section 8.2 carefully in all respects. 4. CORPORATE GOVERNANCE. Following the Plan's effective date, the reorganized Debtor will be free of the constraints of the chapter 11 process, but will be subject to certain rules of corporate governance set forth in Section 8.3 of the Plan. In particular, the Preletz Group will be allowed to maintain full operational control over the reorganized Debtor for at least three years following the Plan's effective date, and will have full control over the appointment, compensation, employment and retention of the reorganized Debtor's senior management. In addition, the Preletz Group will be entitled to select, remove and replace three of the reorganized Debtor's five directors for the first three years following the Plan's effective date, but no extraordinary nonoperational actions, such as mergers or consolidations, sale of substantial portions of assets or commencement of a succeeding bankruptcy case, will be permitted without the consent of the holders of a majority of issued and vested Reorganized Shares. Among other details of corporate governance, the reorganized Debtor will provide rent-free space for storage of assets, books and records of the Distribution Estate at least until October 1, 1998; certain officers of the reorganized Debtor will provide services to the Distribution Estate free of charge in order to assist in the disposition of remaining assets within such estate, at the discretion of the Distribution Agent; and the reorganized Debtor will use its best reasonable efforts to maintain registration and public listing of its shares, within certain constraints set forth in the Plan. C. DISTRIBUTION ESTATE As of the Plan's effective date, all assets that will not be revested in the reorganized Debtor, that is the "Non-Hammer Assets," will be retained and vested in a Distribution Estate created for the benefit of creditors. The Distribution Estate will be maintained and administered by a Distribution Agent, under the monitoring and governance of the Committee, which will 33 continue to operate after such effective date. The Distribution Agent will be selected by the Committee, and shall manage the Distribution Estate subject to the following provisions of the Plan, among others: -- The Distribution Agent will serve at the pleasure and direction of the Committee, which will be entitled to terminate and replace the Distribution Agent at any time. -- It shall be the Distribution Agent's duty to dispose of all assets of the Distribution Estate and to resolve all claims against that estate, at the instruction of the Committee and in a manner reasonably intended and designed to maximize recoveries by creditors, and the Distribution Agent shall report regularly and in detail to the Committee with regard to the status of the administration of such estate. -- The Distribution Agent will be authorized to sell assets with the Committee's approval but without other notice, provided that the gross purchase price of each such sale does not exceed the sum of $50,000. For other dispositions, including larger sales and any compromises of disputes, the Distribution Agent will be authorized to implement such dispositions only with the approval of the Committee and either (a) in the absence of a timely written objection received within five Business Days following written notice to certain parties within a "Postconfirmation List,"5 or (b) in the event of such timely written notice, upon approval by the Bankruptcy Court on no less than five Business Days' notice of a hearing thereon. -- Disbursements will be made to creditors by the Distribution Agent from time to time as directed by the Committee, with appropriate reserves for existing and anticipated administrative expenses as well as reserves for disputed claims. - -------- 5 For these purposes and for all other purposes under the Plan, the term "Postconfirmation List" refers to the United States Trustee, the Reorganized Debtor and its counsel, the Distribution Agent and his or her counsel, the Committee and its members and counsel, and those parties who, subsequent to the Plan's confirmation, file with the Bankruptcy Court and serve upon the aforementioned parties and counsel requests for special notice; provided that some parties may be removed from the list from time to time either by consent or by order of the Bankruptcy Court on notice, based upon a showing that such parties no longer hold material interests or claims in the Chapter 11 Case. 34 -- Both the Distribution Agent and the Committee will be authorized to retain professionals in order to assist in their respective obligations and rights under the terms of the Plan, with the Committee's approval, and in particular, the Distribution Agent will be entitled to retain the Debtor's present bankruptcy counsel and the Committee's present counsel without further order of the Bankruptcy Court, and the Committee will be authorized to continue to retain its counsel without further order of the Bankruptcy Court. Fees and expenses of the Distribution Agent, the Committee and their respective professionals earned or accrued on or after the Plan's effective date, together with quarterly fees owing to the United States Trustee, will be paid periodically from the Distribution Estate. -- Fees and expenses other than those owing to the United States Trustee will be paid only upon ten Business Days' notice to parties within the Postconfirmation List, either absent written objections or upon approval by the Bankruptcy Court in the event of timely objections. D. DISCHARGE AND EXCULPATION Under the terms of the Plan, the reorganized Debtor will be fully discharged of all debts accruing prior to the Plan's effective date, and the effectiveness of the Plan shall operate as a permanent injunction against asserting such obligations against the reorganized Debtor, except for those obligations which the reorganized Debtor expressly assumes under the terms of the Plan. Such assumed obligations will include the following: (a) certain Ordinary Course Expenses, as described hereinabove; (b) all claims for warranty, return, refund, product defect and the like, to the extent arising from the purchase of Hammer products; (c) rent obligations with respect to the Debtor's new Newark office lease, to the extent set forth in the Plan; (d) any obligations which the Preletz Group elects to assume with respect to the cure and reinstatement or satisfaction of secured claims; and (e) any cure payments and ongoing obligations which the reorganized Debtor elects to assume with respect to executory contracts affecting Hammer Assets. In all other respects, the effectiveness of the Plan shall operate as a complete and final discharge, release and satisfaction of all claims that might be asserted against the Debtor at any time prior to the Plan's effective date, whether those claims are known or unknown, matured or contingent, liquidated or unliquidated. In addition, the Plan's effectiveness will operate to release any claims which the Debtor may have against the Debtor, the Preletz Group, the Committee, members of the Committee and each of their present officers, directors, agents, advisors, 35 attorneys or accountants or any claim arising out of or in connection with an act or failure to act in connection with rights and duties related to the Chapter 11 Case, except any claims expressly created or preserved under the terms of the Plan or related documents. The Debtor knows of no claims against such parties at the present time. Also, the Plan provides that actions taken by the Committee or by the Distribution Agent, or their respective representatives, agents and counsel, in implementing the terms of the Plan following the Plan's effective date will be deemed to be within the scope of duties and functions set forth in Sections 1103 and 1107 of the Bankruptcy Code. As such, and absent willful misconduct, each of such parties will be immune from challenge or liability for actions taken or not taken during the course of such Plan implementation. E. EXECUTORY CONTRACTS Article VI of the Plan provides for treatment of executory contracts, including unexpired leases, to which the Debtor is a party as of the Plan's effective date and which were entered into by the Debtor prior to the commencement of the Chapter 11 Case. In summary form, all such executory contracts will be deemed rejected unless they are assumed by specific provision of the Plan, by a separate order of the Bankruptcy Court or by a schedule of assumed contracts (the "Schedule 6.2.1") to be filed by the Debtor no later than ten days prior to the commencement of the Confirmation Hearing. To the extent that executory contracts are rejected, claims arising from such rejection must be filed no later than 30 days following the Plan's effective date (or earlier if the Bankruptcy Court or Bankruptcy Code establishes an earlier deadline), and all such rejection claims will be classified and treated within Classes C or D, to the extent allowed. To the extent that Schedule 6.2.1 identifies a contract to be assumed, such schedule will indicate whether the contract is to be assumed by the reorganized Debtor (with respect to Hammer Assets) or by the Distribution Estate (with respect to Non-Hammer Assets), and will identify the amount of any monetary default that must be cured in order to effectuate such assumption. Any party to a contract identified in such schedule who disputes the cure amount set forth therein will be required to file and serve an objection thereto within five Business Days following the Plan's confirmation, absent which any amount of cure in excess of the amount set forth in said Schedule 6.2.1 will be deemed discharged and barred. Payment of all allowed cure amounts will be made by the assuming party (the reorganized Debtor or the Distribution Agent) on the Plan's effective date, on such later date as such cure becomes due under applicable terms, or when a 36 final order determining the cure amount is entered, as to any disputed portions of such cure amounts. F. OTHER PROVISIONS Parties in interest are urged to review the entire Plan fully and carefully, particularly with respect to many details not fully addressed herein. The following is a summary, but not a comprehensive listing, of some of the remaining details of the Plan not described hereinabove: -- All causes of action owned by the Debtor prior to the Plan's effective date shall be deemed fully preserved, and except as to those causes of action relating to the benefit or protection of Hammer Assets, all such causes of action shall vest in the Distribution Agent as of the Plan's effective date. It will be the Liquidation Agent's responsibility, in consultation with the Committee, to prosecute all such causes of action to the extent beneficial to the Distribution Estate. -- The Preletz Group has agreed to invest in the reorganized Debtor as described elsewhere herein with the proviso that it may withdraw from that commitment, upon ten days' notice, in the event of a material adverse change in the operations or business of the Debtor's Hammer product line prior to the Plan's effective date. The Plan provides, in Section 7.2.3 and elsewhere, that in the event of such withdrawal, the Plan will nonetheless become effective and all assets of the estate, including those that would otherwise have constituted Hammer Assets, will vest in the Distribution Estate and will be liquidated for the benefit of creditors. -- Section 11.5 of the Plan provides for noticing of certain parties, including the Debtor, the Preletz Group, the Committee and the Distribution Agent, and any notices required by other provisions of the Plan will not be considered complete unless the notice procedures of such Section 11.5 have been satisfied. -- Exhibit "A" attached to the Plan sets forth the meaning of a number of defined terms of the Plan, and it is important to review such definitions in order to fully understand the ramifications of terms and conditions set forth in the Plan. 37 VI. CONFIRMATION PROCEDURE A. SOLICITATION OF VOTES In accordance with Section 1124 of the Bankruptcy Code, the Claims and Interests in Classes C, D and E of the Plan are impaired. The holders of Claims in Classes C and D are entitled to vote to accept or reject the Plan, and the holders of Interests are deemed to have voted to reject the Plan. The holders of Allowed Claims in Classes A and B are unimpaired, and are deemed to have accepted the Plan. As to classes of claims entitled to vote on a plan, the Bankruptcy Code defines acceptance of a plan by a class of creditors as acceptance by holders of at least two-thirds in dollar amount and more than one-half in number of the claims of that class that have timely voted to accept or reject a plan. A vote may be disregarded if the Bankruptcy Court determines, after notice and a hearing, that such acceptance or rejection was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. Any creditor within Classes C or D (i) whose claim has been listed by the Debtor in the Schedules filed with the Bankruptcy Court (provided that such claim has not been scheduled as disputed, contingent or unliquidated), or (ii) who filed a proof of claim within any other applicable period of limitations, or with leave of the Bankruptcy Court, which claim or vote is not the subject of an objection, is entitled to vote. B. THE CONFIRMATION HEARING The Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a confirmation hearing. The Confirmation Hearing in respect of the Plan has been scheduled before the Honorable Dennis Montali, United States Bankruptcy Judge at the United States Bankruptcy Court, 235 Pine Street, Courtroom 22, San Francisco, California, at a date and time identified in a notice accompanying this Disclosure Statement. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement of the adjourned date made at the Confirmation Hearing. Any objection to confirmation must be made in writing and specify in detail the name and address of the objector, all grounds for the objection and the amount of the Claim or number of shares of stock of the Debtor held by the objector. Any such objection must be filed 38 and served in the manner and timing set forth in a notice accompanying this Disclosure Statement. C. CONFIRMATION At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan only if all of the requirements of Section 1129 of the Bankruptcy Code are met. Among the requirements for confirmation of a plan are that the plan is (i) accepted by all impaired classes of claims and equity interests or, if rejected by an impaired class, that the plan "does not discriminate unfairly" and is "fair and equitable" as to such class, (ii) feasible, and (iii) in the "best interests" of creditors and stockholders which are impaired under the plan. 1. ACCEPTANCE. Classes C and D of the Plan are impaired under the Plan and are entitled to vote to accept or reject the Plan. The Debtor reserves the right to seek nonconsensual confirmation of the Plan under Section 1129(b) of the Bankruptcy Code with respect to either such Class if it rejects the Plan. In addition, as stated, Class E is deemed to have voted to reject the Plan, and the Debtor will seek nonconsensual confirmation of the Plan under Section 1129(b) of the Bankruptcy Code with respect to that Class. 2. NONCONSENSUAL CONFIRMATION. In order to obtain nonconsensual confirmation of the Plan, the Debtor must demonstrate to the Bankruptcy Court that the Plan "does not discriminate unfairly" and is "fair and equitable" with respect to each impaired, nonaccepting Class. The Bankruptcy Code provides nonexclusive definitions of the term "fair and equitable," including the following: a. UNSECURED CREDITORS. For a class of unsecured claims, either (i) each impaired unsecured creditor within the dissenting class receives or retains under the plan property of a value equal to the amount of its allowed claim, or (ii) the holders of claims and interests that are junior to the claims of the dissenting class will not receive or retain any property under the plan. b. EQUITY INTERESTS. For classes of equity interests, either (i) each holder of an equity interest will receive or retain under the Plan the value or fixed preference or redemption price, whichever is higher, or (ii) no classes of claims or interests junior to such equity interests receive or retain any property under the plan. The Debtor believes that the Plan and the treatment of all Classes of Claims and Interests under the Plan satisfy the foregoing requirements for nonconsensual confirmation of the Plan. 39 3. FEASIBILITY. The Bankruptcy Code also requires that, as a prerequisite to confirmation of a plan, the plan proponent demonstrate that confirmation is not likely to be followed by a liquidation or the need for further financial reorganization, unless such liquidation or reorganization is contemplated by the plan. As set forth in Section X(A) hereinbelow, the Debtor believes that no liquidation or further reorganization, other than that which is expressly contemplated by the Plan, will be required, and that the Plan therefore satisfies the feasibility requirements of the Bankruptcy Code. 4. BEST INTERESTS TEST. The Bankruptcy Code also requires, as a prerequisite to confirmation of a plan, that with respect to each impaired class of claims or interests, each holder of a claim or interest either (i) accepts the plan or (ii) receives or retains under the plan property of a value, as of the effective date, that is not less than the amount that such holder would receive or retain if the Debtor were liquidated under chapter 7 of the Bankruptcy Code. With respect to the Plan, Classes C, D and E are impaired, and the Debtor believes that the Plan satisfies the foregoing "best interests" test as to each such class. As set forth in Section X(B) hereinbelow, the Debtor believes that in a chapter 7 liquidation of the Debtor's estate, there would be no recovery at all for holders of equity interests (shareholders), and that the net distribution to unsecured creditors would be less than is contemplated under the terms of the Plan. Therefore, the Debtor believes that holders of Allowed Claims within Classes C and D will likely receive greater distributions under the Plan than they would in a chapter 7 liquidation, and that shareholders within Class E will do no worse under the Plan than they would in a chapter 7 liquidation, because they would receive no distribution in either event. D. CONSUMMATION Under the terms of the Plan, its provisions will become binding and effective as of an Effective Date, as defined within Exhibit "A" attached to the Plan. Pursuant to that definition, the Plan's effective date will occur within 30 days following the Plan's confirmation (or later in the event of a Court-imposed stay of implementation), on a date jointly selected by the Debtor, the Committee and the Preletz Group. VII. MANAGEMENT OF THE REORGANIZED DEBTOR As of the Plan's effective date, the management, control and operation of the reorganized Debtor will become the general responsibility of its Board of Directors, subject to the governance provisions summarized in Section X(B)(4) hereinabove. 40 Senior management of the reorganized Debtor will be subject to the following: A. COMPOSITION OF THE BOARD OF DIRECTORS The Board of Directors of the reorganized Debtor will consist of five directors, including Michael O. Preletz (the Chief Executive Officer of the Debtor), Chapman A. Stranahan (the Debtor's Assistant C.E.O.) and other individuals to be selected. As stated, the Preletz Group will be entitled to select, remove and replace three of those five directors at all times during the first three years following the Plan's effective date. B. IDENTITY OF OFFICERS It is currently anticipated that the present officers of the Debtor will continue in their current positions as the officers of the reorganized Debtor, at least initially. Set forth below is the name and position with the Debtor of each current officer, together with a brief description of each officer's employment history: It is currently anticipated that the officers of the Debtor immediately prior to the Effective Date will continue in their current positions as the officers of the Reorganized Debtor, at their current compensation levels. Set forth below is the name and position with the Debtor of each current officer, together with a description of each officer's prior business experience: MICHAEL O. PRELETZ, CHIEF EXECUTIVE OFFICER. Mr. Preletz joined the Debtor as a director and chief executive officer on March 24, 1997, following the resignation of J. Larry Smart. Mr. Preletz has over 35 years of experience as a successful turnaround expert for companies in the high technology industry. He has held senior management positions with a number of companies and has overseen the restructuring of Redcor (which later became Silicon General), Magnuson Computer (which was later acquired by Storage Technologies), Zymed Medical, Rexon Corporation, ADAC Laboratories, Visual Technology and Read-Rite Corporation. CHAPMAN A. STRANAHAN, PRESIDENT AND CHIEF OPERATING OFFICER. Mr. Stranahan joined the Debtor in August 1997 as part of the restructuring team. Mr. Stranahan has over 20 years' experience in helping small and mid-sized high technology companies grow and expand. He has held management positions in the areas of sales and marketing, operations and quality control. Prior to joining the Debtor, Mr. Stranahan held various positions with TRW Semiconductors, Silicon General, Wangtek, Read-Rite Corporation, and most recently with Technistar. 41 MARK R. KOZIOL, EXECUTIVE VICE PRESIDENT. Mr. Koziol joined the Debtor in June 1997 as part of the turnaround team. Mr. Koziol currently is responsible for sales and marketing, service and engineering. Mr. Koziol has nearly 20 years' experience in the storage subsystem market. He has held management positions in sales, marketing and engineering. Prior to joining the Debtor, Mr. Koziol held various senior management positions with Unisys, Memorex Telex, Storage Dimensions, and most recently with Sandisk Corporation. GEORGE D. OLIVA, VICE PRESIDENT OF FINANCE AND ADMINISTRATION. Mr. Oliva joined the Debtor in August 1997 as part of the turnaround team. Mr. Oliva has over 10 years of experience in high growth, high technology public companies. He has held a variety of senior financial positions, several of which were within the disk drive or data storage industry. Prior to joining the Debtor, Mr. Oliva held positions with Conner Peripherals, Read-Rite Corporation, KLA Instruments, DSC Communications and Arthur Andersen & Company. C. COMPENSATION OF EXECUTIVE OFFICERS Whereas no final determination has yet been made, it is presently contemplated by the Debtor that the reorganized Debtor's executive officers will receive the following annual salaries, exclusive of incentive bonuses and stock option plans that may be implemented in accordance with the terms of Sections 8.1.4 and 8.1.5 of the Plan: Michael O. Preletz $300,000 Chapman A. Stranahan $120,000 Mark R. Koziol $185,000 George D. Oliva $120,000 B. COMPENSATION OF DIRECTORS Whereas no final determination has yet been made, it is presently contemplated by the Debtor that the reorganized Debtor's outside directors (i.e., those directors who are not also officers or employees of the Debtor), will receive compensation equal to $1,500 for each meeting of the Board of Directors which they attend, plus compensation at the rate of $100 per hour for other services rendered, and that inside directors will receive no compensation therefor other than the compensation agreed upon by the Debtor with respect to their roles as officers or employees. 42 VIII. APPLICABILITY OF CERTAIN FEDERAL AND OTHER SECURITIES LAWS TO THE REORGANIZED SHARES DISTRIBUTED UNDER THE PLAN A. GENERALLY As stated elsewhere hereinabove, the Plan provides for the issuance of the Reorganized Shares on and after the Plan's effective date. The Reorganized Shares will be issued without registration under the Securities Act of 1933, as amended, or under any state or local law, at least initially, in reliance upon the exemptions set forth in Section 1145 of the Bankruptcy Code and Section 11.2 of the Plan. Under the provisions of Section 1145 of the Bankruptcy Code, securities issued under a plan are exempt from registration if, among other things, they are offered or sold by the Debtor, an affiliate or successor in exchange for claims against the Debtor, or principally in such exchange and partly for cash or property. Under the Plan, the Reorganized Shares will be issued and distributed principally in exchange for the discharge of, and in exchange for, claims against the Debtor and partly for cash (such as shares issued pursuant to the Creditors' Rights Offering or to the Preletz Group), and therefore, in the Debtor's view, the exemption provisions of Section 1145 of the Bankruptcy Code pertain. In particular, the provisions of Section 11.2 of the Plan establish that all such Reorganized Shares shall be deemed exempt pursuant to the provisions of Section 1145. B. RESALE CONSIDERATIONS The Debtor believes that the resale or disposition by the recipients of the Reorganized Shares will be exempt from registration under the Securities Act of 1933 if the recipients are not deemed to be "underwriters" under Section 1145(b) of the Bankruptcy Code. Section 1145(b) of the Bankruptcy Code defines four types of underwriters: (a) a person who purchases a claim against, interest in, or claim for administrative expense in the case concerning, a debtor with a view to distributing any security received in exchange for that claim or interest; (b) a person who offers to sell securities offered or sold under a plan for the holders of those securities; (c) a person who offers to buy those securities from the holders of those securities, if the offer is (i) made with a view to distribution of the securities, and (ii) made under an agreement made in connection with the plan, its consummation or the offer or sale of securities under the plan; and (d) a person who is an "issuer" with respect to the securities as the term "issuer" is defined in Section 2(11) of the Securities Act of 1933. 43 Under Section 2(11) of the Securities Act of 1933 an "issuer" will include any person directly or indirectly controlling or controlled by the Debtor, or any person under direct or indirect common control with reorganized Debtor (an "Affiliate"). Whether a person is an Affiliate, and therefore an "underwriter", with respect to the reorganized Debtor for purposes of Section 1145(b) of the Bankruptcy Code will depend on a number of factors. These factors include: (a) the person's equity interest in the reorganized Debtor; (b) the distribution and concentration of other equity interests in the reorganized Debtor; (c) whether the person is an officer or director of the reorganized Debtor; (d) whether the person, either alone or acting in concert with others, has a contractual or other relationship giving that person power over management policies and decisions of the reorganized Debtor; and (e) whether the person actually has that power notwithstanding the absence of formal indicia of control. An officer or director of the reorganized Debtor may be deemed an Affiliate. To the extent that a person deemed to be an "underwriter" receives securities, resales by that person would not be exempted by Section 1145 of the Bankruptcy Code from registration under the Securities Act of 1933 except in "ordinary trading transactions" (within the meaning of Section 1145(b)(1) of the Bankruptcy Code). The Bankruptcy Code does not define the term "ordinary trading transactions," and the Securities and Exchange Commission (the "Commission") has not given definitive guidance with respect to the proper construction of the term. In a no- action letter the staff of the Commission has, however, concurred in the view that a transaction will be an "ordinary trading transaction" if it is carried out on an exchange or in the over- the-counter market at a time when the issuer of the traded securities is a reporting company under the Exchange Act and does NOT involve any of the following factors: (i) (x) concerted action by two or more recipients of securities issued under a plan of reorganization in connection with the sale of those securities, or (y) concerted action by distributors on behalf of one or more such recipients in connection with sales; (ii) the preparation or use of informational documents concerning the offering of the securities to assist in the resale of the securities, other than the disclosure statement approved in connection with the plan (and any supplement thereto) and documents filed with the Commission by the debtors or the reorganized company pursuant to the Exchange Act; or (iii) special compensation to brokers or dealers in connection with the sale of the securities designed as a special incentive to resell the securities, other than 44 compensation that would be paid pursuant to arm's-length negotiations between a seller and a broker or dealer, each acting unilaterally that is not greater than the compensation that would be paid for a routine similar-sized sale of similar securities of a similar issuer. In addition, a person deemed to be an "underwriter" solely because he is an Affiliate may be able to sell securities without registration, in accordance with Rule 144 under the Securities Act of 1933, which permits public sales of securities received pursuant to a plan by statutory underwriters subject to volume limitations and certain other conditions. Based on the views of the Commission expressed in no-action letters, a person deemed to be an underwriter solely because he is an Affiliate may be able to sell securities without registration in accordance with Rule 144, without complying with the holding period requirement of Rule 144(d). BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTOR MAKES NO REPRESENTATIONS CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE REORGANIZED SHARES. THE DEBTOR RECOMMENDS THAT RECIPIENTS OF SECURITIES UNDER THE PLAN CONSULT WITH THEIR OWN COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF THOSE SECURITIES. C. HART-SCOTT-RODINO ACT REQUIREMENTS Those that are to receive equity securities under the Plan may have to observe the filing and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). Holders required to make HSR Act filings cannot receive any such distribution of equity securities until the expiration or early termination of the waiting periods under the HSR Act. Such holders should consult their own counsel regarding their potential responsibilities under the HSR Act. IX. CERTAIN RISK FACTORS TO BE CONSIDERED HOLDERS OF CLAIMS AGAINST THE DEBTOR SHOULD READ AND CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT (AND THE DOCUMENTS DELIVERED TOGETHER HEREWITH AND/OR INCORPORATED BY REFERENCE), PRIOR TO VOTING TO ACCEPT OR REJECT THE PLAN. THESE RISK FACTORS SHOULD NOT, HOWEVER, BE REGARDED AS CONSTITUTING THE ONLY RISKS INVOLVED IN CONNECTION WITH THE PLAN AND ITS IMPLEMENTATION. A. OVERALL RISKS TO RECOVERY UPON CLAIMS The ultimate recoveries under the Plan to holders of claims (other than those holders who are paid in cash under the Plan) 45 depend upon the realizable value of the Non-Hammer Assets to be sold pursuant to the Plan and the Distribution Estate's Reorganized Shares, as well as the ultimate amount of claims allowed. The securities to be issued pursuant to the Plan are subject to a number of material risks, including, but not limited to, those specified below. Prior to voting on the Plan, each holder of a claim entitled to vote should carefully consider the risk factors specified or referred to below, the exhibits annexed hereto, and all of the information contained in the Plan and exhibits thereto. B. PROJECTED FINANCIAL INFORMATION The projected financial information included in this Disclosure Statement is dependent upon the successful implementation of the business plan upon which the projections are based, and upon the validity of other assumptions contained therein. Those projections reflect numerous assumptions, including confirmation and consummation of the Plan in accordance with its terms, the anticipated future performance of the reorganized Debtor, industry performance, certain assumptions with respect to competitors of the Debtor, the development of the reorganized Debtor's products, general business and economic conditions, and other matters, most of which are beyond the full control of the Debtor. In addition, unanticipated events and circumstances occurring subsequent to the preparation of the projections may affect the actual financial results of the operations of the reorganized Debtor. C. DIVIDEND POLICY The reorganized Debtor does not anticipate that the reorganized Debtor will pay any dividends upon the Reorganized Shares in the foreseeable future. Certain institutional investors may only invest in dividend-paying equity securities or may operate under other restrictions which may prohibit or limit their ability to invest in the Reorganized Shares. X. PROJECTIONS AND LIQUIDATION ALTERNATIVES Based upon the Debtor's best estimates of the future performance of the reorganized Debtor's business, the prospects for liquidation proceeds of the Debtor's various assets and review of claims asserted against the estate herein, and in consultation with its financial advisors and counsel, the Debtor makes the following estimates of future results of liquidation alternatives: A. PROJECTED PERFORMANCE The Debtor believes that the recapitalization and restructuring of the reorganized Debtor's finances and operations 46 under the terms of the Plan will enable the company to achieve profitability and enhanced revenue over the course of the first few years following the Plan's effective date. In particular, the Debtor believes, based upon what it believes to be reasonable assumptions of future events, that it will achieve revenues of approximately $12 million in 1998, $21 million in 1999, $36 million in 2000 and $82 million in 2001. During those same periods, the Debtor projects a net loss of $154,000 in 1998, and net income of $447,000 in 1999, $1,647,000 in 2000 and $9,011,000 in 2001. For the same periods, and based upon a beginning net equity of $1,300,000, the Debtor projects net equity of $1,146,000 at the end of 1998, $6,594,000 at the end of 1999 (assuming an infusion of approximately $5 million in additional capital in that year), $8,250,000 at the end of 2000 and $17,261,000 at the end of 2001. All such projections and estimates, together with the primary assumptions upon which the projections are based, are set forth in EXHIBIT "C" attached hereto, which has been prepared by the Debtor's financial advisors, Hickey & Hill, Inc., in consultation with the Debtor's senior management. Hickey & Hill, Inc. have advised the Debtor that in the event that the Debtor is able to achieve the projected revenues and margins forecast by the Debtor's senior management, and otherwise achieve the assumptions set forth in the projections, such advisors believe that the reorganized Debtor will be able to accomplish the aforementioned projections. The advisors have noted that the revenue growth rates included in the projections are very aggressive and will require the successful introduction of new products by the year 2000 in order to be achieved, together with substantially improved profitability derived from the growth in revenues. In contrast to those projections, the Debtor's current operations are not profitable, and produce revenues substantially below those forecast for the reorganized Debtor. For example, as set forth in EXHIBIT "B" attached hereto, the company's results for the month of October 1997 indicate gross revenues of $979,128, and a net loss for the month of $166,335. The company's results for the month of September 1997 indicate gross revenues of only $555,317, and a net loss for the month of $228,584. Thus, on an annualized basis, the company's two most recent months' results indicate annual gross revenues of only $9,206,670, and a net annual loss of $2,369,514. Nonetheless, the Debtor believes that its projected performance following its reorganization is reasonable, and that the benefit that will be derived from reorganization and recapitalization will permit the company to achieve the milestones forecast therein. Therefore, to the extent that the reorganized Debtor's future performance is a factor in 47 determining the feasibility of the Plan, the Debtor believes that the Plan is fully and demonstrably feasible. B. LIQUIDATION ALTERNATIVE The Debtor believes that the only practical alternative for resolving the Debtor's finances, other than reorganization under the Plan, is a liquidation of all assets pursuant to the provisions of chapter 7 of the Bankruptcy Code. The Debtor believes that such an alternative would produce a far less favorable outcome for creditors and other parties in interest. In a chapter 7 liquidation, a trustee would be appointed by the United States Trustee in order to liquidate all of the estate's assets for a fee, and creditors would receive the proceeds of that liquidation, on a pro-rata basis, net of the costs of liquidation. In the view of the Debtor, the gross proceeds of that liquidation would be less, and the costs of liquidation would be greater, than under the terms of the Plan. Under the Plan, the Non-Hammer Assets will be sold by the Distribution Agent for the benefit of creditors, much as they would be liquidated by a chapter 7 trustee. However, the Debtor believes that a chapter 7 trustee's fees would be substantially greater than those of the Distribution Agent, inasmuch as the trustee would likely receive a percentage (up to approximately 3 or 4 percent of gross proceeds), whereas a Distribution Agent is expected to receive more modest fees based upon an hourly rate and actual services rendered. In addition, the chapter 7 trustee would liquidate the Hammer Assets, rather than receive stock in the reorganized Debtor as will the Distribution Agent, and that substitution would diminish ultimate recoveries by creditors, in the Debtor's view. As set forth in EXHIBIT "E," the Debtor's financial advisors, Hickey & Hill, Inc., have opined that the liquidation of the Hammer Assets is approximately $771,000, net of costs directly attributable to that liquidation. Under the Plan, creditors will receive 3,500,000 shares of stock of the reorganized Debtor; using the same per-share valuation at which the Preletz Group and United Equities have agreed to purchase that stock, $0.325, those 3,500,000 shares have an imputed value of $1,137,500. Further, whereas the shares may ultimately diminish in value, they may also increase substantially in value, thereby providing to creditors an opportunity for appreciation. Based upon the Debtor's projections of future performance, and assuming achievement of such results, the Debtor believes that the reorganized Debtor's stock will have a value materially higher than the aforementioned imputed value. Also, in a chapter 7 liquidation, the claims against the estate would likely be greater. Under the Plan, the reorganized 48 Debtor will assume potentially large warranty and product return rights with respect to the Hammer product line, but in a liquidation, those claims would be asserted against the estate, thereby increasing the overall claims against limited assets. In addition, to the extent that the reorganized Debtor assumes and cures any executory contracts or secured claims under the Plan, such assumption and cure will reduce claims against the estate, whereas in a chapter 7 liquidation, there would be no offsetting assumptions. Further, under the Plan, the Distribution Estate will benefit from free rent for a limited period of time and the free services of management officials of the reorganized Debtor in order to assist in disposing of estate assets, none of which would be available to the Trustee in a chapter 7 liquidation. Finally, the Debtor believes that recoveries for creditors would be delayed by a chapter 7 liquidation, inasmuch as (a) new personnel, including the trustee and professionals whom the trustee retained, would require some time to familiarize themselves with the assets and circumstances of the Debtor's estate, and (b) the necessity of liquidating the Hammer Assets as well as the Non-Hammer Assets would increase the burden and slow the timing of the administration of the Debtor's estate. Attached as EXHIBITS "D" and "E" hereto are liquidation analyses of the Non-Hammer Assets and the Hammer Assets, respectively, prepared by Hickey & Hill, Inc. Together, the analyses indicate probable liquidation proceeds of all of the assets of the estate herein in an aggregate amount of approximately $5,569,000, net of costs directly attributable to liquidation efforts, but before the general administrative expenses and other priority claims of the estate. Assuming the same administrative expenses and priority claims as projected under the Plan, those liquidation proceeds would be reduced by approximately $900,000, producing net funds available for unsecured creditors of approximately $4,700,000. The Debtor believes that in a chapter 7 liquidation, allowable claims would exceed $32.5 million, having been increased by additional warranty and product defect and return claims, as well as additional executory contract rejection claims. Assuming those amounts, the Debtor believes that unsecured creditors would receive distributions of between 14 and 15 percent of their allowable claims, and that shareholders would receive no distributions at all. As set forth hereinbelow, the Debtor estimates recoveries available for general unsecured creditors under the Plan to be approximately $5,416,500, to be divided among a pool of a smaller amount of claims. Thus, the Debtor believes that distributions to creditors under the Plan, estimated to be approximately 17.76% of claims, will be greater than distributions in a chapter 7 liquidation would be. 49 For all of the reasons set forth above, the Debtor believes that recoveries for creditors under the Plan will be more favorable than that outcome, and accordingly, the Debtor believes that the "best interests" test described in Section VI(C)(4) hereinabove is satisfied by the terms of the Plan. C. PROJECTED RECOVERIES Attached hereto as EXHIBIT "F" are the Debtor's best estimates and projections for recoveries available for distribution to creditors within Class D, under the terms of the Plan. As set forth therein and in the notes which accompany the projections, the Debtor believes that creditors will receive approximately $5,416,500 in cash and shares of the reorganized Debtor (assuming an imputed present value for the shares without accounting for any depreciation or appreciation in the value of the reorganized Debtor's equity). Based thereon, the Debtor believes that holders of allowed claims within Class D will receive distributions equal to approximately 17.76 percent of their claims. Those estimates do not include any amounts attributable to causes of action that may be asserted against third parties, other than estimated preference causes of action, and do not assume any costs in pursuing such causes of action. Also, the projections are subject to all of the cautionary statements contained elsewhere herein, including the prospect of material changes in assumed facts and events. Finally, the projections do not take into account the time value of money, or interest that may be earned, with respect to funds held by the Distribution Estate. Nonetheless, the Debtor believes that the projections constitute reasonable estimates of recoveries for creditors under the terms of the Plan. XI. CONCLUSION AND RECOMMENDATION The Debtor believes that confirmation and implementation of the Plan is preferable to any alternative because it will provide the greatest recoveries, in the shortest possible time, to creditors. The Debtor therefore urges creditors entitled to vote on the Plan to vote to accept the Plan and to evidence such acceptance by returning their ballots in a timely manner. DATED: December 10, 1997 STREAMLOGIC CORPORATION, a Delaware corporation By: ______________________________ Michael O. Preletz Chief Executive Officer 50 Submitted By: GOLDBERG, STINNETT, MEYERS & DAVIS A Professional Corporation By: __________________________________ Merle C. Meyers, Esq. Attorneys for Debtor-in-Possession 51 EXHIBIT "F" PROJECTED DISTRIBUTIONS IN CLASS D 1. Net Assets Available for Class D Distributions: SOURCE OR USE NOTE AMOUNT BALANCE A. Non-Hammer Assets, net 1 $4,798,000 $4,798,000 B. 3,500,000 Reorganized Shares 2 1,137,500 5,935,500 C. Preference Recoveries, net 3 400,000 6,335,500 D. Other Causes of Action 4 Unknown 6,335,500 E. Less Priority tax claims 5 (100,000) 6,235,500 F. Less administrative expenses, preconfirmation 6 (650,000) 5,585,500 G. Less administrative expenses, postconfirmation 7 (100,000) 5,485,500 H. Less Class A priority claims 8 (35,000) 5,450,500 I. Less Class B secured claims 9 -0- 5,450,500 J. Less Class C convenience claims 10 (34,000) 5,416,500 AVAILABLE FOR CLASS D DISTRIBUTIONS: $5,416,500 2. Calculation of Percentage Distributions: DESCRIPTION AMOUNT A. Claims estimation: $30,000,000 B. Additional claims from preference recoveries: 500,000 C. Total Claims: $30,500,000 D. Available for distributions: $ 5,416,500 E. Percentage (Item D, divided by Item C): 17.76% F-1 3. Notes to Calculations: (1) Based upon the liquidation analysis of Non-Hammer Assets, net of costs directly attributable to liquidation efforts and claims secured thereagainst, as set forth in Exhibit "D" attached to the Disclosure Statement. (2) Imputed value based upon the per-share price ($0.325) at which the Preletz Group and United Equities will purchase shares of stock of the reorganized Debtor. (3) Assumes gross preference recoveries of $500,000, less $100,000 in attributable attorneys' fees and costs. (4) The extent and quantification of causes of action against third parties, other than preference causes of action, cannot yet be determined, and therefore no recoveries or attributable costs are assumed. (5) Estimated amount of priority tax claims, as set forth in Section V(A)(1) of the Disclosure Statement. (6) Assumes unpaid and awarded fees and expenses of approximately $230,000 through September 30, 1997, additional unpaid fees and expenses for the same period of approximately $70,000, and ongoing fees and expenses after September 30, 1997 and until confirmation of approximately $350,000. See Section V(A)(1) of the Disclosure Statement. (7) Estimated administrative costs of the Distribution Estate, excluding litigation costs attributable to preference causes of action and other causes of action against third parties, and excluding costs directly attributable to liquidation efforts (which costs are included as an offset in Item A and Note 1 above). (8) Estimated amount of Class A priority claims, as set forth in Section V(A)(2) of the Disclosure Statement. (9) All secured claims are accounted for in Item A and Note 1 above, and therefore no payment of secured claims is assumed under Item I. (10) Estimated amount of Class C convenience claims, as set forth in Section V(A)(4) of the Disclosure Statement. F-2 -----END PRIVACY-ENHANCED MESSAGE-----